WASHINGTON: The latest Federal Reserve rate hike could slow the consumer engine driving the US economy. Healthy jobs growth and business confidence indicate solid momentum in activity. Yet with household debt reaching record levels, the new Fed move - the second increase in three months - will hit people's wallets.
As expected, the Fed on Wednesday said it's raising the target range for overnight borrowing by a quarter point, to a range of 0.75 to 1 percent. It's another sign of a humming economy. Last month, employers added 235,000 jobs while a group made up of 200 CEOs said its index for hiring and sales jumped by more than 19 points in the first quarter of 2017, the largest increase since 2009.
The central bank is not looking to dampen the party just yet. Members of the policymaking Federal Open Market Committee see inflation and growth remaining moderate at around 2 percent, and they expect to raise rates three times this year, unchanged from December's outlook.
Consumers are being overstretched in some ways, though. Aggregate household debt is on track to surpass the 2008 peak of $12.7 trillion this year, according to the Federal Reserve Bank of New York.
The most worrisome spots are the ones seeing the fastest growth. More than 11 percent of the country's $1.3 trillion in student loans are more than 90 days delinquent or in default. The auto-loan delinquency rate rose 13 percent last year to its highest level since 2009, according to credit firm TransUnion.
Debt-service costs are running at historic lows at 10 percent of disposable income, but central-bank tightening will drive up financing charges. At the same time, prices are rising. The personal consumption expenditures index stood at 1.9 percent in January, just shy of the central bank's 2 percent inflation target. Consumer spending, which has been driving GDP growth, rose by only 0.2 percent in January, while disposable income fell by the same amount, the first drop in three years.
The good news is that overall delinquency rates are down, coming in at 4.8 percent compared to 8.5 percent in 2008. Consumers are financially healthier, but the Fed may put them in a more penny-pinching mood.
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