How are US households really exposed to the rate hikes?
If the Fed wants to fight inflation with rate hikes, US households must be net interest payers. Are they?
As a result of the most shocking inflation surge in decades, we are now 18 months into the fiercest hiking cycle the Fed has ever conducted. Their objective is to discourage borrowing for consumption and investment to reign in inflation. For that to work, consumers and investors need to be net interest payers. Otherwise they will actually benefit from higher rates. Aggregate demand might then increase and consumer prices with it. This would render the entire current monetary policy pointless.
To understand the current economic environment and opine on the merit of the Fed’s tightening campaign, it is therefore crucial to understand whether the finances of US households are positively or negatively correlated with interest rates.
The financial position of US households
The table below illustrates the aggregate balance sheet of US households and nonprofit organizations as of 2Q23 and how it has changed since 1Q22, the quarter before the hiking cycle started.