Of Interest

How much will higher interest rates hurt? Higher rates usually impact economic activity with a lag, so it is probably too soon to tell. In the developed economies where rates have increased dramatically from ultra-low levels, the answer so far is not much. We have seen banking turmoil, or at least in some parts of the banking sector, but little impact on employment or consumer spending. At any rate, the banking panic seems to have eased, thankfully, and casualties have been limited. At least, the acute phase appears to be over, though we might still enter a chronic phase of uncertain timing, breadth, and severity as banks cut back lending, which in turn causes some borrowers to default, inflicting losses on the banks. Consumers and corporates are also still switching deposits from smaller to larger banks and money market funds.