The ramifications of 'higher for longer' rates
The Washington Post
November 2, 2023 at 6:45 a.m. EDT
Consumers don’t need an economics lesson to understand the impact of high interest rates. They feel it in the cost of mortgages, currently above 7.5 percent for a 30-year, fixed-rate mortgage — the highest in 23 years. It’s a similar story for car loans, which auto executives also understand all too well. Elon Musk, speaking for a change on a subject for which he has firsthand knowledge, recently blamed the rate spike for Tesla’s weaker-than-expected sales results. “I am worried about the high interest rate environment that we’re in,” he told Tesla investors. “I just can’t emphasize this enough that for the vast majority of people, buying a car is about the monthly payment.”
Less appreciated by corporate titans and everyday borrowers alike is the massive changes in store if interest rates, abnormally low for the past 15 years, remain high for months and years to come. An entire generation of professionals has grown accustomed to ultralow rates, which translates into dirt-cheap money for anyone wanting to borrow. Low costs of capital, in turn, encouraged all sorts of dodgy behavior. Free or nearly free money drives business decisions that don’t necessarily take into consideration the need to earn a return on those investments.
If the rate jump were merely a hiccup — and many came to believe that’s what it would be — none of this would matter. But the reality is that the period beginning after the financial crisis of 2008 and 2009 is what was unusual. For most of modern financial history, U.S. interest rates, best represented by the yield at which the federal government pays to borrow money for 10 years, have hovered in the mid-single digits. The 10-year Treasury bill spiked at times — famously above 15 percent in the early 1980s — but generally hovered about where it is now, in the neighborhood of 6 percent. On Wednesday, the Federal Reserve left its benchmark unchanged, but left open the possibility of another increase.
Persistently high rates — Wall Streeters are calling the phenomenon “higher for longer” — would mean that the rules of business will look more like they did in decades past and less like in recent memory, when rates hovered below 2 percent and at times touched zero. That means that all sorts of businesses (as well as the U.S. government), which had gotten used to borrowing cheap and spending their loot willy-nilly, will be forced to scrutinize their decisions far more carefully.