Fed Hikes Slash Household Net Interest Income in Break From Past

On the spending side, interest costs rose faster this time because Americans now have a larger share of their debts in consumer credit, which is quicker to reprice and saddles borrowers with bigger bills when rates go up. Mortgages, by contrast, are mostly locked-in beyond the Fed’s reach.

As for interest income, one reason it’s lagged is that banks were slow to pass on higher rates to depositors — they’ve come under fire for that all over the world. And after about 15 years in which rates were near zero much of the time, savers may have gotten out of the habit of moving cash between accounts in search of better returns.

Another is that wealth has shifted out of the kind of holdings that pay interest, and into stocks. During the pandemic, for the first time on record, dividends overtook interest payments as a source of unearned income for Americans.

To be sure, aggregate numbers rarely tell the whole story, and in the case of interest income and payments they tell even less of it than usual.

That’s because the people who earn more when rates go up are generally not the same people who face bigger bills. Ownership of interest-earning assets skews toward the wealthiest, while Americans with the most expensive kinds of debt are more likely to be lower earners.

As well as widening inequality, that distribution has consequences for the economic impact of rate increases.

Put simply, the payouts tend to go to savers who are less likely to give the economy a boost by spending each extra dollar on goods and services. By contrast, the bills land on the doorsteps of households who probably would’ve used those dollars to buy stuff — if they didn’t now have to spend them on servicing debt instead.

Photo: Adobe Stock; Charts: Bloomberg