Higher US interest rates: Are households skating on thin ice?

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The FINANCIAL — A recent survey of US household finances has revealed that people may not be all too ready for higher interest rates.

The survey findings, published in a research report ‘On Thin Ice’ by ING and Absolute Strategy Research (ASR) come just a day before the US Federal Reserve’s December meeting tomorrow. The Fed is widely tipped to lift rates, the first time in almost a decade.

The majority of people surveyed said they did not expect interest rates to go up. The report found that although Americans were happier about their finances they were less confident about their future.

‘The good news is that there has been a gradual improvement in people’s financial situation, their personal income, and in the housing market. The improvement in the latter has helped transform household balance sheets. But overall, with the Fed about to raise interest rates, the expectations revealed in this survey leave us with a sense that US households are skating on thin ice’.

The authors concluded that perceptions of the economy and policymakers had deteriorated, households still plan to lighten their debt burden despite better credit availability, and income inequality remained a major issue. The survey goes beyond the ‘typical’ consumer confidence survey in that it attempts to explore the motivations and the perceptions underlying household saving and borrowing decisions of the US adult working population (aged 25-65).

Meanwhile, years of record low interest rates have encouraged low income earners to take on more debt , making them more exposed to higher debt repayment costs when rates do rise, according to another ING report.

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Stagnation Nation, a report on the impact of the US stimulatory policy, Quantitative Easing (QE), on household finances, found that QE had limited impact and unintended consequences. QE was supposed to support spending and boost the economy by lowering interest rates. The report found that low interest rates did not bring the boost in spending that was expected. And it seemed to have encouraged more saving and investment in shares and bonds, which actually limited spending growth by 0.8%.

Stagnation Nation also found the rich were the main beneficiaries of QE in the US with the top 10% wealthiest households pocketing 80% of all gains in wealth and income over the period. ‘All of these unintended consequences suggest caution for central banks following a similar path – most notably the Eurozone’s own central bank, the ECB,’ the report said. QE in the US was introduced at the height of the financial crisis in 2009 and finished in December 2014.

 

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