Fed: Card balances rose by $5.1 billion in December

Brady Porche
Managing Editor
Personal finance journalist with an eye for industry news

 

Card balances rose to a new all-time high in December, according to a federal government report released Wednesday.

Consumer revolving debt – primarily credit card balances – increased by $5.1 billion on a seasonally adjusted basis to $1.028 trillion, per the Federal Reserve’s G.19 consumer credit report. The annualized growth rate was 6 percent.

U.S. consumers broke a nine-year-old record for revolving debt in November, when card balances reached $1.023 trillion. It was the highest revolving debt level since April 2008, when it reached $1.02 trillion. Last September, card balances broke the $1 trillion mark for the first time since January 2009.

Total consumer debt, which encompasses student and car loans along with revolving debt, increased by $18.4 billion to $3.84 trillion in December, an annualized growth rate of 5.8 percent.

Student loan debt has increased by $10.7 billion to $1.49 trillion since the Fed last reported it in September. Auto loan balances have jumped by $11.9 billion to $1.11 trillion since September. 

March rate hike expected as Powell takes over Fed

Consumers are beginning to see strong wage gains in an already robust labor market as they rack up record levels of debt. The U.S. economy added 200,000 jobs in January, and average hourly earnings increased by 0.3 percent. The unemployment rate held steady at 4.1 percent.

With the economy continuing to hum along, many analysts expect a new quarter-point rate hike during the Federal Open Market Committee’s (FOMC) March meeting. It would be the sixth rate increase since the Fed began an effort to normalize interest rates in December 2015. FOMC projections show a majority of committee members expect three rate hikes this year.

“On balance, this economic backdrop is in line with the Fed’s outlook, where they see continued gradual rate tightening,” said Sam Bullard, senior economist at Wells Fargo. “The Fed has three rate hikes projected for 2018 … and all still looks well for that first rate hike to occur at the March FOMC meeting.”

The March FOMC meeting will also be the first for new Fed Chair Jerome Powell, who was confirmed by the Senate Jan. 23. Powell is widely expected to follow the path of gradually normalizing rates that was established under his predecessor, Janet Yellen. But a labor market nearing full employment and a new set of tax cuts signed into law by President Trump could force the Fed to quicken the pace of rate hikes.

“His appointment comes at a critical juncture for the Fed, as it faces a tight labor market coupled with stimulus coming from fiscal policy,” TD Bank Senior Economist Michael Dolega said in a Jan. 30 report.

Rising interest rates will make it costlier for consumers to carry balances on their credit cards. Variable APRs on new card accounts are at an all-time high, per the CreditCards.com Weekly Credit Card Rate Report.

Meanwhile, data from the American Bankers Association (ABA) show a steady widening of the gap between people who carry balances (43.7 percent of all accounts) and those who pay their balances in full each month (29.1 percent).

However, credit card debt as a share of income (5.61 percent) remains well below pre-recession levels, ABA said.

Personal saving rate has fallen to pre-recession low

Personal spending rose by 0.3 percent when adjusted for inflation and real disposable income grew by 0.2 percent in December, according to a federal government report.

But as Americans earn and spend more, they’re saving less. The personal saving rate fell to 2.4 percent – a 12-year low. Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a report that consumers may be willing to save less given the tight labor market and an increase in asset prices over the past year.

“Savings rocketed after the crash in 2008, but few analysts would have predicted it could come so close to revisiting its pre-crash lows again so quickly,” Shepherdson wrote.  

A recent Bankrate survey revealed almost one in five Americans would pay for an unexpected $1,000 expense with a credit card, and less than 40 percent would cover it with savings. But more consumers may be compelled to build their emergency savings and rely less on plastic for stopgap funding, especially if balances keep growing and interest rate rises accelerate. 

See related: Fed: Consumers set all-time revolving debt record in November 


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Updated: 10-23-2018