For nearly two decades, borrowing was easy. Interest rates hovered near historic lows, making debt cheap, abundant and justifiable — even for things we did not really need. But that period is over, and with it, the assumption that money will always be inexpensive.
When inflation surged to 9.1 percent in 2022 — the highest in 40 years — the Federal Reserve responded with its sharpest rate hikes since 2007. The federal funds rate shot above 5 percent, sending borrowing costs surging. Some feared a financial reckoning, but instead, the economy adapted. Businesses and households are navigating this new reality, making more deliberate financial choices rather than retreating from the market. It is not the end of growth; it is the end of easy money — and success now belongs to those who borrow wisely.
Consider the housing market. Mortgage rates now hover just below 7 percent, yet total mortgage balances reached a record $12.6 trillion in late 2024. While higher borrowing costs have slowed sales, they have not derailed the market. Limited inventory — driven by homeowners reluctant to trade in ultra-low rates — has kept prices stable and demand intact. Buyers are adapting. Some are exploring alternative financing options, while others are leveraging savings or adjusting their expectations. Meanwhile, builders are increasing production, and policymakers are expanding housing assistance programs to support affordability.
Businesses, too, continue to borrow. The Small Business Administration reported a 7 percent increase in financing last year, totaling $56 billion, and commercial and industrial loan balances hit $2.8 trillion in December 2024. The idea that rising interest rates kill borrowing has not held up. Instead, we are seeing a shift toward more deliberate, strategic lending. Companies are scrutinizing their financing more carefully, prioritizing investments with clear returns rather than chasing cheap capital.
Consumers, like businesses, are recalibrating rather than retreating. Household debt has climbed to a record $17.9 trillion, but debt payments as a percentage of disposable income remain at 11.3 percent, below pre-pandemic levels and well below the 15.8 percent peak before the 2008 financial crisis. Rising incomes and household wealth have put consumers in a stronger position to take on additional debt and, in many cases, make purchases without relying on credit. While caution is warranted here, and credit card delinquency rates have risen above 3 percent, the ability to for consumers to absorb higher costs without widespread financial distress reflects the resilience of both the labor market and household balance sheets.
Perhaps most importantly, higher rates are not universally bad. Keeping money in your mattress has never been a wise strategy, but for years, parking it in a savings account was not much better. That has finally changed. Savers, long neglected in the era of near-zero interest rates, are seeing meaningful returns again. Money market funds now yield over more than 4 percent — a sharp contrast to the days when interest barely covered the cost of a cup of coffee. Retirees who rely on fixed-income investments are also benefiting, restoring a sense of financial security that had been eroding for more than a decade.
The Fed is keeping its options open. Rate cuts could come in 2025, but only if inflation cooperates. If the economy stays strong, higher rates may linger. If growth stumbles, policymakers may pivot. Either way, one thing is certain: the era of free money is over. This shift is not a crisis — it is a correction. Borrowing now requires justification. Spending demands thoughtfulness. Financial choices carry more weight. Success no longer belongs to those who borrow the most, but to those who borrow the best.