Higher interest rates are rattling markets and the economy, and their effects might soon be seen in how Americans spend their money.
Goldman Sachs says it’s eyeing broader economic consequences of higher rates, and that the pressure being put on stocks could result in a diminished wealth effect. That refers to the propensity for people to spend more as they watch the price of assets like stocks and housing increase.
The 10-year US Treasury yield, which influences borrowing costs across the economy, spiked again on Wednesday, rising to its highest level since 2002.
Goldman said its base case was for the Fed to issue a single rate hike through year-end and for the 10-year yield to decline to 4.4% over the next year. But tighter financial conditions are still coming to the US, potentially resulting in a hit to stock returns and consumer spending, Pierfrancesco Mei, an economist at the bank, wrote in a client note on Wednesday.
Mei said higher rates are expected to weigh on consumer spending by hurting the appetite for credit financing, slowing demand for purchases like cars. Goldman expects higher rates to slow consumer spending growth by 0.2 percentage points in 2027, it said.
Should rates remain at these levels, stocks could also see flatter-than-expected returns, Mei added, referring to how higher rates tighten financial conditions and are typically a headwind for risk asset prices.
“Stable rates could limit upside,” Mei said. “If equities were roughly flat through 2027 because of higher rates, the missing boost from wealth effects would lower consumer spending growth by just under 0.5pp,” he added, referring to the phenomenon where people feel wealthier and tend to spend more when the stock market is doing well, and vice-versa.
Higher rates could also impact other rate-senstive sectors of the economy, such as real estate investment and business investment, the bank added. Residential real estate investment growth could decline as much 2 percentage points over the course of 2027 if rates stay at current levels, while capex, which has played a critical role in the AI trade, is expected to decline 0.3 percentage points.
Interest rates have been top of mind for investors amid the historic sell-off in bonds, which has pushed yields to levels investors haven’t seen in decades. Notably, yields have surpassed the 5% mark — a key psychological threshold in the bond market that can pressure valuations of risk assets like stocks.