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U.S. taking on more debt, what it means for the Fed

Are Americans getting smarter about their money? A new study from the New York Fed shows household debt ticked up 1% in the fourth quarter. While delinquency rates on mortgages and credit cards are falling, the same can't be said for student loan debt or Euro loans.

“Overall Americans learned the huge lessons during the crisis about credit card debt, so credit card delinquencies are down. Americans are being much more judicious about taking on any kind of debt and especially credit card debt,” said Yahoo Finance’s Aaron Task. It’s not all good news though, because “overall debt is rising more than income,” he points out.

While the jobs picture for the past few months has been overwhelmingly positive, wage growth over the past few years has been stubborn. January’s job report showed some signs for hope, though. Monthly wage growth was the strongest it’s been since 2008.

Essentially, explains Task, there are two ways of looking at the uptick in debt. The first is that Americans still aren’t earning enough to pay for what they need, so they’re relying more on borrowing. The second explanation is more positive – that Americans are feeling more confident about the economy.

But as Task sees it, the bleaker explanation may be more accurate. Add to that the statistic that delinquencies are rising for student loan and car payments and you have reason for concern. “The fact that student loan delinquencies are on the rise is very troubling because it affects over 33% of American borrowers,” he said. Student loan debt is the number one type of debt in this country – Americans owe more than 1 trillion on their degrees.

“Auto loans, they’re now the number two slot at nearly a trillion dollars. And we heard a lot last year about auto companies doing sub prime lending and lowering their standards for auto lending, so it’s probably not a surprise that auto loan delinquencies are up,” said Task. But not surprising doesn’t mean it’s not troubling.

While the rates of subprime auto loans, and the delinquencies we’re seeing now, are no where near the levels of the subprime mortgages and subsequent delinquencies that got us into the financial crisis, it’s still a troubling trend, according to Task.

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So will any of these trends in consumer debt have any impact in how the Fed looks at the economy when deciding when to hike rates?

“It’s a really interesting question,” said Task. The Fed has traditionally looked at both the jobs and housing picture when discussing a future rate hike. “The Fed has been very focused on mortgages. They haven’t said a whole lot about student loans or auto loans. I think they’re looking at the much bigger picture that they’ve been at zero for a very long time and can they stay there? But they have to take these numbers into consideration because if they start to raise rates and that puts more pressures on consumers and there’s more delinquencies. That’s going to cause a lot of problems that they don’t want to see happen.”

The Fed releases minutes from its January meeting this afternoon. Everyone is focused on the word “patient” – whether the Fed is united on its oft-dissected language and will remain “patient” when it comes to a rate hike.  

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