The Forgotten Man

October 19, 2022 | Catherine Callaghan, Associate Research Analyst

Two line charts showing rate increases since 2017. Chart subtitle: A higher fed funds rate also means higher mortgage, auto, and credit card rates. First chart description: Federal Funds Rate line is in teal and Prime Rate line is orange. Y-axis shows percentages ranging from 0% to 7%. X-axis shows time, beginning at October 2017 with yearly labels to current October 2022. Period of March 2022 to present is highlighted with a transparent green rectangle overlay. Both lines follow generally the same pattern of increases and decreases, with the Prime Rate 3% or so higher/above the Fed Funds Rate. After a gradual increase from October 2017, the rates were steady for the first half of 2019, then decreased gradually before sharply decreasing to near zero for the Fed Funds Rate and 3.25% for the Prime Rate from March 2020 to March 2020. Since then, both have increased markedly, with the Fed Funds Rate currently at 3.08% and the Prime Rate at 6.25%. Second chart description: Credit Card Rates line is purple, Mortgage Rates line is blue, and Auto Rates line is tan. Both Credit Card and Auto rates utilize quarterly data; Mortgage rates is weekly. Four axes total. X-axis at top of chart is labeled Mortgage Rate Timeline and ranges from October 2017 to October 2022, with yearly increments. X-axis at base of chart is labeled Auto and Credit Card Rate Timeline and ranges from August 2017 to August 2022 in yearly increments. Y-axis at left is labeled Auto and Credit Card rates and ranges from 0% to 25% in 5% increments. Y-axis at right is labeled Mortgage Rates and ranges from 0% to 8% in 1% increments. Period of March 2022 to present is highlighted with a transparent green rectangle overlay. Credit Card Rates line is highest in plot area, beginning in August 2017 at 13.08% and climbing steadily to a peak of 15.09% in February 2019, remaining near that level til May 2020 and hovering in the 14% range until climbing back up again beginning in March this year, to 16.2% as of August 2022. Mortgage rates line fills center of plot area and has most peaks and valleys. Rates climbed from October 2017 to a peak of 12.75% in December 2018, then fell relatively steadily til January 2021 (2.65%), climbed a bit up from there and hovered near 3% until March of this year, and have sharply increased since, currently at 6.92% as of October 13. Auto rates line has hovered generally between 4.5% and 5.5% for entire period of chart. In November 2021, the rate was a recent low of 4.58% however it has climbed since then, with the October 2022 rate at 5.52%, the peak for the time period shown. Chart source: Federal Reserve Bank of St. Louis as of October 13, 2022. End chart description.

While there has been no shortage of recent headlines dissecting the sorry state of the economy and markets, the average U.S. consumer is occasionally overlooked in that narrative. Year-to-date, the Federal Reserve has increased the federal funds rate by 300bps. As the Fed raises rates, the prime rate, or rate set by commercial banks, increases in tandem. For the average Joe, this means any interest rates that are not fixed increase as well, including credit card rates and adjustable mortgage rates. Consumers in the market for a home or vehicle also face higher fixed rates on new loans. This year, rates have reached highs not seen in years: mortgage rates — currently at 6.9% for a 30-year fixed loan — have not been this high since 2002, auto rates at 5.5% are the highest in more than 10 years, and credit card rates — at 16.3% — have never been this high in a data series dating back to 1994.

In an environment where the average consumer is already paying higher prices for fuel, food, and other staples due to soaring inflation, increasing credit card and auto loan rates add to the burden. While consumer spending has so far been fairly resilient to rising prices, the underlying dynamics are not sustainable. According to a Forbes survey from June 2022,¹ 67% of Americans have dipped into their savings for spending, with 31% either depleting their savings or using a significant portion of it. With all eyes on U.S. GDP, it is important to remember that consumer spending makes up 70% of the economy, and the health of the average Joe is what will determine our path from here.

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¹Forbes Advisor OnePoll survey, June 2022