Locked-In Mortgages: Effects on Consumer Spending

US consumers have benefited significantly from low-cost, fixed-rate mortgages, receiving an additional $600 billion in spending power since 2022, as reported by the Swiss Re Institute. This financial boost has mitigated the impact of the Federal Reserve’s interest rate hikes, accounting for nearly 2% of all personal consumption spending, according to economists Mahir Rasheed and James Finucane at Swiss Re.

The influx of spending cash from locked-in low-rate mortgages has softened the effects of monetary policy, leading to resilient consumer demand despite the Fed’s rate increases. This effect is likely to influence the effectiveness of future rate cuts by the Fed, potentially making it more challenging to stimulate consumer demand if the economy slows.

Potential Future Effects on Monetary Policy

The Swiss Re analysts suggest that the limited relief from lower borrowing costs could lead to a more aggressive easing cycle by the Fed than previously anticipated. During the recent Fed tightening cycle, the market rates for US mortgages were as much as 3.2 percentage points higher than the average rate paid on existing mortgages. This disparity has meant that a significant portion of household debt remained insulated from monetary policy changes, resulting in the Fed potentially raising rates higher than necessary, thus adversely affecting renters.

Looking ahead, a similar effect might occur if the Fed decides to cut rates more aggressively. With the median home price having increased approximately 60% since early 2020 and credit card delinquencies surpassing pre-pandemic levels, household debt burdens are substantial. Lower borrowing costs may offer only limited relief to consumers facing these financial pressures.

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