Are Higher Rates Slowing the Economy? A Zoo Offers Clues.

Leesburg Animal Park in Northern Virginia has seen strong business at its Pumpkin Village festival this autumn. Even with rainy weekends and a jump in admission prices, families have been coming out to visit the petting zoo, ride on giant slides and zigzag through a hay-bale maze.

Shirley Johnson, the park’s owner, had been nervous that demand might recede. Headlines were warning all year about impending recession as the Federal Reserve raised interest rates to cool growth and contain inflation. That downturn hasn’t happened, but the uncertainty and higher borrowing costs have influenced her investment plans.

“You can’t stick your neck out quite as far as you could,” she said. The park has held off on an expansion of its gibbon pen, a big project that would have given the playful primates more space, but would have also required taking out a loan.

The park’s experience is one example of a story playing out across the country. More than a year and half into the Fed’s campaign to cool the economy, higher borrowing costs are clearly weighing on business investment and some interest-rate-sensitive sectors, but consumers are spending at a much stronger clip than had been expected.

That resilience has central bankers on watch. For now, they are pleased that the labor market and economic growth have held up even as inflation has come down substantially, and this week Fed officials chose to leave interest rates unchanged as they wait to see whether that can continue. But they are also looking for further evidence that their moves are working to restrain the economy.

“Everyone has been very gratified to see that we’ve been able to achieve pretty significant progress on inflation without seeing the kind of increase in unemployment that is very typical” with interest rate increases, Jerome H. Powell, the Fed chair, said on Wednesday. “The same is true of growth.”

But he said that economic growth, which is mainly powered by consumer spending, would likely need to slow for inflation to fully return to a normal pace. It is now running at about 3.4 percent, still well above the Fed’s 2 percent goal.

“What we do with demand is still going to be important,” he said.

Surveying the economy, the effects of the Fed’s rate moves are clear in some places, mixed in others and have yet to make much of a dent elsewhere.

What has the Fed done with interest rates?

Starting in March last year, the Fed has raised its key rate, which is now set to a range of 5.25 to 5.5 percent. That is above the level that central bankers think is necessary to slow the economy over time.

Higher Fed rates have also helped to push up longer-term borrowing costs in markets, sending mortgage rates to nearly 8 percent, a more than two-decade high.

Despite that, growth remains a lot quicker than economists think is normal. The economy expanded at a 4.9 percent annualized rate from July through September, the Commerce Department reported last week. That has prompted a debate about whether the Fed’s policies are succeeding at cooling things down.

While economists think higher borrowing costs are having an effect, policymakers are watching the data to get a sense of whether they are weighing on the economy enough to fully wrangle inflation.

“There’s a question of calibration,” William English, a former Fed economist who is now at Yale, said of the higher rates. “But are they working? Sure.”

Where are the effects of higher rates clear?

Higher rates tend to dent stock prices: Higher borrowing costs hurt the outlook for corporate profits and prod investment funds toward higher returning interest-bearing securities like bonds. That effect has begun to show up, although markets have been volatile.

The S&P 500 fell for three consecutive months, from August through October, which coincided with longer-term market rates shooting higher. Stocks are off to a stronger start in November, as long-term yields have dipped in recent days.

Higher rates have driven up the value of the dollar, which makes imports cheaper for local buyers and U.S. exports more expensive abroad, among other effects.

And steeper borrowing costs slow business investment. For instance, investment in equipment has been negative for three of the past four quarters, which could be a sign of rate increases at work. Caterpillar, the maker of industrial equipment, spooked investors this week when it reported a shrinking order backlog.

Where are the effects mixed?

While the Fed’s rate moves have made it more expensive to borrow to buy a house or a car, both of those markets have had shortages recently — making it complicated to see the effects.

Take cars. They were in painfully short supply for months during the pandemic, as supply chain problems collided with strong demand. Supply has returned, but now there is a hole in the used car market, since far fewer new cars than usual were sold in 2021 and 2022.

Car buyers have pulled back in recent months, but pent-up demand means that sales have eased, not plummeted.

“It’s been more resilient than we thought this year,” John Lawler, the chief financial officer at Ford, said on a recent earnings call. He noted that vehicles now cost about 14 percent of a consumer’s monthly disposable income, up from 13 percent before the pandemic, and Ford expects a gradual return to normal over the next 12 to 18 months.

The housing market is even more complex. Housing supply is limited, partly because people who have locked in low mortgage rates are now hesitant to sell. Given a dearth of older houses on the market, existing home sales are way down, but new home sales have stabilized and home prices are popping.

Where are the effects not showing up?

If there’s one place where it’s tough to see higher rates biting, it’s the consumer sector.

The job market has held up even as the Fed’s rate moves weigh on some parts of the economy: Hiring has slowed on average this year compared with last year, but it remains quicker than what was normal before the pandemic. Wage gains have cooled, but are also faster than the pre-2020 pace.

That has allowed Americans to keep shopping, even through price increases and fading government pandemic relief. Spending climbed faster in September than economists had expected.

Strong consumption could be a concern for the Fed, if it lasts, because it could enable companies to keep raising prices to cover their own costs or protect profits without losing customers — which could keep inflation rising.

Take the animal park. It has made some medium-size investments this year, like improving its camel enclosure. But those projects cost money, and day-to-day operations have become more expensive.

To keep up, the business raised prices. They scrapped a cheaper child ticket for the Pumpkin Village. Ordinary weekday visits also cost more: $17.95 for adults, per the park’s website, up from $15.95 at the end of 2021.

So far, consumers are still coming.

“People just want to be outside,” Ms. Johnson said. “It’s good old-fashioned fun.”