Personal finance journalist with an eye for industry news
Credit card balances slightly increased in December, according to a federal government report released Thursday.
Consumer revolving debt – primarily credit card balances – inched up by $1.7 billion on a seasonally adjusted basis to $1.045 trillion, per the Federal Reserve’s G.19 consumer credit report. The annualized growth rate was 2 percent.
December’s increase capped off a year in which card balances showed modest growth compared to 2017. In January 2017, revolving debt stood at $971.7 billion, but it reached $1.024 trillion by the following December – a $48 billion increase. But the January 2018 revolving debt figure of $1.025 trillion is only $19.3 billion less than the December 2018 level.
Lynn Reaser, an economist at Point Loma Nazarene University in San Diego, said the Fed’s accelerated pace of rate hikes in 2018 compared to the previous year likely slowed the growth of card balances, along with economic growth and changes in fiscal policy.
“The rise in interest rates was probably a major factor,” Reaser said. “Larger wage increases and tax cuts for many may have also reduced the growth of credit card borrowing.”
Total consumer debt, which includes auto and student loans in addition to revolving debt, increased by $16.5 billion to $4.01 trillion – an annualized growth rate of 5 percent.
Student loan debt has increased by $10.3 billion to $1.6 trillion since the Fed last reported it in September. Auto loan balances have increased by $4.5 billion to $1.16 trillion since September.
See related: Fed: Card balances jumped in November
Experts skeptical about potential end to rate hikes
The Fed last month sent signals that the recent spate of interest rate increases – there have been eight quarter-point rate hikes since December 2015 – could significantly slow in 2019.
Fed Chairman Jerome Powell said in a Jan. 30 press conference the case for raising rates had “weakened,” and the rate-setting Federal Open Market Committee said on the same day it would be “patient” on future adjustments.
TD Bank Senior Economist Fotios Raptis said in a Jan. 30 report the Fed was “correct” to take a wait-and-see approach to further rate hikes, given unresolved economic risks such as the partial U.S. government shutdown, trade tensions with China and uncertainty over Brexit.
“Given this elevated level of uncertainty globally, it may take until June before the Fed receives enough clarity on the evolution of economic and event risks in order to make an adequate assessment on whether it’s the appropriate time to raise rates again,” Raptis wrote.
Still, some analysts don’t know what to make of the Fed’s sudden change in tone regarding rate hikes, particularly since the U.S. economy has showed few signs of slowing.
But Ian Shepherdson, chief economist at Pantheon Macroeconomics, suggested political pressure – particularly President Trump’s harsh criticism of Powell over rate hikes – could be having some effect.
“We very much doubt that Fed Chair Powell dramatically changed his position last week because President Trump repeatedly, and publicly, berated him and the idea of further increases in rates,” Shepherdson wrote in a Feb. 5 report. “But we cannot be sure that the president’s repeated verbal lashings had no influence and, judging from our conversations with investors, we’re not alone.”
Meanwhile, the U.S. economy is still going strong, with the federal government reporting that 304,000 new jobs were added in January. The unemployment rate ticked up to 4 percent due to the fact that many federal workers affected by the partial government shutdown were classified as unemployed.
Consumers’ solid card debt management offsets impact of rate hikes
The Fed hiked interest rates four times in 2018, but it doesn’t appear to have hampered consumers’ ability to manage their debts.
The American Bankers Association said in a Jan. 29 report the effective finance charge yield – a measure of interest payments relative to total outstanding credit – has increased at a slower pace than the federal funds rate over the past three years.
According to ABA data, the effective finance charge yield grew by 1.71 percentage points from the third quarter of 2015 to the third quarter of 2018, while the Fed’s benchmark interest rate increased by 2 percentage points. ABA said it’s a sign consumers have been able to partially offset rising interest rates by better managing their card debt.
The association also noted how credit card debt as a share of disposable income has barely budged over the past six years, though it ticked upward by 0.04 percentage points in the third quarter of 2018.
“Most consumers are maintaining discipline in their use of credit cards, as evidenced by the amount of outstanding credit card debt relative to disposable income,” Jess Sharp, executive director of ABA’s Card Policy Council, said in a news release.
Sharp also noted that card use could spike in early 2019 as government workers affected by the recent shutdown rely more on credit to make ends meet.