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In One Chart: Why the toll of Fed rate hikes will keep seeping into the economy

Even as the Federal Reserve begins to slow its pace of rate hikes, households, companies and the U.S. government should brace for higher borrowing costs to keep seeping into the economy, according to Glenmede.

The Fed rapidly increased rates in 2022, including through a series of four, jumbo hikes of 75 basis points. That pushed the fed-funds rate to its highest level since 2007, with another smaller increase of 25 basis points expected to be on deck for Wednesday, bringing the benchmark rate to a range of 4.5% to 4.75%.

The toll has been felt more acutely by borrowers with adjustable-rate debt, like credit cards. The average card was charging about 20% as of a week ago, the highest on record since Bankrate began tracking these rates in the mid-1980s.

Many U.S. homeowners, however, refinanced into 30-year fixed rate mortgages at historically low rates in recent years, sparing them the sticker shock of today’s higher interest rates.

While expected to climb (see chart), the pandemic debt refinancing boom has helped keep a lid on debt-service costs for U.S. households as a portion of their budgets (blue), for corporations (green) and the federal government (yellow), when comparing interest costs from two decades ago.

Costs of credit are expect to keep moving higher as Fed hikes flow through economy

Glenmede Investment Strategy

“As the existing stock of debt comes due and must be refinanced, in many cases it will be done at higher rates,” wrote a Glenmede investment strategy team, in a Monday client note.

“As a result, the speed with which higher rates lead to higher debt service costs for consumers, businesses and the federal government is dependent on the maturity profile of existing borrowing.”

Stocks closed lower on Monday ahead of the Fed’s rate decision on Wednesday. But with the rate-sensitive Nasdaq Composite Index COMP, -1.96% still was up nearly 8.9% on the year so far, according to FactSet, while the Dow Jones Industrial Average DJIA, -0.77% was up 1.7% and the S&P 500 index SPX, -1.30% was 4.6% higher.

See: The Fed and the stock market are on a collision course this week. What’s at stake.

The 10-year Treasury rate TMUBMUSD10Y, 3.537% edged up to 3.55% on Monday, but still was well above its 1-year low of nearly 1.71% in March, according to Dow Jones Market Data.

Read: 4 ways Powell could tell markets the Fed isn’t ready to pivot

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