What Fed Hikes? Much of America’s Consumer Debt Still Riding Ultralow Interest

livemint.com:

In the depths of the pandemic, Alex and Cynthia Durbin refinanced their mortgage at 2.75%. They built up their savings by spending less, then paid off a car loan and student debt. That meant the family’s balance sheet didn’t take a hit when the Federal Reserve started aggressively raising interest rates last year in an effort to cool inflation.

The Fed on Wednesday raised rates to a 22-year high, the 11th increase since March 2022. Though most things cost more now, the Durbins still have room in their budget to dine out with their three young children and go on vacation a few times a year. “It’s given us a tremendous amount of breathing room," Durbin said of his mortgage rate.

Americans locked in ultralow rates on debt such as mortgages and auto loans in the decade-plus that followed the 2008 financial crisis. Though rates on some loans such as credit cards are rising with the Fed’s hikes, a huge chunk of consumer debt carries the low yields on offer a few years ago. That has allowed many households to continue spending, which has kept the economy going strong despite predictions of a recession.

The U.S. economy grew 2.4% in the second quarter, the Commerce Department said on Thursday. As of the first quarter, only 11% of outstanding household debt carried rates that fluctuated with benchmark interest rates, according to Moody’s Analytics.

That metric has hovered around this historically low level for over a decade. But it only started to matter when the Fed began its campaign. Fixed-rate debt became more common after the 2008 crisis, when lenders turned away from products such as adjustable-rate mortgages and home-equity lines of credit that played a role in the bust.