How Fed Rate Hikes Impact US Debt Slaves

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by Wolf Richter, Wolf Street:

But savers are still getting shafted.

Outstanding “revolving credit” owed by consumers – such as bank-issued and private-label credit cards – jumped 6.1% year-over-year to $977 billion in the third quarter, according to the Fed’s Board of Governors. When the holiday shopping season is over, it will exceed $1 trillion. At the same time, the Fed has set out to make this type of debt a lot more expensive.

The Fed’s four hikes of its target range for the federal funds rate in this cycle cost consumers with credit card balances an additional $6 billion in interest in 2017, according to WalletHub. The Fed’s widely expected quarter-percentage-point hike on December 13 will cost consumers with credit card balances an additional $1.5 billion in 2018. This would bring the incremental costs of five rates hikes so far to $7.5 billion next year.

Short-term yields have shot up since the rate-hike cycle started. For example, the three-month US Treasury yield rose from near 0% in October 2015 to about 1.3% these days. Credit card rates move with short-term rates.

Mortgage rates move in near-parallel with the 10-year Treasury yield, which, at 2.39%, has declined from about 2.6% a year ago. Hence, 30-year fixed-rate mortgages are still quoted with rates below 4%, and for now, homebuyers have been spared the impact of the rate hikes.

Auto loans, in line with mid-range Treasury yields, have wavered a lot and moved up only a little. The average APR on a 48-month new-car loan rose only 40 basis points over the past two years to 4.4% in August 2017, according to WalletHub, citing the most recent data available. Note that the offers of “0% financing” are usually in lieu of rebates or other incentives and are therefore rarely free.

The chart below shows the increase in the Fed’s target for the federal funds rate, from 0-0.25% to 1-1.25% (not including a hike on December 13), so an increase of 100-basis points. Credit card rates have increased in lockstep by 101 basis points. But bank deposits rates have lagged woefully behind, on the logic that credit-card borrowers and savers, both, are going to get shafted:

So how do these rate hikes translate for households with credit card balances?

Revolving credit outstanding of $1 trillion, spread over 117.72 million households, would amount to $8,300 per household. But many households do not carry interest-bearing credit card debt; they pay their cards off in full every month. Finance charges are concentrated on households that use this form of debt to finance their spending and that cannot pay off their balances every month. Many of these households are already strung out and are among the least able to afford higher interest payments.

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