Last week’s Federal Reserve action (err, make that inaction) caused a stir in the financial markets.
Common view was: ” geez, is the economy so bad that it can’t absorb a measly 25 bps increase in interest rates?”
In yesterday’s post, I put the number in context, illustrating that the economic cost of a measly .25% just on servicing the national debt is about $45 billion ( .25% times $18 trillion) …. equivalent to roughly half of the Federal government’s annual cost for ObamaCare.
Today, let’s take a couple of more views of the 1/4 of 1 % …. the impact on household incomes.
In nominal terms, holding cash yields zero returns
In real terms – netting the impact of inflation – holding cash is a losing proposition.
What about interest rates on “interest-plus” checking accounts, savings accounts, money market funds and CDs
Answer: For the past couple of years, the yield from so-called “deposits” has been about the same as cash-in-the-mattress: near-zero in nominal terms …. and a money loser after inflation.
So, what would be the impact on households if interest rates were to bump up a measly .25%?
Let’s run some back of the envelope numbers …
There are about 115 million households in the country … with median household incomes hovering around $52,000.
According to the Fed, households have about $10 trillion stashed in “deposits”:cash, checking accounts, savings accounts and money market funds. Source
If the $10 trillion in deposits earned .25% in incremental interest payments … aggregate household incomes would go up by $25 billion.
The $25 billion translates to almost 1/2 of 1% of median household income.
That may not sound like much … unless your household income has been flat or declining for 7 years.
Then, it would be a statistically significant breath of fresh air.
Of course, households that are borrowers would get hit by higher interest costs.
First, let’s look at mortgages:
Currently, U.S. households are holding between $9 and $10 trillion in home mortgages. Source
For simple arithmetic, let’s call it $9.6 trillion.
Best estimate that I can find is that 2/3s of the mortgages are fixed rate – and most of those are locked-in for 30 years.
If the split assumption is correct, there is about $3.2 trillion in mortgages vulnerable to rate increases.
Add to that number the $3.3 trillion in consumer credit – you know, cars & cards. Source
So, households have about $6.5 trillion in debt with rate exposure
That grosses up to a bit over $16 billion in higher interest charges paid.
So, on first pass, the net effect of a .25% rate increase on households would be positive … by at least $9 billion.
But, as usual, the averages can be deceiving.
Savers – folks with hanging with cash and money market funds – are the winners.
Borrowers – folks with over-sized ARMs and big credit card balances – are losers.
Cutting to the chase: older folks win, younger folks lose.
And, for both groups, the impact is statistically significant.