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What Consumers Earn in Interest Income vs. What they Pay in Interest Expense

One reason why the drunken sailors are in no mood to slow down. Lots of them make a lot more money on T-bills, CDs, money-market funds. Others pay more.

By Wolf Richter for WOLF STREET.

Treasury bills up to six month all yield over 5.5%. One-year T-bills yield around 5.4%. This is money that is deemed to have no credit risk, and minuscule duration risk. Lots of FDIC-insured brokered CDs (sold through a broker), and some CDs sold directly by banks are offered at around 5.5%. Money-market funds yield over 5%. FDIC-insured high-yield savings accounts yield over 4%. Consumers have many trillions of dollars in these investments, especially older consumers that are more conservative with their nest egg.

And after having gotten ripped off for years by the Fed’s interest-rate repression and QE, and after having gotten screwed by their banks that pay 0.2%, they’re taking their money where the income is, and this movement of funds has forced banks to pay more or lose deposits and collapse, and interest income has surged.

Consumers, lots of consumers, with many trillions of dollars in these instruments are finally breathing a sigh of relief, and they’re spending some of this money, which is in part why consumer spending has grown, despite the higher interest rates.

On the other side are the consumers that are paying higher interest rates on money they borrow. But 70% of household debt is in mortgages, and after the refinancing boom in 2020 through 2021, the typical mortgage is a 30-year with a fixed rate of about 3% or even less. Those rates won’t change: 70% of the consumer debt won’t get higher interest rates until the homeowner sells the home, and the buyer has to get a 7.2% mortgage, but purchases of previously owned homes have plunged; or unless the homeowner refinances the loan, but refis have collapsed.

With the biggest portion of household debt just about locked in at these 3% rates, only new auto loans, interest-bearing credit-card debt, personal loans, etc. have seen higher interest rates and higher interest payments.

So how much more interest income did consumers earn from higher interest rates on their interest-bearing assets, and how much more in interest payments did they make due to these higher rates on their debts?

Interest income earned by consumers on their assets jumped to $1.82 trillion seasonally adjusted annual rate in Q2, according to data from the Bureau of Economic Analysis. Note, this is their interest income on tens of trillions of dollars in interest-paying assets. This income was up by $175 billion since the beginning of 2022, when the Fed started hiking interest rates (red in the chart below).

Interest payments on consumer debt rose to $462 billion seasonally adjusted annual rate in Q2, up by $180 billion since the Fed started hiking interest rates (green):

Red (interest income) went up by $175 billion and green (interest payments) by $180 billion since the beginning of 2022. All data below in seasonally adjusted annual rates.

Interest income is always much higher than interest payments. About one-third of households own their home free and clear. Another third has substantially paid down their mortgage over the years, and the interest portion of their mortgage payment has become much smaller. Over one-third of households are renters. Many of them are renters of choice” that live in higher-end houses, rented condos, and higher-end apartment buildings. Many of them have plenty of assets and no debt. Then there is a smaller portion of households that is up to their eyeballs in debt, including recent homebuyers. And a small portion of households is drowning in debt.

So, the growth of interest income (+$175 billion) is nearly the same as the growth of interest payments (+$180 billion).

And total interest income of $1.83 trillion minus total interest payments of $463 billion leaves American consumers in aggregate $1.370 trillion in net interest income in Q2, which has changed very little and is just a hair where it was on the eve of the rate hikes:

Not the same people, but in aggregate…. Consumers with credit card debt at usurious interest rates and expensive auto loans, and especially consumers with subprime credit ratings, are not the same people as those that have a lot of money in T-bills, CDs, money-market funds, and savings accounts, though there surely is some overlap. But in aggregate, all consumers combined, that’s what matters for overall consumer spending, inflation, and the economy.

In other words: higher interest rates are not constraining consumer spending in aggregate: they constrain the spending of some consumers, and are filling the wallets of other consumers.

This additional spending power is particularly important for retirees who are on a fixed income, such as Social Security or a pension. If they have $300,000 in savings, two years ago they earned nearly nothing from it, and now they’re earning $15,000 in interest income a year, and they’re plowing some of that interest income back into the economy, creating new demand.

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