Higher interest rates are disturbing the market and the economy, and their effects may soon be reflected in the way Americans consume.

Goldman Sachs stated that the bank is paying attention to the broader economic consequences of higher interest rates, and the pressure on the stock market could weaken what is known as the "wealth effect." The wealth effect refers to the tendency for people to be more willing to increase their spending when they see increases in the prices of assets such as stocks and housing.

The yield on 10-year U.S. Treasury bonds is an indicator that affects the borrowing costs of the entire economy. On Wednesday, it soared again to its highest level since 2002.

Goldman Sachs stated that its baseline scenario is for the Federal Reserve to raise interest rates once before the end of the year, with the 10-year yield falling back to 4.4% over the next year. However, the tighter financial conditions will still be transmitted to the U.S. economy, potentially dragging down stock returns and consumer spending, wrote Goldman Sachs economist Pierfrancesco Mei in a report sent to clients on Wednesday.

Mei indicates that higher interest rates are expected to suppress consumer spending by dampening the willingness for credit financing and slowing down demand for goods such as automobiles. Goldman Sachs predicts that higher interest rates will cause the growth rate of consumer spending to slow down by 0.2 percentage points in 2027.

Mei added that if interest rates remain at the current level, stock market returns could also fall short of expectations, as higher interest rates would tighten financial conditions, which typically puts pressure on the prices of risk assets.

"A stable interest rate may limit the upside potential," said Mei. "If stocks remain relatively flat around 2027 due to rising interest rates, then the lack of a wealth effect would result in a decrease in consumer spending growth of no more than 0.5 percentage points." What he means is that when the stock market performs well, people feel richer and tend to increase their spending; and vice versa.

Goldman Sachs added that higher interest rates could also affect other interest rate-sensitive areas of the economy, such as real estate investment and business investment. If interest rates remain at current levels, the growth rate of residential real estate investment could decline by up to 2 percentage points over 2027, while capital expenditure, which plays a key role in artificial intelligence trading, is expected to fall by 0.3 percentage points.

During the historic sell-off in the bond market, interest rates have been a focal point for investors. This round of selling has pushed yields to levels not seen by investors in decades. Notably, yields have broken through the 5% threshold, which is a key psychological barrier in the bond market and may put pressure on the valuation of risk assets such as stocks.