In this post, I am going to look at the upcoming rate environment but focus in on consumer debt and the potential savings consumers will experience as rates decline.

1. Consumer Credit Card Interest
Savings in a Decreasing Rate
Environment
Created by: Salvatore Tirabassi
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2. The stock market took some swings last week. It was down hard on January 31st
on fears of no rate relief from the Fed and then rebounded firmly the very
next day. An emotional roller coaster for many, to be sure. In this post, I
am going to look at the upcoming rate environment but focus in on consumer
debt and the potential savings consumers will experience as rates decline.
While the stock market will fluctuate wildly based on changing sentiments
about interest rates over the course of 2024, consumer borrowers will be
affected in a direct and consistent way because most consumer debt products
are pegged to the Fed Funds rate.
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Consumer Credit Card Interest
Savings in a Decreasing Rate
Environment

3. I am not going to focus on mortgages because much of the consumer housing
market is carrying historically low rates into this environment already. As a
result, decreasing rates will benefit new borrowers, not those who closed or
refinanced their mortgages before 2022, which represents most mortgage
holders in the US.
Instead, I want to focus on total consumer debt and the fluctuating interest
rates in credit cards which have rates priced as a function of the Prime Rate,
which is a function of the Fed Funds rate.
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Consumer Credit Card Interest
Savings in a Decreasing Rate
Environment

4. The Fed has pointed to as many as three rate cuts of 25 basis points each.
With the Fed Funds rate at 5.5%, this would bring down the rate to 4.75% at
some point during 2024. The CME’s (Chicago Mercantile Exchange’s) Fedwatch
indicator points to six cuts of 25 basis points during 2024 – 1.5% in total.
Where the Fed ends up, will depend partially on the strong wage growth due to
the low unemployment rate which is currently 3.7%, putting it below 4.0% for 23
months in a row. Because unemployment has been sustainably low, wages have
benefited and real disposable income on a per capita basis has increased 3.7%
year-over-year, which is much, much higher than the 1.7% averaged before the
previous nine recessions since 1959.
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Consumer Credit Card Interest
Savings in a Decreasing Rate
Environment

5. Now, with respect to consumer disposable income, interest expense has taken a some of
the positive gains in wages. The chart below shows how total consumer debt has grown
through Q3 of 2023. Total consumer debt in the United States is approaching levels
not seen since the housing bubble highs before the 2008 crisis.
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Consumer Credit Card Interest
Savings in a Decreasing Rate
Environment

6. However, debt service remains well below the highs. This was caused by the
massive deleveraging after 2008, where many debts carried high interest
rates, and then re-leveraging into a low-rate environment that was sustained
by the housing recession and then by the COVID actions taken by the Fed.
You can see in the chart below, that during COVID (the absolute bottom of the
line chart) debt service reached an impressive low point but even with the
rebound in interest payments caused by all the recent Fed increases, debt
service payments are still at a relative low point. In fact, debt service as a
percentage of disposable income as of the middle of 2023 was lower than any
time since 1981, excluding the pandemic period.
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Consumer Credit Card Interest
Savings in a Decreasing Rate
Environment

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Consumer Credit Card Interest
Savings in a Decreasing Rate
Environment

8. While the information above is about 3-9 months old (the Fed is slow with its
data), the charts probably have not moved materially since they were
published, in my opinion. So, taken at face value, decreasing interest rates
in 2024, will significantly help the consumer.
Right now, US consumers are at near all-time lows in debt service with the
highest interest rates highs that they have seen in 17 years. However, US
consumers are reaching their highest accumulated debt in 17 years. Thanks to
historically low rates, the US consumers have locked in super low mortgage
rates
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Consumer Credit Card Interest Savings in a
Decreasing Rate Environment

9. Back to credit cards. The variable debts US consumers hold in credit cards
are what will drive interest expense fluctuations, and much of the increases
in debt service are related to rising credit card interest rates. In fact,
since the Fed started raising interest rates, credit card average interest
rates have risen from 15% to 21.5%.
I estimate that the savings in interest they might experience should range
between $100 to $200 per household per year. This can continue to grow if
rates decline further in the future. $100-$200 per household per year may
not sound like a lot. But if you put in the context of spending events, it
becomes more meaningful. For example, it’s a few extra dinners out for the
average American household that they previously couldn’t afford.
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Consumer Credit Card Interest Savings in a
Decreasing Rate Environment

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