Why Fed rate hikes haven’t hit Americans hard

Why Fed rate hikes haven't hit Americans hard

## How Americans Have Avoided the Brunt of Fed’s Rate Hikes

The Federal Reserve’s campaign of raising interest rates may have caused concern for many, but it turns out that most Americans have been relatively unscathed by the impact. This is because the majority of household debt is locked into lower fixed rates that were secured before the central bank initiated its aggressive rate hikes to control inflation. According to data from Moody’s, only 11.1% of household debt had a floating rate in the first quarter of this year, meaning that only a small portion of overall household debt was affected as market rates rose over the past 18 months.

This is a significant departure from previous years when a higher percentage of debt had floating rates. In 1997, the figure stood at around 27%, and in 2000 it was 25%. However, in the last two decades, this percentage has steadily declined. The aftermath of the Great Recession in 2008 played a significant role in this trend as the Federal Reserve maintained historically low rates, prompting many Americans to secure fixed-rate loans that are far lower than those offered today. This strategic move has shielded many from the pain of rising benchmark rates.

“US households have largely been insulated from Fed rate hikes, primarily because most consumer debt carries a fixed interest rate, with mortgages contributing to a significant portion,” explained Cristian deRitis, Moody’s Deputy Chief Economist. Data from Equifax supports this claim, revealing that nearly 70% of mortgages carry an interest rate below 4%. Existing borrowers have not experienced any changes in their monthly mortgage payments despite the rise in the Fed Funds rate. The majority of auto loans, student loans, and personal loans also carry fixed rates, providing further protection to borrowers against interest rate increases.

While the majority of US households may not feel the immediate impact of rising rates, credit cards have been significantly affected. This could potentially lead to higher credit card delinquency rates. Last week, the Federal Reserve announced a 25-basis-point rate hike, bringing the federal funds rate to the range of 5.25% to 5.50%. Chairman Jerome Powell emphasized that the battle against inflation is ongoing. Despite this latest rate hike, the market predicts that it may be the final one for the year, with expectations that policymakers will begin easing rates in early 2024.

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Although the Fed’s rate hike campaign may be nearing its end, individuals who took out floating rate loans prior to the rate increase, such as home equity loans, certain auto loans, or new personal lines of credit, are likely facing higher payments today. At the same time, the high rates have likely deterred some Americans from seeking new loans, thereby potentially diminishing credit access for certain borrowers.

“Borrowers seeking new credit have been directly impacted by higher rates, leading some to forgo taking on additional credit,” stated deRitis. “Tighter lending standards and a sharp increase in denied credit applications may further limit credit formation going forward.”

While many Americans have managed to navigate their way around the impact of the Fed’s rate hikes, it is crucial to keep a tab on potential consequences, particularly in areas such as credit card delinquency rates and limited credit formation. However, despite these challenges, the majority of households can take solace in the fact that their fixed-rate debt has provided some form of shelter from the storm.

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