Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. Real interest rates have risen by almost 10 percentage points, compared with 4 points during the 2004–2006 tightening, yet activity has held up because households entered the episode with large savings accumulated during the pandemic. As those surplus savings are used up and borrowers refinance at higher rates, the full impact of tightening has not yet been felt.

Jesper Rangvid Rangvid's Blog
Date Posted:

Jesper Rangvid argues the hiking cycle hasn’t catalyzed a recession yet due to the accumulation of savings, but notes that “surplus savings will soon be used up.”

Have pandemic savings delayed the full impact of higher interest rates?

Core argument: Real interest rates have risen by almost 10 percentage points in this tightening episode, compared with a rise of "only" 4 percentage points during the 2004–2006 episode.

Real interest rates have risen even more than nominal. Real interest rates have risen by almost 10pp. In comparison, real interest rates rose by “only” 4pp during the 2004-2006 episode. The main reason that economic activity has held up so well is that households entered this tightening episode with large savings that they had accumulated during the pandemic. Therefore, the pandemic caused both inflation and the flare-up in interest rates and led to this amazingly resilient economy. However, surplus savings will soon be used up, and at some point people will have to take out new mortgages at higher interest rates. Moreover, central banks have continued to raise interest rates in 2023 and will keep them high for longer. All this means that the full impact of this tightening episode has not yet been felt.

Takeaways by Macro Roundup® AI

  1. Real interest rates have risen by almost 10 percentage points in this tightening episode, compared with a rise of "only" 4 percentage points during the 2004–2006 episode.
  2. The main reason economic activity has held up so well is that households entered this tightening episode with large savings accumulated during the pandemic, which caused both inflation and the flare-up in interest rates.
  3. Surplus savings will soon be used up, borrowers will eventually have to take out new mortgages at higher rates, and central banks will keep rates high for longer, so the full impact of tightening has not yet been felt.

Related Articles:

  • Soft Landing Summer — The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.
  • Excess No More? Dwindling Pandemic Savings — Research on U.S. household savings after the pandemic recession points to rapid accumulation and then drawdown of excess savings, with cumulative drawdowns exceeding $1.9tn and less than $190bn of excess savings remaining in the aggregate economy. The authors estimate that if recent drawdown rates persist, aggregate excess savings would be depleted.
  • The Trickling Up of Excess Savings — The authors argue that excess savings created by debt-financed government transfers do not disappear as households spend them down; instead they "trickle up" to wealthier households with lower propensities to spend, so the boost to aggregate demand fades only slowly. Their benchmark estimate puts this at roughly 5 years rather than a few quarters.
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