Currently, the US economy as a whole is resilient. Despite some recent correction, the overall performance of US stocks is still quite good. To say that high interest rates have had a substantial negative impact on the US economy, this argument is hard to convince.

Along with the rise in US inflation in recent months — inflation is sticky at the 3% level, which is significantly higher than the Fed's 2% target, it has triggered a retracement in interest rate cuts prospects. The question at hand is: What would happen if the Federal Reserve decided to keep interest rates at current levels for a longer period of time, or even stay on hold for the whole of 2024? What would happen if the Federal Reserve didn't cut interest rates next, but raised interest rates one or two more times? What impact will the Federal Reserve's actions have on financial markets and the wider economy?

Looking back at the beginning of this year, investors did not anticipate these problems. At least at this stage, the “high interest rates will last longer” scenario makes Wall Street and market participants uneasy. Because the market generally believes that from a pricing perspective, if interest rates rise, adjustments must be made, and the situation has changed.

Industry insiders pointed out that we should pay close attention to the information conveyed during the current earnings season, and answers to some questions will soon be revealed. Company executives will provide important details other than revenue and profit, including the impact of interest rates on profit margins and consumer behavior. If there are any signs that companies are having to start cutting costs and causing problems in the labor market, then this would be a sign that keeping interest rates high may be causing problems.

Looking back at history, high interest rates do not necessarily mean bad things for the US stock market and the country's economy; they may even be a good sign. It makes no sense for high interest rates to cause a recession. Generally speaking, as long as high interest rates are linked to economic growth, then this is not a bad thing. Of course, this isn't absolute. The last time this was not the case, then Federal Reserve Chairman Volcker used aggressive interest rate hikes to curb inflation, with the ultimate intention of causing the US economy to fall into recession.

In times of strong economic growth, such as now, the Federal Reserve rarely cuts interest rates. This week, the US will release GDP data for the first quarter of 2024. The market is expected to be 2.4% annualized. If this were the case, this would mark the 7th consecutive quarter of US growth of more than 2%.

By contrast, the Federal Reserve keeps interest rates too low for too long, which is more likely to lead to a crisis. For example, it spawned the internet bubble and subprime mortgage crisis. Before the COVID-19 outbreak, the Federal Reserve's benchmark fund interest rate was only 1%. In other words, the recent major recessions were instead a crisis created by a period of low interest rates.

Some economists believe that the impact of the Federal Reserve's policies on the US economy has been exaggerated. Their evidence includes that the Federal Reserve tried to raise the inflation rate to 2% through monetary policy for more than 10 years before the COVID-19 outbreak, but it basically failed. From another perspective, the Fed's monetary policy mainly affects the demand side. This part is still strong, while the supply side largely exceeds the control of interest rate policies, and this is the main driver of the slowdown in inflation.

Based on the above reasons, US inflation soared after the COVID-19 outbreak and then fell. Although the downturn occurred at the same time as the Federal Reserve's tight monetary policy, this made some economists wonder how much the Fed actually contributed to this.

Where interest rate policies really work is in the financial market, which in turn affects the state of the economy. Interest rates that are too high or too low can distort financial markets. In the long run, this will ultimately damage the economy's productive capacity and may lead to bubbles, thereby destabilizing the economy.

Some industry insiders pointed out that the current interest rate level in the US is too high for the financial market, and the Federal Reserve should gradually restore interest rates to a normal level, neither very low nor very high, and maintain that level.

Currently, the market expects the Federal Reserve's 2.6% neutral interest rate to be unrealistic, that is, it neither stimulates nor limits the level of interest rates in the economy. Goldman Sachs recently thought the neutral interest rate could be as high as 3.5%. Cleveland Federal Reserve Chairman Meister also recently said that long-term neutral interest rates may be higher.

Therefore, although the market generally expects the Federal Reserve to cut interest rates sooner or later in the future, it will not return to interest rates close to zero after the financial crisis. In fact, over time, the federal funds rate has averaged 4.6% since 1954, including the seven-year period of near zero interest rates after the 2008 financial crisis.

Furthermore, many economists mentioned that the reason why the Federal Reserve's austerity policy did not have a serious impact on the US economy is related to the fact that the US government's large-scale spending has offset the Fed's interest rate hike to a certain extent. However, the sharp rise in US national debt and the increase in the multiplier ratio caused the US government's net interest expenses to explode.

Since the outbreak of COVID-19 in March 2020, the US national debt has soared to $34.6 trillion, an increase of nearly 50%. The US federal government's budget deficit is expected to reach $2 trillion in fiscal year 2024, and net interest expenses will exceed $800 billion. The US government deficit was 6.2% of GDP in 2023, compared to the EU only allowing 3% of its member states.