consumer credit

The Federal Reserve announced that consumer credit fell by a record $21.6 billion in July – more than 5 times the projected decline of $4.0 billion. Consumer credit figures for June were revised to a decrease of $15.5 billion from the originally-reported decline of $10.3 billion.

Total consumer credit fell at a 10.4% annual rate to $2.47 Trillion. This data suggests those US households are staying away from the use of debt as unemployment and other economic factors worsen. This is the sixth consecutive monthly decrease – the first time that has happened since the last half of 1991 – and represents the largest decline since the Fed began tracking consumer credit in 1943.

So, how does this affect interest rates?

While several things can affect interest rates, most of the day-to-day fluctuations in interest rates are caused by simple supply and demand. As we have seen in the recent past, as investors demand more and more Mortgage Backed Securities (MBS) the price has increased which has an opposite affect on the interest rates. Now, with consumer credit shrinking so quickly, there is going to be a supply issue. As consumers borrower less and less, the supply of MBS and other investments go down. Lessening supply has the same affect as increasing demand – it raises the price which reduces the interest rates.