The double-edged sword of rising rates has consumers chasing interest and collecting IOUs
Not just platinum problems… Last week American Express said it had set aside $1.1B — way more than expected — to cover potential loan losses. Amex isn’t the only lender worried about delinquencies. US consumer debt hit a record $4.82T in February, and Americans are starting to fall behind on credit-card and loan payments. Driving the IOU pileup: pandemic savings have dried up, wages are lagging behind inflation, and rising interest rates have become a national frenemy.
Enemy/friend: Folks hate high rates on their debt (picture: car payments at 15-year highs), but they dig higher returns on their savings.
APYes: Last month the average annual percentage yield (aka: return) for online savings accounts reached 3.75%, up from just 0.5% a year earlier.
Interest chasing: 30% of US customers moved $$ between banks last month, and a third of those said they were searching for a higher APY — which also just hit a 15-year high.
Smilin' while they're cryin’... The double-edged sword of higher rates is jabbing banks too. Last quarter, the four largest US lenders wrote off $3.4B in loans (up 73% on the year) as consumers struggled to pay down debts. Citi, JPMorgan Chase, and Wells Fargo recently set aside a combined $2B to cover potential loan losses. But there’s a corporate plus side to climbing rates: this month, those same banks reported expectation-busting earnings as rising rates on customer loans (like mortgages) padded their coffers. They expect profits to increase if hikes continue.
Cash is cool again… Now that investors can earn higher interest on their cash, some are parking more $$ in interest-bearing accounts like money-market funds and savings. That can be bad news for stocks, since investors demand higher returns from equities to justify the changed opportunity costs. Meanwhile, banks are competing to offer higher APYs than rivals as the Fed continues raising rates. At least one more hike’s expected in May.