When the Federal Reserve raises interest rates, U.S. households — in aggregate — usually get a boost to interest income that outweighs the extra cost of servicing debt. Not this time.
The annual interest bill that Americans pay on mortgages, credit cards and other debt has climbed by almost $420 billion since the Fed started tightening policy in March 2022, according to the latest numbers from the Bureau of Economic Analysis. The rise in interest income over the same period was only about $280 billion.
The upshot: Unlike every other Fed hiking cycle of the past half century, the latest one triggered a sharp decline in household net interest income.
Still, research by Bloomberg Economics shows that net interest income, which was still considered a plus for consumer spending at the start of 2022, had become a significant drag by the middle of last year.
Floating Rates
There's likely a combination of reasons the Fed's hikes over the last two years had a different effect than in earlier cases.
On the spending side, interest costs rose faster this time because Americans now have a larger share of their debts in consumer credit, which is quicker to reprice and saddles borrowers with bigger bills when rates go up. Mortgages, by contrast, are mostly locked in beyond the Fed's reach.
As for interest income, one reason it's lagged is that banks were slow to pass on higher rates to depositors — they've come under fire for that all over the world. And after about 15 years in which rates were near zero much of the time, savers may have gotten out of the habit of moving cash between accounts in search of better returns.
