Everybody is convinced that the Federal Reserve will raise interest rates again in December. With October’s hot CPI print, some analysts even think the central bank will bump rates by 50 basis points.
Meanwhile, Americans are leaning on high-interest credit cards to make ends meet as rising prices strain budgets.
One has to wonder how long consumers can hold out as the central bank pushes their borrowing costs even higher.
This raises a question: can American consumers stomach more rate hikes?
Gasoline prices skyrocketed 9.1 percent, driving the CPI up by 0.6 percent in September. Americans apparently coped with this sudden price surge by running up their credit cards.
Consumer debt surged by $27.84 billion in September, a 6.4 percent increase, according to the latest Federal Reserve data.
Americans are currently buried under $5.22 trillion in consumer debt.
The Federal Reserve consumer debt figures include credit card debt, student loans, and auto loans, but not mortgages. When you include mortgages, U.S. households are buried under record debt levels. As of the end of Q3 2026, total household debt stood at $19.105 trillion.
Revolving debt, primarily reflecting credit card balances, grew by $16.3 billion, a 14.5 percent increase. It was the biggest jump in revolving debt since 2022.
Non-revolving debt now stands at $1.37 trillion.
Non-revolving credit grew more modestly in September, rising by 11.54 billion, a 3.6 percent increase. This reflects borrowing for automobiles, student loans, and other big-ticket items.
Non-revolving credit growth has been tepid for a couple of years. It averaged around 5 percent before the pandemic but has averaged between 2 and 3 percent in recent months. Non-revolving credit growth indicates that consumers have cut back on big-ticket spending to cover the surging cost of day-to-day necessities.
Many analysts claim the big jump in credit card spending proves the resiliency of the American consumer. And while that is plausible, it more likely signals desperation. With gasoline suddenly 9 percent more expensive and other prices rising as well, Americans were forced to turn to Visa and Mastercard to make ends meet.
We’ve seen this pattern repeat multiple times over the last several years. Credit card borrowing surges along with price inflation. As price inflation moderates, consumers try to slow spending and pay down balances, only to be hit by another wave of price inflation.
Flush with stimulus and locked in their homes during the pandemic, Americans paid down credit card debt and built up savings. When the post-COVID inflation wave hit, consumers burned through that savings and turned to plastic. Credit card balances surged as Americans coped with rapidly rising prices. However, credit card spending began slowing in late 2024.
Over the last two years, credit card spending has trended lower, signaling credit stress. But we still see occasional surges in credit card use, generally corresponding with price shocks.
A healthy economy doesn’t run on credit cards. They have this inconvenient thing called a limit. At some point, Americans will hit that limit.
American consumers who lean on credit cards face a double whammy from rising debt and interest rates. The average annual percentage rate (APR) currently stands at 19.71 percent, with some companies still charging rates as high as 28 percent. The average is only slightly down from the record high of 20.79 percent set in August 2024.
A Big Problem for the Federal Reserve
This brings us back to those rate hikes.
There is a strong case for raising interest rates given persistent inflation. But there is also a case for rate cuts given $1.4 trillion in revolving credit. Every time the interest rate nudges higher, credit card payments creep up right along with it.
On top of that, the federal government is drowning under $40.5 trillion in debt, and its interest costs have eclipsed $1 trillion annually. Uncle Sam pays more interest expense each month than it spends on national defense.
Meanwhile, corporations are leveraged to the hilt.
Most analysts seem to forget this massive Debt Black Hole when they forecast a higher-interest-rate environment over the longer term. At some point, higher rates will pop the debt bubble, and the economy will roll over.
The bottom line is an economy built on debt and addicted to easy money doesn’t function in a higher-interest-rate environment.
Simply put, the Federal Reserve is in a Catch-22 and has been for months. It needs to cut rates to support the debt bubble, and it needs to raise rates to slay price inflation. It can’t do both,
If you wonder why the Fed has slow-walked rate hikes despite CPI remaining above the mythical 2 percent target for 68 months, look no further than the debt black hole. The central bankers over at the Fed won’t say it out loud, but they know every upward nudge to interest rates increases the risk of an economic crash and a financial crisis.
The Fed may well raise rates in December. It may even go “big” with a 50-basis-point hike. But it’s only a matter of time before the wheels fall off and the Fed is cutting. I think 0 percent rates in a year are far more likely than 5 percent.
Keep this in mind when you’re tempted to sell gold because yields are rising.
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