In contrast to Wall Street's "frenzied interpretation" of Federal Reserve officials' remarks, the average American citizen pays little attention, and some don't even know who the Chairman of the Federal Reserve is.

On Wall Street, every word or intonation from Federal Reserve Chairman Powell and his colleagues is scrutinized carefully, with some large banks even employing computer natural language processors for analysis.

However, on ordinary streets, people are not so exaggerated. A survey conducted in 2014 found that about half of the respondents didn't even know who the Chairman of the Federal Reserve was, and only a quarter could name then-Chairman of the Federal Reserve and current Secretary of the Treasury Yellen. Approximately 17% said that the Chairman of the Federal Reserve was still Greenspan.

Perhaps this difference can be explained by the impact of interest rates on Wall Street and ordinary people, which is the Federal Reserve's main tool for controlling inflation. The Federal Reserve raised the key policy interest rate by 5.25 percentage points, which had an impact on the economy, but the U.S. economic growth still greatly exceeded most people's expectations.

Mizuho Securities economists Steven Ricchiuto and Alex Pelle said that if the Atlanta Fed's GDPNow estimate of U.S. GDP growth for the fourth quarter is correct, then the U.S. GDP growth rate for the whole year of 2023 will reach 2.8%, which is exactly one percentage point higher than the Congressional Budget Office's (CBO) estimate of the U.S. economy's potential growth rate.

Advertisement

The average person's lack of concern about the Federal Reserve's actions may be because the economy is not as sensitive to interest rates as it used to be. Mark Zandi, Chief Economist at Moody's Analytics, pointed out that the proportion of households' floating interest rate debt is relatively low, which mitigates the impact of high interest rates on their after-tax income used to pay interest and principal.

In a customer report on November 21, Jefferies economist Thomas Simons cited a study by the New York Fed, which found that during the pandemic, about half of American homeowners took advantage of lower mortgage rates through refinancing or purchasing homes. In addition, only 60% of American households have mortgages, and 90% of them have interest rates of 4% or lower.

In many other countries, such as the UK, Canada, Australia, and New Zealand, mortgage interest rates are usually adjusted every few years. Therefore, the impact of central bank interest rate hikes directly flows to households, who have to increase their monthly mortgage payments.

Although the higher mortgage interest rates in the United States have deterred potential buyers, homeowners have been "unscathed."

Zandi said that the resilience of the U.S. economy means that the Federal Reserve's interest rate hikes are not as aggressive as they appear, and he admitted that he was puzzled by the fact that the Federal Reserve's interest rate hikes did not slow down economic growth more seriously.But now, after observing how the relationship between the economy and interest rates has changed, he believes that the current target range of 5.25%-5.50% for the federal funds rate is more reasonable.

Zandi also noted that so far, despite the Federal Reserve's rate hikes, housing prices and the stock market have remained resilient. The former reflects a long-term shortage of affordable housing, and homeowners who have locked in ultra-low mortgage rates are unwilling to sell, exacerbating the situation. Meanwhile, excitement about artificial intelligence has driven the stock market higher.

Although the rate hikes have not hindered the "seven giants" that have driven the S&P 500 Index (SPX) up by 18% so far this year, rate hikes are usually a headwind for the stock market.

Data shows that when the S&P 500 Index is on an upward trend and interest rates are falling, the annual return is 14.5%. However, when the S&P 500 Index is on an upward trend but interest rates are rising, the annual return is only 0.79%.

Despite facing higher interest rates, the U.S. economy remains resilient, but the Federal Reserve tends to be wary of the potential damage it could cause to the stock market. Steven Blitz, Chief U.S. Economist at TS Lombard, said, "The Federal Reserve will not sacrifice household confidence in the stock market for 2% inflation."

After the release of the minutes of the FOMC meeting that ended on November 1, he pointed out in a report on Tuesday that, according to a poll, household exposure to the stock market has returned to its highest level since 2008.

Although the U.S. economy has been relatively unaffected by the Federal Reserve's rate hikes so far, the stock market may be more impacted. The S&P 500 Index has risen by 10% since the end of October last year, mainly driven by the decline in U.S. Treasury yields, which is based on market expectations that the Federal Reserve has ended rate hikes and will cut rates by a full percentage point in four installments in 2024.

However, if these optimistic expectations for monetary easing fail to materialize, the stock market may falter, and it is then that the general public may start to pay more attention to the Federal Reserve.