High rates could strain US household finances

U.S. consumers are on more solid footing thanks to lower interest rates and loan forbearance programs during the pandemic that allowed them to pay down debt and build up cash, according to new research from the Federal Reserve Bank of New York.

Still, it’s hard to determine how much households have left in excess savings, and some could face more strain over time now that student loan payments are returning and interest rates have risen, the researchers said in a series of blog posts published on Wednesday.

“Overall, households report solid and stable expectations for spending growth, consistent with our evidence on the strength and liquidity of household balance sheets, including relatively low delinquencies,” the researchers wrote. “Of course, the period of very low interest rates that supported many of these developments is decidedly over, at least for now, suggesting that household finances will likely tighten further in the coming months.”

Homeowners who refinanced their loans to lower rates during the pandemic benefited from smaller mortgage payments, freeing up cash that could be used to pay down debt, build savings or support spending, the research showed. Many homeowners also withdrew home equity from their properties, providing them with about $280 billion in extra cash as of the second quarter of this year.

The Fed has raised interest rates aggressively since March 2022 to combat high inflation, bringing its benchmark rate from near zero to above 5%, the highest level in 22 years. American consumers have so far remained resilient, with retail sales exceeding all forecasts and employment surging unexpectedly last month.

But some households could begin to feel the squeeze from interest rates that are expected to remain high through next year. As more people buy homes and cars at higher rates, more consumers will face larger payments that could leave them with less spending cash, the researchers said.