A mountain of credit card debt is piling up as Americans turn to plastic to counter their dwindling purchasing power. According to the Federal Reserve Bank of New York, consumers now owe a record $988B on their cards, up 17% from a year earlier, or about $5,700 per person. While the steadily rising figure took a break during the pandemic years, the number is causing renewed nervousness as it flirts with the fast-approaching $1T milestone.
Driving the spike: High inflation is pushing more consumers to put non-discretionary spending on cards, while others may be having a harder time paring back their lifestyles despite the price pressures. Interest rates are compounding the issue, with the average annual percentage rate now over 20%, making it a really costly debt for consumers. It’s also higher than at any point since the Fed started tracking card APRs in 1994, contributing to the overall U.S. household debt that topped $17T in Q1.
“The first few years of the 2020s have seen a number of acute economic, financial, and geopolitical disruptions on a worldwide scale, and it will take time for the ultimate consequences of these shocks to be fully felt,” PIMCO writes in a new article called The Aftershock Economy. SA analyst Wolf Richter also discusses the current landscape, but says that “despite Fed tightening and bank collapses, it’s still an astoundingly loose financial situation.”
The Fed
The Federal Reserve is plotting at least two more rate hikes this year, according to data from the economic projections it released yesterday, even as it felt the need to pause its current tightening cycle in order to assess the impact of its prior increase.
The Fed, which was lifted rates 10 ten times over the past 15 months, adding 500 basis points to its benchmark Fed Funds rate, left that rate unchanged at between 5% and 5.25% late Wednesday, with Chairman Jerome Powell noting a lack of progress in bringing down core PCE inflation rates amid resilient economic growth.
That said, Powell was keen to assure reporters in Washington that the Fed would remain ‘data dependent’, and insisted that each subsequent meeting, including in July, would be assessed independently, but wouldn’t call Wednesday’s decision to hold rates steady a ‘skip’.
In a 45-minute press conference that followed yesterday’s policy meeting, Powell said a lot. But when I heard him talk toward the end about when the Fed might possibly cut rates, it really got my attention.
He was talking about “maintaining real rates,” meaning a lending rate to banks that is above inflation. In monetary-policy land, that acts as a headwind for the economy (and inflation). Powell said, with emphasis added…
“We’re having real rates that are going to have to be meaningfully positive and significantly so for us to get inflation down… That certainly means that it will be appropriate to cut rates at such time as inflation is coming down really significantly. And again, we’re talking about a couple of years out.
I think as anyone can see, not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate if you think about it. Inflation has not really moved down. It has not reacted much to our existing rate hikes. We’re going to have to keep at it.”
As we get closer and closer to the destination (with respect to the 2% inflation target) — and according to the (summary of economic projections), we’re not so far away — t’s reasonable, it’s common sense to go a little slower,” Powell said. “I think it allows the economy a little more time to adapt as we—as we make our decisions going forward.”
Markets, however seem ready for a quick return to tightening, with the CME Group’s FedWatch suggesting a 72% chance that the Fed will lift the Fed Funds rate by 25 basis points next month in Washington, but don’t see rates rising further into the end of the year.
- The Fed no longer expects the U.S. to enter a recession in 2023.
- The Fed predicts the unemployment rate will be 4.1% at year-end, down from the previously estimated 4.5%.
- The Fed sees annual gross domestic product rising 1.0% instead of the prior forecast of 0.4%.
In other words, the central bank sees a stronger U.S. economy for the rest of this year than they were expecting three months ago… and six months ago and nine months ago (based on its past quarterly projections).
The Fed delivered a “hawkish pause” this month, with the dot-plot signaling another 50 bps of rate hikes this year.
The FOMC’s rate projections were also moved higher for 2024 and 2025.
However, at his press conference, Chair Powell stressed the need for more time to assess the impact of “long and variable lags” of the Fed’s massive tightening cycle. Consequently, some analysts opted to disregard the 50 bps of new hikes. The market faded the hawkish dot-plot, but it still sees a 60% chance of a rate hike in July.
The FOMC lowered its projections for unemployment while boosting core inflation forecasts. Most FOMC members still see inflation risks skewed to the upside.
It doesn’t mean stock prices can’t or won’t keep going up. It just means that higher inflation for longer – and higher interest rates for longer – should be seriously considered… along with the consequences of that reality.
Next, let’s take a look at market reaction to the FOMC projections and press conference. Treasury yields moved up slightly on “higher for longer” expectations.
Here is the change in the futures-implied fed funds rate trajectory.
The Treasury curve inversion deepened. This is a big warning or a coming recession.
The curve’s steepening move after the banking turmoil is getting reversed.
The stock market mostly faded the Fed’s hawkish stance. The headline PPI surprised to the downside, with producer prices declining in May. The core PPI climbed by 0.2%, with the gain driven by trade services (business markups). Companies have managed to boost their margins again. Excluding trade services, the core PPI saw its first (very slight) monthly decline since the COVID shock.
Sticky inflation:
US Economy
- A growing number of states are reporting an increase in continuing jobless claims.
- The ratio of job openings/jobs hard to get is narrowing, which typically portends a rise in the unemployment rate and the beginning of a recession.
- Wells Fargo sees one more rate hike from the Fed.
- According to the NY Fed’s consumer survey, one-year inflation expectations continue to trend lower. Longer-term expectations ticked up.
- Cleveland Fed’s data from repeat-rent leases (leases that are renewed for a second or subsequent term) signal sharp declines in rent inflation in the months ahead.
- Housing supply remains tight but not getting worse.
- The national mortgage delinquency rate fell below 3% for the first time in about 20 years and is down 13% year-over-year.
- The budget deficit was somewhat wider than expected in May.
- Interest expense continues to grow.
- Consumers plan to sharply reduce discretionary spending over the next six months, according to a survey by Morgan Stanley.
- Subdued demand for cardboard boxes suggests a deceleration in economic activity.
- The CPI report was roughly in line with expectations
- Core inflation remaining stubbornly high.
- Below is the year-over-year trend.
- the market moderated its expectations for rate cuts next year.
- Mortgage applications continue to run well below 2014 levels.
- Speculators are net bearish copper for the first time since early 2020. Copper is a major economic indicator.
- The Investment Manager Index from S&P Global indicates thawing sentiment. Here is sentiment by sector.
- Fund managers remain uneasy about real estate.
- Semiconductor stocks have rallied despite the deep drop in global sales. A similar divergence is seen in the memory market.
- Semi Insiders have been selling.
- Retail sales unexpectedly increased in May.
- Car sales climbed.
Market Data
- The rally in global equities appears overbought.
- Market breadth has been weak.
Quote of the Week
“Worrying is like paying a debt you don’t owe.” – Mark Twain
Picture of the Week
Amazing Sea Turtle
All content is the opinion of Brian Decker
