Every three months, a select group of Federal Reserve officials gets together to guess where the federal funds rate is headed. That’s the interest rate banks charge one another for overnight loans. It’s important because it’s an economic cue ball, creating a knock-on effect for other interest rates.
The Fed forecasters’ median prediction is that the federal funds rate is headed to 3.4 percent by the end of 2020 from the current 1.9 percent. This means you’ll be paying more to get a mortgage, a new-car loan or to carry a balance on your credit card. How much more? Possibly enough to absorb whatever extra income you might be enjoying from lower tax rates or higher wages.
The Fed is picking our pockets because, to prevent the economy from overheating, it is legally required to keep inflation in check by raising rates. But the task has been made more urgent by the Republicans’ $1.5 trillion tax giveaway to the wealthy and corporations, which effectively threw gasoline onto a very hot barbecue.
“It makes the Fed’s job more difficult all around because what you’re getting is a stimulus at the very wrong moment,” a noted former Federal Reserve chairman, Ben Bernanke, said in a recent appearance at the American Enterprise Institute. Economists at the Fed would never have chosen such a policy. But in the GOP, tax cuts aren’t so much science as they are theology, even if the faithful have to be sacrificed.
Trump supporters who benefited the least from the Republican tax cut — wage workers, farmers and anyone else not in the top 10 percent of earners — will now have to pay the bulk of the bill to mitigate the damage it caused to the economy.
You can see this in credit card debt, which has crested at $1 trillion, now at an average interest rate of about 16.8 percent. Credit card interest rates are tied to the prime rate, which is tied to — you guessed it — the federal funds rate. Chase, for instance, adds from 11.74 percent to 20.49 percent to the prime rate, creating a maximum credit card rate of 29.99 percent. For those consumers who carry a balance (about a third don’t), and a card that automatically adjusts (not all do), the difference can mean hundreds of dollars in extra interest costs annually. In one 2016 study, the credit reporting company TransUnion said rising rates affect 92 million consumers, 9.3 million of them severely.
And now rates are now rising at time when household debt reached a record $13.21 trillion in the first quarter. Household debt service payments as a percentage of disposable income hit 5.9 percent in the first quarter, according to the Federal Reserve, a figure not reached since just before the Great Recession. Average credit card debt per borrower is about $5,700 and growing at a rate of 4.7 percent while wages are growing at about 3 percent. That can’t continue forever.
There’s an anomaly in an economy that is supposedly running flat out: Many families still haven’t recovered the wealth they lost in the financial collapse. A sobering analysis by Deutsche Bank concludes that more families than ever have zero or negative wealth, excluding their homes. (Homeownership has fallen to 64.2 percent of households, from a peak of 69 percent in 2004.) Despite high stock prices and record home prices, household net worth since 2007 has decreased for all income groups — except the top 10 percent. Net worth for the richest Americans is up an average of 27 percent. For the middle class, what remains of it, wealth has decreased 20 percent to 30 percent in real terms — their share of the pie has shrunk.
Similarly, a recent St. Louis Fed study of generational wealth concluded that the very families whose wealth should be growing are falling behind. “We believe many families in the youngest cohort we studied here — respondents born in the 1980s — are at substantial risk of accumulating less wealth over their life spans than the members of previous generations,” the report said.
That’s an astonishing conclusion in an economy that, as President Donald Trump insists, has never been better. Certainly, it’s never been better for the wealthiest 10 percent of families, who now own about 75 percent of the nation’s total household wealth, as opposed to less than 35 percent in the 1970s. Or for the nation’s richest 0.1 percent, who now own as much wealth as the bottom 90 percent, according to Deutsche Bank. For the other 90 percent, the ability to build wealth rests on the ability to save, which they can’t do if interest rates are rising and eating into their earnings. The personal savings rate, at 2.8 percent, is heading in the wrong direction.
Raising rates now, perversely, gives the Fed a monetary tool with which they would be able to fight the next recession — by cutting those rates. And that may come sooner than expected. By 2020, when Bernanke believes any stimulative effect of the tax cuts will have run its course, we will be facing what he called a Wile E. Coyote economy, after that overeager cartoon character.
The overstimulated American economy will run off the cliff on its own momentum, Bernanke fears. That will leave the nation with an enormous federal deficit and not much fiscal room to maneuver. Having been essentially made to pay for the tax cuts for the richest Americans, the rest of the nation will be staring down the abyss, too.