And after having gotten ripped off for years by the Fed’s interest-rate repression and QE, and after having gotten screwed by their banks that pay 0.2%, they’re taking their money where the income is, and this movement of funds has forced banks to pay more or lose deposits and collapse, and interest income has surged.
Consumers, lots of consumers, with many trillions of dollars in these instruments are finally breathing a sigh of relief, and they’re spending some of this money, which is in part why consumer spending has grown, despite the higher interest rates.
On the other side are the consumers that are paying higher interest rates on money they borrow. But 70% of household debt is in mortgages, and after the refinancing boom in 2020 through 2021, the typical mortgage is a 30-year with a fixed rate of about 3% or even less. Those rates won’t change: 70% of the consumer debt won’t get higher interest rates until the homeowner sells the home, and the buyer has to get a 7.2% mortgage, but purchases of previously owned homes have plunged; or unless the homeowner refinances the loan, but refis have collapsed.
With the biggest portion of household debt just about locked in at these 3% rates, only new auto loans, interest-bearing credit-card debt, personal loans, etc. have seen higher interest rates and higher interest payments.
So how much more interest income did consumers earn from higher interest rates on their interest-bearing assets, and how much more in interest payments did they make due to these higher rates on their debts?
Interest income earned by consumers on their assets jumped to $1.82 trillion seasonally adjusted annual rate in Q2, according to data from the Bureau of Economic Analysis. Note, this is their interest income on tens of trillions of dollars in interest-paying assets. This income was up by $175 billion since the beginning of 2022, when the Fed started hiking interest rates (red in the chart below).
Interest payments on consumer debt rose to $462 billion seasonally adjusted annual rate in Q2, up by $180 billion since the Fed started hiking interest rates (green): (...)
In other words: higher interest rates are not constraining consumer spending in aggregate: they constrain the spending of some consumers, and are filling the wallets of other consumers.
This additional spending power is particularly important for retirees who are on a fixed income, such as Social Security or a pension. If they have $300,000 in savings, two years ago they earned nearly nothing from it, and now they’re earning $15,000 in interest income a year, and they’re plowing some of that interest income back into the economy, creating new demand.
by Wolf Richter, Wolf Street | Read more:
Image: Wolf Street
[ed. Finally, all us risk averse chickens may be getting a break. Even one month CDs are going for 5.40% now. See also: Entire Housing Market, Buyers and Sellers, May Have Shrunk by 20% to 25% because of the 3% Mortgages; and, The Most Splendid Housing Bubbles in America, August Update:]
