U.S. household debt soars to $16.9 trillion

According to a Federal Reserve report released on Thursday, the total debt held by American households rose to a record $16.90 trillion from October to December 2022, marking the largest quarterly increase in twenty years. Inflation and rising interest rates drove up mortgage and credit card balances.

The report revealed that household debt grew by $394 billion in the last quarter, pushing the total up to $2.75 trillion higher than it was just before the onset of the COVID-19 pandemic. Additionally, the increase in credit card balances in December 2022 compared to the same month one year prior was the largest since records began in 1999.

Mortgage debt increased to $11.92 trillion at the end of December, rising by $254 billion, while mortgage originations fell to $498 billion, a level last seen in 2019. The report also indicated that credit card balances increased by $61 billion, while auto loan balances rose by $28 billion in the fourth quarter.

A significant portion of the increase in overall debt is linked to the US central bank's efforts to dampen demand and quell inflation by raising its benchmark interest rate from near zero in March 2022 to over 4% by the end of December. The rate of monetary tightening was the fastest since the early 1980s.

The increase in interest rates had an immediate impact on the housing market by pushing up mortgage costs, while labor shortages and supply chain issues led to an imbalance in the economy. The Russian invasion of Ukraine also raised food and energy costs around the world. Despite low unemployment, high prices and climbing interest rates may be making it difficult for some borrowers to repay their debts, especially for younger borrowers.

While delinquency rates for credit cards, auto loans, and mortgages rose, the overall share of debt in arrears by more than 90 days remains below pre-pandemic levels. Wilbert van der Klaauw, an economic research advisor at the New York Fed, suggested that some borrowers' financial stability may be challenged due to the persistently high prices and climbing interest rates. The Fed has raised its policy rate again, and investors predict at least two more 25 basis point hikes before it pauses to allow time for its actions to permeate through the economy, reducing the risk of it falling into a recession.