Ep. 110 - The Jerome Powell Show | Consumer Debt Continues To Surge | #002

Nov 15, 2023

The Rising Cost of Living in America

American households are facing increasing financial pressures. Consumer debt is on the rise, led by mortgages, credit cards, and student loans. Total consumer debt now stands at over $17 trillion, with the average credit card debt per household rising from $4,000 to $8,000 in recent months.



Delinquencies on the Rise

This mounting debt is becoming harder to manage. Credit card delinquencies where payments are 90 days past due have jumped to nearly 10%, up from just under 8% three months ago. This dramatic rise over a short period of time signals growing distress. Auto loan delinquencies are also up but still below 5%. Meanwhile, mortgage and student loan delinquencies remain extremely low for now.


The most concerning trend is delinquencies among millennials, those aged 40 and under. This group has the highest rate of missed credit card payments by far. Some potential reasons of this could be their first major financial challenge and the impact of stagnant wages combined with the rising cost of living.



The Interest Rate Impact

Much of the pain consumers feel can be traced to the Federal Reserve's rapid interest rate hikes over the past year. Even though rates have stabilized recently, the impact is still flowing through the system. Credit card rates now range from 20-25% depending on location. The average monthly car payment tops $1,000, pushed higher by auto loan rates around 8-10%.


Mortgage rates have also moved significantly higher over the past year, reducing home affordability and causing housing demand to slow. The 30-year fixed mortgage rate has nearly doubled from January 2022, when rates were near 3%, to over 8% currently. This rapid rise in mortgage rates has priced many first-time homebuyers out of the market.


However, mortgage delinquencies remain surprisingly low despite higher rates. This can be attributed to two key factors. First, existing homeowners continue to hold strong home equity positions. The average homeowner equity now stands at over $180,000, providing a buffer against financial hardship. Second, the ongoing housing supply shortage leaves few options for current owners if they lost their home. There is a record lack of homes for sale and rents are also sky-high.




The Path Ahead

All signs point to the Fed announcing another interest rate pause at their December meeting. Markets are pricing in just a 10% chance of a hike.. Inflation trends will dictate future moves. If inflation shoots back up, the Fed will likely resume hiking. If price pressures continue easing, rate relief could come sooner.


Ultimately, the Fed has achieved their dual goals of a positive real interest rate environment and a Fed Funds rate above inflation. As long as inflation cooperates, the pace and magnitude of future hikes may not be as steep. But consumers should prepare for an extended period of higher borrowing costs across the board.



Bottom Line

American households face a challenging road ahead as they navigate mounting debts and rising interest rates across multiple fronts. With credit card delinquencies spiking, consumers should make reducing credit card balances a top priority. Credit cards often carry exorbitant interest rates of 20-25%, far above other types of borrowing. Paying off credit card debt can provide an instant boost to monthly cash flow.


Seeking professional advice on options to consolidate or restructure debts can further stabilize personal finances. For example, tapping into home equity to pay off credit cards is a smart move to lock in lower fixed interest rates while gaining tax deductions. A debt advisor can map out the best strategies to reduce pressure on monthly budgets.


While the Federal Reserve appears poised to pause its rapid interest rate hikes for now, lingering inflationary pressures may renew challenges for household budgets in 2024. Consumers should brace for an extended period of higher borrowing costs across mortgages, credit cards, auto loans and other lending. Staying proactive, monitoring budgets diligently, and exploring debt relief options will be essential to weather the turbulence ahead.