Why Wallets Stay Open Despite Soaring Market Rates [Weekend Money]

U.S. Consumers Can't Give Up Their Lifestyles Even as Interest Rates Rise

Although market interest rates in the United States have risen sharply, household financial strain from higher rates is not expected to emerge immediately.

KB Securities said that wage growth lagging behind inflation does not necessarily lead to a consumption cliff. Households with assets and income from financial investments have ample capacity to spend, while households that have not benefited from the wealth effect continue spending by using debt to cover living expenses.

This is in line with the assessment of Thomas Barkin, president of the Federal Reserve Bank of Richmond. He has said, "Even as things gradually become more difficult, with prices rising and wage growth slowing, people want to maintain their lifestyles," adding, "Consumers' ability to cope is remarkable."

The problem is that higher interest rates make it more difficult to spend using borrowed money. As interest expenses rise, households' capacity to spend may shrink, or financial institutions concerned about rising delinquencies may tighten lending standards. Therefore, a sharp rise in interest rates will slow the growth of personal consumption going forward.

However, the impact of high interest rates on households is expected to unfold gradually. What has risen sharply recently is the yield on bonds, while mortgage, auto, and student loans linked to these rates have fixed rates set when the loans are issued. As a result, only people who have recently purchased assets such as homes and cars at current interest rates will be affected by high rates.

Even when variable rates apply to loans taken out to cover living expenses, the impact on households is limited. Such loans are mainly taken out through credit cards or home equity lines of credit (HELOCs). Their interest rates are based on the prime rate, which is typically around 3 percentage points above the U.S. benchmark interest rate. Even as market rates surged, credit card and HELOC rates reflected only increases in the U.S. benchmark interest rate.

Heejin Kwon, a researcher at KB Securities, said, "Further increases in the federal funds rate would directly add to the burden on households, but the impact would unfold gradually." She added, "We are watching to see how the recent sharp rise in market rates will affect the economy next year, but we believe it is unlikely to lead to a sharp contraction in consumption."

This content was produced with the assistance of AI translation services.