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Why is the U.S. economy doing well despite interest rate hikes?

Why is the U.S. economy doing well despite interest rate hikes?

Posted August. 22, 2023 08:45,   

Updated August. 22, 2023 08:45


During a meeting in July with Mary Daly, President of the San Francisco Federal Reserve Bank, the frequently asked question at economic forums these days was brought up.

"Why is the economy looking good despite the interest rate hikes?"

She laughed as if she expected the question and answered, "For that, a lot of young scholars should find out the answer going forward," implying that even U.S. economists are puzzled.

Intense tightening by the Federal Reserve (Fed) has pushed the U.S. benchmark interest rate to 5.25-5.50%, the highest level in 22 years. Common sense dictates that higher interest rates cause businesses and households to cut back on investment and spending, leading to a contraction in the economy. The Fed had even predicted a mild recession later this year.

However, what's currently unfolding is the widespread use of the term 'resiliency,' which is being used as frequently as the word of the year. Much like a rubber band that regains its original shape even after being stretched tightly, the U.S. economy continues to grow regardless of the magnitude of interest rate increases or the occurrence of banking crises. The Atlanta Fed has forecasted an astonishing 5.8% annualized growth rate for the U.S. economy in the third quarter of this year. Furthermore, the Fed retracted its recession forecast just last month.

Late last year, Amazon founder Jeff Bezos advised consumers to “hold off on big purchases like TVs and cars and prepare for economic struggles,” but consumers are scoffing. Concert tickets for pop singer Taylor Swift's U.S. tour, which cost more than a TV, were sold out in seconds. Lionel Messi, the 'God of Soccer,' is visiting the New York City area this week for a Major League Soccer (MLS) game, causing ticket prices to surge up to $10,000.

Why is this happening in the U.S.? Daly attributed it to the impact of the COVID-19 pandemic. Consumers were confined to their homes during the pandemic, unable to spend much beyond the emergency relief funds they received from the U.S. government. Consequently, they are now spending extravagantly on concerts, soccer games, dining out, and travel, thereby contributing to economic growth. Additionally, some suggest that the energy transition has also prompted increased investment.

The growth of the world's largest economy should be good news for the Korean economy. However, this common sense isn't working as effectively as it used to. Rather than focusing on TVs and smartphones, the U.S. spending frenzy is now centered around concerts and accommodations. As consumption patterns shift from goods to experiences, Korean exports, which are primarily manufacturing-based, will have less opportunity to stand out.

That's why U.S. long-term market interest rates have soared, bidding 'goodbye' to 20-year low rates. This is also the reason the world is eagerly awaiting Fed Chair Jerome Powell's remarks at the central bank's annual Jackson Hole meeting this Thursday night.

The more I observe the U.S. economy, the more concerned I become. If the U.S. economy performs poorly, I worry about Korean exports; if it does well, I fret over the exchange rate due to high-interest rates. There is a lot of uncertainty due to the Fed's intense tightening. Adding to these concerns, the Chinese real estate crisis has also emerged. We are definitely walking on thin ice.