US household credit card debt and total household debt have reached record highs, making low-income groups vulnerable to debt repayment. Continued interest rate hikes by the Federal Reserve could trigger credit defaults and drag down consumption. As US inflation data continues to exceed expectations, market pricing in further Fed rate hikes continues to intensify. However, while tightening monetary policy, US household debt is already at historically high levels, meaning that further rate hikes could trigger a series of unexpected risks that the market has not yet fully priced in.

US household debt hits a new high, with credit card debt continuing to balloon.

The latest data from the Federal Reserve Bank of New York shows that U.S. credit card balances increased by $22 billion in the third quarter, climbing to a record high of $1.29 trillion, a year-on-year increase of 4.2%. Total household debt in the U.S., including mortgages, auto loans, and student loans, increased by $334 billion in the third quarter, reaching a total of $19.1 trillion. Data from TransUnion further illustrates the pressure on residents: in the third quarter, the average consumer's credit card debt was $6,678, a year-on-year increase of 2.4%; the number of people carrying credit card debt increased from 174.8 million to 178 million, an increase of 2%.

High credit card interest rates place significant debt burden on vulnerable groups.

Credit card borrowing costs are already high; LendingTree statistics show that the annualized interest rate for new credit cards is approximately 24%, making it an extremely expensive borrowing channel. Furthermore, credit card interest rates are mostly linked to benchmark interest rates. If the Federal Reserve continues to raise interest rates, the interest burden will increase accordingly, directly squeezing already strained household cash flow. A survey by the New York Fed indicates that new credit cards continue to flow to low-income, low-credit-score groups, whose accounts are inherently more financially vulnerable and less able to withstand risks. First-quarter data shows that 12.8% of credit card balances are already in the severely overdue range of more than 90 days.

Inflation continues to erode incomes, and many residents rely on credit to maintain their fixed expenses.

Persistently high inflation is the underlying driver of continued household debt. Data from the U.S. Bureau of Labor Statistics shows that the CPI rose 0.4% month-on-month in October, following a 0.6% increase in September, indicating that prices continue to erode household income. A survey shows that 55% of cardholders rely on credit cards to cover essential expenses such as food, clothing, housing, and transportation, and 56% of borrowers said they would need at least six months to repay their credit card debt. Against this backdrop, raising interest rates not only suppresses demand but also directly amplifies the debt burden on some families, potentially leading to a surge in defaults.

Small business confidence is weakening, and tax and labor issues are exacerbating their operational burdens.

The US NFIB Small Business Optimism Index fell slightly to 97.8 in October, a new low since June. Labor supply issues remained the top concern for small businesses for the fourth consecutive month; tax concerns rose sharply, with 21% of business owners listing taxes as their primary concern, the highest level since May 2021. Although business expectations for the next six months have slightly improved, small businesses are highly sensitive to interest rate changes. Rising financing costs will further compress profits and limit expansion and hiring, representing an easily overlooked tail risk in the interest rate hike transmission chain.

Credit data shows divergence: seemingly stable, but with hidden risks accumulating.

There exists a structural contradiction that the market easily overlooks: currently, credit data reported by some banks remains relatively stable. Wells Fargo CEO Charlie Schaff stated in October that the bank's early delinquency rate remains historically low, and the write-off rate has declined compared to the previous period and the same period last year, indicating no immediate signs of a comprehensive weakening in consumer credit. However, he also cautioned that credit quality may weaken in the future. This divergence means that risk is not evenly distributed but concentrated among subprime and low-income groups, constituting "hidden risk." Once continuous interest rate hikes erode the cash flow buffer, defaults will be released in a concentrated manner.

The Federal Reserve's continued interest rate hikes could have a significant cascading impact.

If the Federal Reserve insists on continuing to raise interest rates, the potential chain reaction can be divided into three layers: First, the pressure on household debt repayment will worsen rapidly, with credit card and subprime consumer loan delinquency rates rising quickly, impacting the consumer credit sector and dragging down the asset quality of banks; second, residents will be forced to reduce non-essential consumption, causing a rapid decline in the resilience of US consumption and shaking the core support of the US economy; finally, consumer confidence data such as PMI and PPI will be affected, and the risk will be transmitted to asset pricing fund managers selling equity assets, as the Federal Reserve is currently focusing on inflation and the returns from interest rate hikes and underestimating the recession risk brought about by a default on household debt.

Summarize:

The Federal Reserve is currently facing a dilemma: persistently high inflation necessitates tightening policy, but household debt and the vulnerability of small and micro enterprises increase the cost of raising interest rates. The lagged effects of policy tightening, coupled with high existing debt, mean that consumer credit defaults and a rapid slowdown in domestic demand represent a significant set of tail risks in this round of interest rate hikes.