Consumers Shaking Off Rate Increases...For Now

Summary

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Episode Summary: Consumers Shaking Off Rate Increases...For Now

Podcast: WSJ Your Money Briefing
Date: October 16, 2018
Host: J.R. Whalen
Guest: Peter Rudiger, Wall Street Journal Reporter

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Overview

This episode explores the impact of the Federal Reserve’s continued short-term interest rate increases on U.S. consumers and businesses. Despite fears and criticism—most notably from President Trump—that the Fed is raising rates too quickly, the nation’s largest banks report little sign of consumer or corporate distress. The discussion unpacks recent earnings reports from major banks, consumer borrowing trends, and the delicate interplay between rising rates and overall economic health.

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Key Discussion Points & Insights

1. How Rising Rates Affect Consumers Immediately

• Role of Prime Rate:
  • Peter Rudiger explains that when the Federal Reserve raises its benchmark short-term rate, banks increase the prime rate—a benchmark for loans such as credit cards and home equity lines.
    • Quote:

      “Anytime the Federal Reserve raises interest rates, banks respond by rising what's known as the prime rate. …So your credit card interest rate that you pay actually is tied to the prime rate.”
      — Peter Rudiger (02:30)

  • This leads to immediate higher costs for borrowers and benefits to bank income.

2. Consumers Remain Unfazed by Higher Borrowing Costs

• Bank Earnings & Credit Card Usage:

  • Despite higher rates, major banks (JP Morgan, Wells Fargo, Citigroup) reported strong earnings and increased credit card balances.
    • Quote:

      “Credit card balances were up at each of those institutions, despite having to pay more to borrow on credit cards.”
      — Peter Rudiger (03:00)

• Mortgage Slowdown:

  • Consumers are starting to pull back on long-term loans—especially mortgages—as those rates approach 5%.
    • Insight: Mortgage originations at JP Morgan and Wells Fargo dropped by double digits.

3. Impact of Rising Rates on Markets and Lending

• Stock Market Volatility:

  • The week of October 8 saw increased market worries about the speed of Fed rate hikes and the rising cost of long-term borrowing.

• Bank CEO Comments on Credit Quality:

  • Jamie Dimon, CEO of JP Morgan, notes that consumer credit quality remains strong:
    • Quote:

      “Most of the consumer credit written since the Great Recession is pretty damn good, in his words.”
      — Peter Rudiger (03:48)

4. Post-Recession Lending Trends

• Banks became much more selective post-2008-09 crisis, leading to high-quality loan portfolios.
• Despite $1 trillion in total U.S. credit card debt, on-time payments are increasing and default rates are falling.
  • Quote:

    “People are paying their loans on time, even more so than they were a year ago. So the U.S. consumer is still pretty healthy.”
    — Peter Rudiger (04:26)

5. Businesses Handling Rate Increases Well

• Bank executives report low concern about U.S. companies’ ability to absorb higher borrowing costs, even among struggling retailers like Sears.
  • Quote:

    “They likewise feel pretty confident that the U.S. companies can absorb higher borrowing costs. …There’s really not a lot of negativity coming from the bank chiefs on the corporate sector either.”
    — Peter Rudiger (05:26)

6. The “Sweet Spot” for Banks—and the Road Ahead

• Banks’ Advantage:

  • For now, rising rates allow banks to earn more from lending without having to pay much more interest to depositors.

• Potential Shift:

  • Over time, consumers and businesses may demand higher returns on savings, pressuring bank profit margins.
    • Quote:

      “We’re still in that sweet spot… After a while… [depositors are] going to start demanding to be paid more. So banks' profit margins are going to be impacted by that over time.”
      — Peter Rudiger (06:11)

• Future Outlook:

  • The “piper”—in the form of higher savings rates or declining demand for loans—may eventually have to be paid by banks or consumers.
    • Exchange:

      J.R. Whalen: “So the consumer could be the piper…”
      Peter Rudiger: “…coming to be paid sooner or later.”
      (06:46)

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Memorable Quotes

• “Most of the consumer credit written since the Great Recession is pretty damn good.”
  — Jamie Dimon (as paraphrased by Peter Rudiger, 03:48)

• “People are paying their loans on time, even more so than they were a year ago. So the U.S. consumer is still pretty healthy.”
  — Peter Rudiger (04:26)

• “We’re still in that sweet spot… [but] banks’ profit margins are going to be impacted by that over time.”
  — Peter Rudiger (06:11)

• “So the consumer could be the piper—”
  “…coming to be paid sooner or later.”
  — J.R. Whalen & Peter Rudiger (06:46)

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Timestamps for Important Segments

• 02:30 – How Fed rate hikes translate immediately to consumer loan rates
• 03:00 – Consumers keep borrowing despite higher credit card costs; mortgages begin to slow
• 03:48 – Bank CEO optimism and credit quality since Great Recession
• 04:26 – On-time credit card payments and “healthy” consumer profile
• 05:26 – The business sector and rate hikes: Why banks remain confident
• 06:11 – Current “sweet spot” for banks with higher rates; warnings about future margin pressure
• 06:46 – Consumers may eventually feel the pinch as deposit rates catch up

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Tone and Style

This episode features a calm, analytical tone, with a focus on data and firsthand commentary from financial leaders. Both Whalen and Rudiger present a clear-eyed but optimistic view of the U.S. economy's resilience amid rising interest rates.

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Transcript

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[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Many people have voiced their opinion that the Federal Reserve is raising interest rates too fast. Is that scaring some consumers away? We'll discuss in a moment. First, these money and market stories. You should know Fidelity Investment says it will store and trade Bitcoin for hedge funds and other professional investors. Some bitcoin observers said that Fidelity's move will lend the cryptocurrency world some mainstream credibility and potentially remove some obstacles for buyers and sellers. The new Fidelity business will allow money managers, family offices and other institutional clients to trade Bitcoin and ether. That's another digital currency. The company, however, for now has no plans to extend the trading of Bitcoin to retail customers. And a survey of more than 750 workers by Harvard Business School and UCLA shows that 80% of respondents said they would be willing to pay money to stop an email containing their salary information from being distributed to co workers. About half of the people surveyed said they still would not tell five peers what they earn in exchange for $125. The research found that people are reluctant to ask co workers about their salaries out of respect for most co workers preference to keep that salary information private. But they're also fearful that asking about salaries would force them to reveal their own pay rate. But discussing salary could help an employee better value their work. A little more than half of the respondents believe that their guess of a co worker's salary was within 5% of the real average. In actuality, though, people's guesses were 16% off the real figure. The Federal Reserve has raised short term interest rates eight times since December of 2015. And while some, including President Trump, might feel the Fed is, in the president's words, out of control, the nation's big banks have yet to see a negative impact on consumers. And Wall Street Journal reporter Peter Rudiger is here to discuss. So Peter, just for a Mom, briefly explain for us how the benchmark short term interest rate potentially affects consumers immediately.

[Peter Rudiger]

Anytime the Federal Reserve raises interest rates, banks respond by rising what's known as the prime rate. And the prime rate serves as a benchmark for all sorts of loans to consumers. So your credit card interest rate that you pay actually is tied to the prime rate, the interest rate you might pay on a home equity line of credit is tied to the prime rate. So immediately banks get a benefit to their bottom line from being able to charge you more for borrowing.

[J.R. Whalen]

While the rising rates could make it more expensive for consumers to borrow, I guess they've been largely undeterred. That's the word from some bank executives.

[Peter Rudiger]

Exactly. We heard last week, we had JP Morgan, we had Wells Fargo, we had Citigroup, all report earnings, all were pretty big double digit gains in net income. What they said was the US consumer, at least in terms of some of those types of loans. I just mentioned credit cards in particular, they still want to borrow. Credit card balances were up at each of those institutions, despite having to pay more to borrow on credit cards. What you're starting to see though is certain longer term loans that aren't as tied to what the Federal Reserve does, but are tied to what the bond market does. That's a mortgage, for instance. Consumers are starting to taper off some of their borrowings. We had mortgage originations at JP Morgan and Wells Fargo fall by double digits just because mortgage rates now are approaching 5%.

[J.R. Whalen]

Is that what has spooked the markets, especially during the week of October 8th? Was it more the long term loans?

[Peter Rudiger]

Yes. So long term interest rates were rising the week before. We had banks reporting. Folks were worried about the pace of Federal Reserve rate increases and how that might filter through to how much they pay to borrow, how much consumers pay to borrow for homes. In some of the commentary we heard from the executives about whether they were worried about consumers not being able to afford higher borrowing costs, they were actually pretty optimistic. So Jamie Dimon, the CEO of JP Morgan, said that most of the consumer credit written since the Great Recession is pretty damn good, in his words.

[J.R. Whalen]

That's interesting that they have seen really this Trend since the 0809 recession really has trended upward and positively, almost undeterred.

[Peter Rudiger]

That's right. I think what you saw after the recession is a lot of risk aversion on behalf of banks and the types of customers they want to lend to. It was tougher to get a mortgage for a long time. It was tougher to get a credit card unless you had a pretty good credit score. As a result of that, a lot of the mortgages and credit card loans they have made since the decade since the crisis, they have turned out to perform really well. So what you saw in earnings announcements last week was, okay, we've already talked about the cost of borrowing going up. Households are still not paying that much to service those debts. So as you might expect, an economic recovery that's long in the tooth. People might be starting to fall behind on some of their credit card debts as those pile up. Credit card debt is now over $1 trillion in the U.S. the reverse is happening across the board. People are paying their loans on time, even more so than they were a year ago. So the US Consumer is still pretty healthy. That's the kind of the read we got from a lot of the bank executives talking on conference calls last week.

[J.R. Whalen]

All right, so that's the impact on consumers. But the banks also have not shown much concern regarding the effect of rates on the business community either.

[Peter Rudiger]

We have a lot of headlines in our paper in the past couple weeks just on big US Companies struggling, Sears filing for bankruptcy. Executives were asked what they feel about the health of the US Business community, especially retailers, and they said they likewise feel pretty confident that the US Companies can absorb higher borrowing costs. These weren't unanticipated. A lot of folks have issued hundreds of billions of dollars in bonds and have untapped lines of credit that they can use in case they need to expand. So there's really not a lot of negativity coming from the bank chiefs on the corporate sector either.

[J.R. Whalen]

So these short interval rate increases by the Fed and they've been cautious and they've been taking little steps along the way, that could be the key to keeping everyone fairly happy, I think.

[Peter Rudiger]

So what you'll see over time is that right now banks are in this kind of sweet spot where they get to enjoy some of these higher rates that they can charge on loans. After a while, though, as those interest rates that the Federal Reserve increases after they build up, consumers are going to start expecting maybe a higher interest rate on their savings account and businesses too. When they park their deposits at a bank, they're going to start saying, wait a minute, the Fed rate is here and I'm still being offered peanuts on my savings account. They're going to start demanding to be paid more. So banks profit margins are going to be impacted by that over time. We're still in that sweet spot though, where they can get more in lending income but don't have to pay that much to depositors.

[J.R. Whalen]

So the consumer could be the piper

[Peter Rudiger]

coming to be paid sooner or later.

[J.R. Whalen]

All right, that's the Wall Street Journal's Peter Rudiger joining us here in our studio. Peter, thanks for being with us.

[Peter Rudiger]

My pleasure.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

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