Pandemic effects and government aid are blunting impact of higher rates, for now
5 min
The world’s central banks raced at an extraordinary pace over the past year to cool inflation, but it hasn’t proved enough—yet.
Economic growth remains mostly solid and price pressures strong across affluent countries despite sharply higher interest rates.
Why haven’t growth and inflation slowed more? Much of the explanation lies in the pandemic’s weird effects and the time it takes for central-bank rate increases to curb economic activity. Additionally, historically tight labor markets have fuelled wage gains and consumer spending.
First, the unusual nature of the pandemic-induced 2020 recession and the ensuing recovery blunted the normal impacts of rate hikes. In 2020 and 2021, the U.S. and other governments provided trillions of dollars in financial assistance to households that were also saving money as the pandemic interrupted normal spending patterns. Meanwhile, central banks’ rock-bottom interest rates allowed companies and consumers to lock in low borrowing costs.
Households and businesses continued to spend heavily in recent months. Families tapped their savings, which were replenished by solid income growth. Businesses kept hiring thanks to pandemic-related labour shortages and large profits.
“There are just a lot of embedded pandemic-era forces that are working against this tightening,” Tom Barkin, president of the Federal Reserve Bank of Richmond, told reporters last week.
Two industries traditionally sensitive to interest rates—autos and construction—offer examples.
Pandemic-related shortages of semiconductor chips limited the supply of cars for sale, leading eager buyers to pay higher prices for the vehicles available. Although U.S. construction of single-family homes tumbled last year, construction employment grew over the past 12 months. Fuelling job growth were supply-chain bottlenecks that extended the time needed to finish homes and a record amount of U.S. apartment construction, which takes longer to complete.
U.S. single-family housing construction has rebounded recently thanks to historically low numbers of homes for sale. Many households refinanced during the pandemic and locked in low mortgage rates—a good reason to stay put. “I didn’t fully anticipate how much the move in interest rates would convince people not to put their houses on the market,” Barkin said.
Normally, the Federal Reserve’s rate increases force heavily indebted consumers and businesses to rein in spending because they have to pay more to service their loans. But consumers haven’t overextended themselves with debt over the past two years; household debt service payments accounted for 9.6% of disposable personal income during the first quarter, below the lowest levels recorded between 1980 and the onset of the pandemic in March 2020.
“A lot of the imbalances you might anticipate at this point in the cycle just have not had the time to build up,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
Second, government spending has continued to bolster growth, cushioning economic shocks that proved less catastrophic than expected. While Europe’s energy crisis helped to tip the region into a shallow recession over the winter, the region skirted the deep downturn that some analysts had forecast. European governments pledged up to $850 billion to support spending.
This year falling oil and natural-gas prices have pumped up economic growth by putting money into consumers’ pockets, boosting confidence and easing pressures on government budgets. The price of a barrel of oil has fallen by nearly half in the past year, from around $120 to less than $70—below its level before Russia’s 2022 invasion of Ukraine sent prices soaring.
The reopening of China’s economy supported activity in the country’s many trading partners, while weak domestic growth prompted Beijing this month to provide new stimulus.
In the U.S., fiscal policy has provided more oomph for the economy this year. Federal funding continues to flow from President Biden’s roughly $1 trillion infrastructure package approved in 2021 and two pieces of legislation signed last year that provide hundreds of billions of dollars to boost renewable-energy production and semiconductor manufacturing.
Third, it takes time for higher interest rates to ripple through the economy and cool growth and inflation. The Bank of England first raised interest rates from near zero in December 2021, while the Fed and the European Central Bank lifted off in March 2022 and July 2022, respectively.
By some estimates, the first two-thirds of the Fed’s rate increases only restored rates to a level that was no longer pushing on the gas pedal, while the last third slowed the economy by pressing the brakes. The upshot is that policy has restricted growth for just eight or nine months, Atlanta Fed President Raphael Bostic wrote in an essay published last week.
Chicago Fed President Austan Goolsbee compared the potential coming impact of the Fed’s 5 percentage points in rate increases to the unseen hazards faced by Wile E. Coyote, the unlucky cartoon character. “If you raise 500 basis points in one year, is there a huge rock that’s just floating overhead…that’s going to drop on us?” he said in a recent interview.
Dario Perkins, managing director at the research firm TS Lombard, said higher rates are slowing growth in ways that aren’t obvious, such as by causing employers to cut unfilled jobs or companies to forgo expansion. “It might appear that monetary policy isn’t working when, in fact, it is,” he wrote in a recent report.
To be sure, some central banks might not have done enough to cool demand. The ECB, for example, increased its key rate to 3.5% this month, but it is still negative when adjusted for inflation—potentially a stimulative level.
Many economists still anticipate a recession over the next six to 18 months, either because of past rate increases or those to come.
Just how much higher to raise rates is hard to judge because of mixed signals about economic activity. In the U.S., hiring has been strong, but average hours worked declined in May and the number of people filing for state unemployment benefits has climbed in recent weeks to its highest levels since late 2021.
Falling energy and grocery prices helped lower U.S. inflation to 4% in May from a four-decade high last summer of around 9%, according to the Labor Department’s consumer-price index. The breadth of price increases has narrowed. In May, less than 50% of all prices in the CPI rose by more than 5%, down from 80% of the index at one point last year.
Central bankers remain anxious, however, because measures of so-called core inflation, which exclude volatile food and energy prices, have declined much less. Those readings tend to better predict future inflation.
Central banks in Norway and the U.K. announced half-point interest-rate increases last week to address persistent inflation. Central banks in Canada and Australia recently resumed rate increases after pausing, pointing to higher service-sector inflation and tight labor markets.
The Switzerland-based Bank for International Settlements, a consortium of central banks, warned in a report released Sunday that reducing inflation to many central banks’ 2% target could be harder than expected.
Easy gains from lower energy- and food-price inflation have been banked. The longer high inflation lasts, the more likely it is that people will adjust their behaviour and reinforce it, the BIS said. In that scenario, central banks might find they need to cause a sharper downturn to force inflation down to their goal.
“The ‘last mile’ may pose the biggest challenge,” the BIS said.
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Randy Boyagoda’s new novel, “Lords of Serendipity,” delivers a biting satire of cheating, politics and dysfunction across modern universities.
5 min
Administrative cowardice. Rampant cheating. The soaking and scamming of undergrads and grad students. Performative wokeism. Intensifying competition for international tuition dollars from an expansive China.
These are either the latest dire headlines about American higher ed or the myriad subplots of “Lords of Serendipity,” an ambitious new novel by Randy Boyagoda. Unlike most campus fiction, its scope extends well beyond the cloister of the liberal arts classroom to whammy the entire university system, from its financial model to its function within a globalized economy. Along the way, it skewers its lightning-rod targets with a precision too sharp to be considered entirely fictional.
That its author is not only well-versed in satire, having written four other novels in the genre, but is also a professor of English at the University of Toronto and an experienced college administrator, further blurs the lines between comic fiction and brutal fact. It’s the kind of no-holds-barred book only a consummate insider would know to write—but only one who is also conveniently outside the American university system could get away with writing.
“This is someone who’s got the inside dope on what can go on at universities, especially with international students, and what kind of con games are going on,” said Margaret Atwood, a friend and fellow Torontonian.
The novel, like Boyagoda himself, is often very funny—even as the dilemmas its characters face read as tragedy. Its cast includes the bickering members of a Sri Lankan hotel cleaner’s family, insecure American freshmen, dead-end third-tier college professors and their highflying Ivy League counterparts and dispirited university functionaries. An old-fashioned Dickensian tale, it sweeps across continents and campuses, from a classic liberal-arts college to a stand-in for Harvard University to an urban technical school to the dilapidated buildings of a state-run university in Sri Lanka.
“I’m a joyful person,” Boyagoda said in an interview, though he prefers to see his outlook on academia as “hopeful” rather than optimistic. He smiles and laughs frequently. He bikes everywhere. He derives energy from his students and from his four daughters, ages 14 to 20. They help him and his American wife, Anna, also an educator, care for Boyagoda’s father, an immigrant from Sri Lanka who has dementia and lives with the family.
The germ of the novel came to Boyagoda during the pandemic, when he was serving as a vice-dean. An urban legend was circulating about a statistics grad student selling passing grades to international students. The cheating scheme itself may well have been apocryphal, but it felt tantalizingly plausible.
“As a novelist, it stayed with me,” Boyagoda said. “Who would sell grades for a stats course? Why would someone buy grades? What’s motivating them? Why wouldn’t the university be doing something about it?” What he didn’t want to do, he explained, was write “another novel about a creative writing professor and his drama with students.”
In addition to writing novels—the first of which was a finalist for Canada’s prestigious Giller Prize; he’s written eight books in total—Boyagoda teaches literature full-time. For his students next semester, kids raised in a purportedly “post-literature era,” he’s assigning three 700-page novels, he noted mischievously, books by George Eliot, Ralph Ellison and Kiran Desai.
On RateMyProfessors, students remark on Boyagoda’s heavy assignments, tough grading and distaste for cellphones, but also hail his “comedy.” When alerted to these reviews, Boyagoda laughed. “Guilty as charged,” he said.
“Randy’s one of those people in academia who is very well educated but doesn’t have an ounce of superiority about him,” said John Irving, who frequently guest lectures in Boyagoda’s classroom. “It’s amazing to see how willing students are to talk in his classrooms, how little afraid they feel of being mocked or put down—he gets complete candor out of them.”
Negotiating competing interests seems to come naturally to him. Like many college campuses, after the Oct. 7 Hamas attack on Israel, the University of Toronto was embroiled in protests, encampments and discord; part of the school’s response was to convene a working group on civil discourse. Boyagoda was put in charge, serving for two years. It’s the kind of thankless task many professors would flee from, but Boyagoda relished the prospect and thinks the group, which is ongoing, made progress.
He has since pivoted to another formidable academic concern: the waning prestige of the humanities. In July, Boyagoda became the director of the Jackman Humanities Institute and special advisor on the humanities to the dean of arts and science. This fall, he is starting a series of gatherings he calls the Dead Book Club. (Dead writers feature heavily among his favorites: St. Augustine, Dante, William Faulkner, Evelyn Waugh, Saul Bellow.)
“The goal is to encourage students to read for its own sake and have conversation for its own sake,” Boyagoda said. “The importance of the humanities will be revealed to those who participate.”
“Lords of Serendipity,” which publishes next week, reflects Boyagoda’s commitment to the pursuit of knowledge: “I’m supposed to say I learn more from my students than they do from me, but no,” Boyagoda said. “I enjoy sharing my excitement and joy about literature and ideas. There are these moments when you are teaching and you can see someone’s face change because they didn’t know something and then they did. That moment when you’re actually watch someone enlarge themselves is deeply satisfying.”
In literary circles, Boyagoda is often referred to as a Catholic novelist, a description he embraces. “A novelist willing to give shape and voice to contemporary religious experience is needed,” Boyagoda said. “I understand myself as a Catholic novelist, provided that I’m not only a Catholic novelist, I’m also a South Asian novelist and I’m a Canadian novelist. I don’t want to be captive to one label.”
His characters, he said, are subjected to what he calls “Graham Greene character situations.”
“They are trying to do good in a fallen world and realize the most they can do is less harm than someone else would do in that same role,” he explained. “They have to accept they are complicit in something that provides some good thing to others. It’s a very Graham Greene way of thinking about sacrifice.”
The campus green they inhabit is a febrile zone in which lofty ideals and cynicism regularly collide. It’s a place where a traditional holiday college celebration is now an occasion for political protest. Kids freely police one another inside and out of the classroom with social media their constant, ready weapon of choice. International students, knowing their family’s financial futures hinge on their degrees, operate in terror of failure and deportation.
Early readers of the book include Gary Shteyngart and Junot Diaz, both of whom have taught at universities and written comic novels. They each contacted Boyagoda midway through to say, in essence, “You nailed it.”
As biting as “Lords of Serendipity” can be, Boyagoda’s faith in higher education remains undaunted.
“It’s absurd that we live in societies that make the decision to take people between the ages of 18 and 22, when they are most physically capable of contributing to our nations and communities, and tell them, ‘Go away for four years, and read and learn and have conversations,’” he said. “I want students to be aware of what an incredible privilege that is.”
Corrections & Amplifications
Randy Boyagoda is a special advisor on the humanities to the dean of arts and science at the University of Toronto. An earlier version of this article incorrectly said he is a special adviser to the dean of humanities. (Corrected on Sept. 2)
