Traditionally, interest rate hikes work to slow down the economy by raising the cost of borrowing. For instance, households would spend less as loans — such as mortgage for homes and hire purchase for cars — become more expensive and interest charges for credit card balances rise. Lower consumer demand and higher interest rates would result in businesses scaling back or delaying investments, further dampening economic activities. Given that household consumption accounts for more than two-thirds of gross domestic product (GDP), any slowdown will have significant impact on the economy.
The long-awaited US recession is now looking less and less likely to happen, at least according to the markets. We have no doubt a recession will eventually come to pass — it is part and parcel of economic and business cycles — but not imminently so, despite the most aggressive Federal Reserve interest rate hike in decades. This has confounded many bearish forecasts at the start of this year — and US stocks have rallied, contrary to expectations. Where the US markets go from here is of great significance, and not just for investors in US stocks, because positive or negative sentiment will spill over into other markets globally.
US households and businesses are less sensitive to interest rate hikes this time
