I should have pulled the trigger when I had the chance. Not long ago, I was feeling flush, and toying with the idea of transforming my recent stock market gains into something my family sorely needed: an eat-in kitchen.
Why it matters: Aside from my personal quest to calmly stir mac-and-cheese while chatting with my wife and five-year-old daughter, our will-they-or-won't-they renovation drama shows how Fed rate hikes turn human psychology into a tool of monetary policy.
State of play: Just a couple months ago, the financial logic for a renovation was clear and compelling.
- After 20 years of obsessively maxing out my 401(k) contributions — and about two years in which the stock market basically doubled — I was overcome by an odd sensation I'd never before encountered: confidence in my retirement.
- Meanwhile, low interest rates would make the borrowing costs for the project pretty affordable.
- And superheated home values where we live — Westchester County, just north of New York City — likely made sinking a bit of cash into our circa-1940 Cape Cod-style cottage the best investment I could make.
Context: We love the place, but it has a tiny, somewhat bizarre kitchen. For example, to maximize space, a previous owner mounted and framed the microwave in the wall, like some sort of mixed media art installation. (Its weirdness probably turned off other buyers, and helped us get the house. But it's a never-ending irritant.)
The intrigue: As has become abundantly clear recently, all the factors I mentioned above — the home price boom, the low borrowing costs, the soaring stock market — were side effects of one simple fact: Money was remarkably cheap, thanks to the Fed.
That's changing. Since March, the Fed has raised interest rates twice, and talked tough about more hikes to come. And just like that, all the solid economic underpinnings of my plan have gone wobbly.
- Borrowing costs have surged — just look at the 30-year mortgage rate, at 5.25% compared to sub-3% for much of last year.
- The housing market seems like it may start to slow.
- The stock market has buckled. With the S&P 500 down by roughly 19%, my 401(k) doesn't inspire quite as much optimism as it used to.
How it works: My experience is a pretty clear example of what economists call the wealth effect.
- When the value of assets — like stocks and houses — goes up, it can spur additional investment, and consumption.
- This chain is part of the way the Fed's interest rates influence the people leading households, companies and large institutions.
- It's not an exaggeration to say that Jerome Powell gets in their heads and changes their psychology, and by extension, the economy.
Yes, but: There's a valid criticism that because the wealth channel is an effective way of influencing the economy, it's led the Fed to focus too much on keeping stock prices and home values up. And since stocks and homes are owned by the richer part of American society, this has worsened wealth inequality in recent years.
- On the other hand: It's also helped lower the unemployment rate, which benefits a broad range of Americans.
The bottom line: The fate of our eat-in kitchen hangs very much in the balance at the moment. We're not giving up on the idea.
- But we're not making a big push to get it done soon. So our family will be demanding less lumber, tile, wiring and labor than we might have if Powell and his pals hadn't started lifting rates. And that's exactly what they wanted.
