The financial world has braced for a slowdown. The Fed has r...

The financial world has braced for a slowdown. The Fed has raised rates at breakneck speed and has stopped bond purchases. If a recession hits America, pundits reckon profits will tank, and stocks will fall by a third. But if they're wrong, markets will continue their rise, and the nay-sayers will have missed out. Is the economy more potent than most expect? Yes, and a recession this year is unlikely.
First, rate hikes have stimulated, not snuffed, the economy. They have increased the government's interest bill and deficit. That means more money going into the private sector. Over the past year, the nation's interest payments have risen by a third to $1.2trn, an increase of 1% of GDP. Interest payments on government debt are now 4.5% of the nation's income. Unless it finances it with taxes, the deficit, the gap between government spending and taxes, goes up. That creates new money. With the deficit at 5% of national income already and set to increase, that's a lot of cash in the private sector's hands.
While we're still a ways off the interest bill hitting 6% of GDP, as it did in the '80s, higher rates mean increased refinancing costs. Once lawmakers raise the debt ceiling, the Treasury will issue new debt and refinance the old stuff at higher rates. That will increase the interest bill and stimulate demand more.
Second, the country’s net worth has risen despite higher rates, and the job market is robust. According to the Federal Reserve’s Flow of Funds report, the private sector is worth 6% more than a year ago. That is despite a slight drop in households’ net worth. Businesses have prospered while families are a little poorer in inflation-adjusted terms. The relative strength of corporate balance sheets helped. Higher interest rates pushed money into the economy and companies expanded.