How long does it take for Fed rate hikes to impact the economy, and why the effects may persist for a decade or more?

• Economic growth is predicted to be slowed by the Federal Reserve's interest rate increases.
• Interest rate changes may be prompting investors to respond more rapidly, reducing the typical delays.
• A 1% increase in interest rates can decrease GDP by 5% for 12 years, as per research by the Federal Reserve Bank of San Francisco.

Despite the 5.5% benchmark federal funds interest rate set by the Federal Reserve in 2023, the U.S. economy continues to grow.

The Fed anticipates that their interest rate choices will eventually curb growth.

The rise in borrowing costs resulting from Fed decisions does not have an immediate impact on all consumers. Instead, it mainly affects individuals who require new loans, such as first-time homebuyers. Additionally, factors like the use of contracts in business can slow the transmission of Fed decisions throughout the economy.

According to Sarah House, managing director and senior economist at Wells Fargo, the longer the elevated rates remain, the more you will experience the effects, even if they don't all hit at once.

House stated that consumers had more savings than expected due to their reduced spending during the pandemic. This extra cushion allowed them to delay borrowing, making the current cycle different from previous ones in terms of when the lags occurred.

An unexpected hike in interest rates can decrease GDP by 5% for 12 years, as stated in a research paper from the Federal Reserve Bank of San Francisco.

According to Douglas Holtz-Eakin, president of the American Action Forum, the paper's implications for central bank policymakers are negative in both the short and long term. In the short term, there are concerns about unemployment and recessions. In the long term, increases in wages come from productivity, which is where the paper's negative impact lies.

If not instantly, economists believe that financial markets may react more quickly to Federal Reserve policy changes. According to Federal Reserve Governor Christopher Waller, policy tightening is announced before it actually happens, as he stated in remarks on July 13 at an event in New York.

According to former Federal Reserve vice chair Roger Ferguson, the stock market has moved at varying speeds, which raises the question of how long it will take for the market to recover. While the consensus is that it will take a long time, there is a possibility that it could happen faster.

The impact of the Fed's interest rate hikes on the economy takes time to manifest.