The average interest rate at origination for outstanding mortgages is currently around 4% in most states, see map below. With 30-year fixed mortgage rates currently above 7%, this map shows why Fed hikes over the past two years have had such a limited impact on the housing market and consumer spending. Similarly, most corporates have locked in low interest rates during the pandemic.
In addition, consumer spending continues to be boosted by significant wealth gains for households coming from the AI story driving the S&P 500 higher and households receiving decade-high levels of cash flow from fixed income, including private credit.
The bottom line is that easy financial conditions combined with locked-in interest rates for households and firms have made the transmission mechanism of monetary policy much weaker than expected.
In other words, the ongoing strength of the economy is due to easy financial conditions and locked-in low interest rates for the private sector.
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