Yesterday, I thought that the Fed would keep rates unchanged for May. In moving today on rates, the Fed has clearly signalled that the following are all of current concern: 1) general inflation (as I have previously argued); 2) asset price inflation (particularly in relation to the heavily overpriced Sydney, and to a lesser extent, Melbourne, property markets; and 3) the propensity for people to borrow far more than their equity contributions /asset buffers can justify.
With the Fed: 1) inclined towards taking the heat out of the property market asap; and 2) many people borrowing up to 110% of property values, etc, I do not think that it will take much more of a rise in interest rates for loan defaults to start appearing all across the landscape (not widespread, but should be enough to cause a ripple at the margins).
Put simply, far too many people have borrowed up to the fullest extent of their asset values, without leaving anything in place by way of an equity buffer. At the same time, many of these same people have geared their incomes to leave little in the way of discretionary cover should interest rates rise.
It will, therefore, be quite interesting to see just how the household budget caters to a rising interest rate environment, coupled together with rising inflation.
For my part, nothing beats a startegy of paying down one's debts, or accelerating debt retirement during the good times. A sobering thought for us all.
