The Federal Reserve Rate Hike And Its Impact On Consumer Debt!

Aggregate household debt balances

Source: New York Federal Reserve

Yesterday the Federal Reserve raised its key fed funds rate by .25% and signaled that they would likely raise two more times in 2018!

For consumers who have a record amount of debt outstanding (a level over $13 trillion that’s $280 billion higher than the 2008 peak and 16.2% above the 2013 trough), the good times relative to borrowing have most certainly been rolling during this period of a virtual 0% Fed-induced rate environment.

And for those reading this who are somewhat sad that those 0% good times have ended, remember that the Fed is raising rates because the economy is doing well, employment is strong and inflation is tame. At least that’s how the Fed sees it although there are others who may disagree.

And, while interest rates are far from being normalized, this is a summary of the impact that a move-up will have both good and bad…

Impact Of Higher Interest Rates

Savers – Some of the hardest hit by Fed policy post-financial crisis have been savers and retirees. With little return available from the safest segments of the fixed income market, many have been forced to move further out on the risk spectrum. This may have meant buying corporate bonds instead of treasury bonds or possibly even junk bonds as the reach by so many for yield compressed the spread between the safest and most risky of fixed income.

In some instances, these traditional savers were in many cases ‘forced’ to abandon fixed income altogether and instead invest in the riskier asset class of equities.

Now this group can once again start looking towards bonds.

Mortgages, Variable-Rate Student Loans, HELOCs (home equity lines of credit) and Credit Cards – Those consumers with adjustable-rate debt outstanding will be squeezed as rates will likely continue to rise. And, for those looking to take on new debt whether fixed or variable, they will face a climbing rate environment.

For those with credit card balances (already at a record with outstanding balances on average over $6,000) you likely already feel the pain paying about 17%. This .25% increase will tack-on approximately another $1.6 billion of 2018 finance charges.

Mortgage rates both fixed and variable have been steadily climbing and will likely continue to do so in the face of the Fed raising its key rate in the future. If you are looking to buy, now may be better than later in terms of financing costs, but a lack of supply in some markets is making that difficult for even the most motivated of buyers. Remember, however, that for potential homebuyers while rates are certainly higher than they were in the recent past, taking a longterm view they are still relatively low.

For homeowners with a HELOC outstanding, it may be worth speaking with your banker about potential options.

Adjustable student loan debt, already possessing a significant delinquency rate, will be negatively impacted by this rate hike along with any hikes in the future.

Finally, for car buyers leasing or taking out auto loans, the increase in rates will not have a significant impact in terms of additional monthly costs, but for those with adjustable rate debt outstanding the increase may cause the delinquency rate that already has been climbing, to climb further.

There potentially are steps that consumers with outstanding debt can take to try and mitigate the impact of higher rates, and whether any are available to individual consumers is something that should be discussed with your financial advisor.

Michael Haltman, President
Hallmark Abstract Service
Phone: (646) 741-6101

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