Wealthy Americans drive the US economy and will likely delay the need for interest rate cuts by the Federal Reserve

WASHINGTON (AP) — Since retiring two years ago, Joan Harris has upped her travel game.

Once or twice a year, she visits her two adult children in different states. She is planning multiple other trips, including a science fiction convention in Scotland and a Disney cruise shortly afterward, along with a trip next year to Neolithic sites in Great Britain.

“I really have more money to spend now than I did when I was working,” said Harris, 64, an engineer who worked for 29 years in the federal government and lives in Albuquerque, New Mexico.

At the time, she and her ex-husband were paying for their children's college educations and accumulating money in savings accounts. She is now a bit of a splurge and, for the first time, willing to pay for first-class plane tickets. She plans to fly business class to Scotland and has arranged for a higher-level suite on the cruise.

“I suddenly realized, as my father got older and my mother passed away, it became more like, 'No, you can't take him with you,'” she said. “I can become so incapacitated that I can't enjoy something like going to Scotland or going on a cruise. So I might as well do it, right?”

Older Americans, like Harris, are working to sustainably strengthen the American economy. to benefit from Huge gains in stocks Over the past several years, housing markets have come to represent a larger share of consumer spending – the main driver of economic growth – than ever before.

A large portion of their spending goes toward higher-priced services such as travel, healthcare, and entertainment, in addition Upward pressure on those prices – And on inflation. Such spending is relatively immune to the Fed's efforts to slow growth and tame inflation through higher borrowing rates, because it rarely requires borrowing.

Wealthy older Americans, if they own government bonds, may benefit from higher interest rates by the Fed. These increases have caused bond yields to rise, generating more income for those who own such bonds.

The so-called “wealth effect,” whereby rising home and stock values ​​give people the confidence to spend more, is a big reason why the economy is defying expectations of a sharp slowdown. Its unexpected force, which contributes to increased inflation, has exacerbated the problem. forced A shift in the Fed's plans.

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Last March, Federal Reserve policymakers predicted they would cut the benchmark interest rate three times this year. But since then, inflation measures have remained uncomfortably high, in part because… Rapid consumer spending. Chairman Jerome Powell recently made clear that the Fed is not confident enough that inflation is falling sustainably to cut interest rates.

When the Fed meets this week, it is certain to keep its benchmark interest rate unchanged at its highest level in 23 years, the result of 11 rate hikes. The Fed's increases have pushed up borrowing costs across the economy — for everything from home and auto loans to credit cards and business loans.

Even as the Fed raised borrowing costs, the value of stocks and homes continued to rise, expanding the net worth of wealthy households. Consider that household wealth grew at a rate of 5.5% per year in the decade following the Great Recession of 2008-2009, but since 2018, it has accelerated to nearly 9%.

Stock prices, as measured by the Standard & Poor's 500 index, are about 72% higher than they were five years ago. Home values ​​rose 58% from the end of 2018 through 2023, according to the Federal Reserve.

In all, Americans' wealth swelled from $98 trillion at the end of 2018 to $147 trillion five years later. Adjusted for inflation, the gains are less dramatic, but still significant.

“People have had big wealth gains in stocks, big wealth gains in fixed income, big wealth gains in house prices, and big wealth gains even in cryptocurrencies,” said Torsten Slok, chief economist at Apollo Asset Management Group. “All of this adds up to a very significant tailwind.”

The gains are hardly universal. The richest tenth of Americans own two-thirds of household wealth. However, median household wealth — the midpoint between the richest and poorest — rose 37% from 2019 to 2022, the largest rise on record since the 1980s according to the Federal Reserve, to $193,000.

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Older people also hold wealth disproportionately. People aged 55 or older now own nearly three-quarters of all household wealth, up from 68% in 2010, according to the Federal Reserve. In percentage terms since the pandemic, household net worth has also risen for younger households. But because younger adults started at a much lower level, their gains were nowhere near enough to keep up with older Americans.

“Baby boomers are the richest generation of retirees we have ever had,” said Edward Yardeni, president of Yardeni Research. “Not everyone is well off, but we've never had a retiring generation with this much wealth. That's one of the main reasons the economy is strong.”

However, many older Americans face significant financial challenges. A quarter of Americans over 50 have no retirement savings, according to a report poll By AARP.

However, as baby boomers age and accumulate more assets on average, they account for an increasing share of consumer spending. Americans 65 and older provided nearly 22% of consumer spending in 2022, the most recent year for which data is available. This is the highest number on record dating back to 1989, up from about 16% in 2010.

One consequence of the Fed's higher interest rates has been a kind of age-segmented economy. Older, wealthier Americans who already own homes and cars were less affected by the Fed's interest rate hikes. In contrast, younger Americans suffer from a combination of expensive home prices and high mortgage rates, which makes it more difficult to purchase a first home.

Harris, for example, sees this divide in her family: Her house and car were paid off, and rising interest rates had little impact on her finances. She recently visited a house in her neighborhood and was surprised to see it was priced at $500,000. She bought it, which she thought could fetch a higher price, for $162,000 in 1991.

Her daughter, Ruby, 25, had a much different experience during a recent visit to an open house near her boyfriend's apartment in the Boston area. The old two-bedroom apartment was on the market for $800,000. Sold out within a week.

Ruby considers herself lucky to have a well-paying job as a materials engineer. But that apartment price still seems astronomical. She likes the area, especially because of its walkability, but doubts she'll ever be able to buy a home there.

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“In the long run, it probably won't be affordable to stay here,” she said. “Whereas the Midwest is more affordable, it won't have the neighborhoods that I love.”

Economists estimate that although the wealth effect overall has had a relatively modest impact on spending, it may now be larger. That's because retirement-age Americans, who are more likely to spend their wealth, make up a larger share of the nation: Americans ages 65 and over make up about 17% of the population, compared to 13% in 2010. Stock holdings can now easily access… Their account balances are online, increasing their awareness of increases in their net worth.

research Written by Michael Brown, Visa Economist Others have also found that greater wealth in the stock market typically fosters spending on discretionary items such as restaurants, travel and entertainment — sectors of the economy where spending is increasing and inflation remains high.

The Conference Board, a business research group, asks Americans… Monthly consumer confidence survey Whether they are planning a vacation abroad in the next six months. Slok noted that more than one in five families say they do, a record high percentage in records dating back to 1967.

Cruise line company Royal Caribbean just reported huge profits and strong demand, “resulting in higher prices for all of our key products,” CEO Jason Liberty told investors. “Customer sentiment remains very positive, supported by resilient labor markets, wage growth, stable inflation and record high household net worth.”

Last week, the Fed's preferred measure of inflation, excluding volatile food and energy costs, showed a rise. It increased by 2.8% over the previous year, a sign that inflation remains steady. Strong consumer spending, especially on services, was a major factor. In one measure of services inflation that the Fed closely monitors, prices rose 3.5% from a year earlier, well above the 2% inflation target.

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