Hooray For Rising Rates?

Although some economists argue that rising interest rates squeeze con-sumers more than they help them, Edward F. McKelvey of Goldman, Sachs & Co. disagrees. He notes that industry and Federal Reserve sources estimate that only a third of all mortgages and revolving credit balances, currently about $3.1 trillion and $328 billion, respectively, are adjustable-rate. That's some $1.15 trillion in liabilities.

On the other hand, McKelvey calculates that households own about 1.7 times that amount, or $1.95 trillion, in assets whose returns can change over a year's time. This includes about $469 billion in time deposits and Treasury securities maturing within a year, $330 billion in money market funds, and $1.15 trillion in savings deposits that can be moved if their rates rise too sluggishly.

What's more, since rate hikes on most adjustable-rate mortgages, which account for the bulk of interest-sensitive household liabilities, are capped at 200 basis points a year, McKelvey calculates that the household sector's maximum exposure to rising interest rates in current liabilities is about $22 billion a year. By contrast, the interest individuals received over the latest 12 months, minus so-called imputed interest, came to an annualized $33 billion--indicating, says McKelvey, that "rising rates are putting more income into the pockets of families than they are taking out in the form of larger debt-service payments."