US Consumer Debt Risks Soar as Fed Hikes Interest Rates

The Federal Reserve's interest rate increase is raising concerns about US consumer debt amid high living costs. The first rate hike since 2023 saw a 25 basis point increase, with markets expecting up to three additional hikes due to persistent inflation and strong growth.

Even modest policy tightening can strain consumers with limited savings, increasing the risk of higher loan delinquencies and weaker spending. Low and falling US personal savings rates make households more vulnerable as they borrow more to sustain spending amid rising rates and high essential goods prices.

RBC warns that increased reliance on credit during Fed tightening should drive higher delinquencies, potentially weakening consumer spending and triggering broader economic impacts. Frances Donald of RBC notes that households are saving less and borrowing more to sustain consumption, warning that greater dependence on credit during a Fed hiking cycle should lead delinquencies to rise alongside interest burdens.