The Federal Reserve raised interest rates by 25 basis points this week, its first increase since 2023, with elevated inflation, a robust job market and steady economic growth making the case for tighter policy. Consumer loan delinquencies have historically tracked the policy rate, and a low, falling personal savings rate leaves indebted households with less of a cushion as borrowing costs climb.
Elevated inflation, a robust job market and steady growth made the case for tighter policy clear. Markets are currently pricing in three rate increases for the cycle, but even one quarter-point move lands hardest on consumers who already carry debt and face higher prices for petrol and other essentials.
Over the past 30 years, changes in the consumer loan delinquency rate have followed changes in the policy rate: higher rates have translated into more delinquencies, and looser policy has been followed by a decline. What is especially concerning now, however, is that the personal savings rate is low and falling, indicating some consumers will not have much of a cushion when debts come due.
Frances Donald of RBC said households are saving less and borrowing more to sustain spending, and that if consumers become more dependent on credit during a Fed hiking cycle, delinquencies should be expected to rise alongside the interest rate burden. She added that this poses a threat to consumer spending, still the primary growth engine for the U.S. economy.
Donald also noted that when consumers' credit ratings fall, they can lose access to credit, which could have ripple effects. Higher interest costs, low savings and an energy shock, she said, are a tough combination.
Source: Markets
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