Interest rate hikes may mark start of new economic climate

When the Federal Reserve raised interest rates last week by the largest amount since 1994, it did more than declare war on inflation.

The U.S. central bank also launched a high-stakes test of the economy’s ability to shed its dependence on limitless credit and tolerate higher borrowing costs for consumers, businesses and the government.

For 40 years, the formula for U.S. economic growth has been the same: cheap money. Consumers could borrow easily to buy homes and cars. Companies, whether profitable or not, could tap bond investors for cash to fund their operations. And Washington could afford to bail out both Wall Street and Main Street by running eye-popping budget deficits made possible by borrowed funds.

Whenever the stock market wobbled — beginning with the 1987 crash — the Fed rode to the rescue by slashing rates and flooding markets with cash.

Those days are over, at least for now.

“It’s just a completely different environment,” said Eric Winograd, senior economist with AllianceBernstein in New York.

The Fed’s three-quarter percentage point increase in its benchmark lending rate this week marked an abrupt end to more than four decades of falling, and ultimately near-zero, interest rates.

The shift has rocked financial markets, driving mortgage rates to their highest level in nearly 14 years, sending bonds into their steepest plunge ever and tanking speculative investments such as technology stocks and bitcoin, a cryptocurrency.

As the economy adjusts, more tumult lies ahead. Consumers, already feeling the pinch of higher prices, will pay more for credit card balances and auto loans. The least creditworthy companies will struggle to raise money needed to hire and expand. And Uncle Sam will face tens of billions of dollars in higher annual interest bills.

American households may find the transition out of the low-rate era particularly challenging. The jump in rates has closed the door on mortgage refinancings, a source of added cash for millions of homeowners over the past year, according to data from the Federal Reserve Bank of New York.

The high inflation that prompted the Fed to act is also making it hard for people to grow their wealth.

“Stocks, bonds and cash — we’re in a bear market for all three,” said Liz Ann Sonders, chief investment strategist for Charles Schwab & Co.