WASHINGTON -- The surge in U.S. interest rates this week could spell higher costs for consumers, crimping their spending and cutting into economic growth.
Indeed, there is a sense globally that the days of low- cost loans and cheap money — which fueled everything from consumer spending and investment strategies to company mergers — may be over.
Central banks around the world are raising rates to curb inflation and damp down accelerating economic growth. In turn, interest rates are rising sharply.
In the United States, expectations that the Federal Reserve would not cut rates this year drove the yield on the 10-year Treasury note — a benchmark for many types of loans — up nearly a quarter of a percentage point this week alone. And stock markets — until braking on Friday — sank as investors worried about the impact of higher corporate borrowing costs on profits.
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"The fallout on consumers will be even more substantial if the stock market were to falter in a significant way, further hurting household wealth," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.
For the consumer, borrowing costs for mortgages and refinancings will be higher, which could put even more of a damper on a troubled housing market and an economy that barely budged during the first quarter.
So far this year, consumer spending has held steady, but a change in borrowing costs could impact that.
"Our view is that the consumer was already in the midst of slowing and higher interest rates make that even more likely," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities.
"We're looking for a slowdown in consumer spending from 3.5 percent-4 percent to 2 percent- 2.5 percent," LaVorgna added.
PAIN IN THE POCKETBOOK
Consumer sentiment is fading, according to the latest reading from the RBC Cash Index survey, which found U.S. consumers less sanguine about their current prospects.
"In spite of continued jobs growth, U.S. consumer sentiment is weighed down by several factors," said T.J. Marta, economic and fixed-income strategist for RBC Capital Markets. "Mortgage rates have spiked to their highest since last July, gasoline prices remain above $3 per gallon going into the driving season and equity prices have begun to waver after two months of gains."
Amid these weights on the consumer, inflation concerns are now perking up even more, as forecasts are calling for stronger economic growth later this year. A growing number of firms are shifting their expectations for actions from the Federal Reserve to a rate increase rather than a cut in the central bank's benchmark overnight fed funds rate.
However, any such action is not expected until next year.
And most Wall Street firms are still pricing in a rate cut because of the sluggish growth the economy saw in the first three months of this year..
"I am still waiting to hear any good economic argument that could validate any potential lowering of the federal funds rate," said Eugenio J. Aleman, senior economist at Wells Fargo.
For a year now, the Federal Reserve has held rates steady, but all the while, the central bank has kept inflation risks as its key concern.
There is a silver lining in the cloud of slower consumer spending later this year, however. Economists say this may actually help the Fed in its effort to curb inflation.
"The current slowdown in consumer expenditures could be the helping hand the Federal Reserve has been waiting for so they don't have to increase interest rates yet again," Wells Fargo's Aleman said.
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