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US Household Wealth Hits New Record High Near $93 Trillion

Today I have more encouraging news to report about the US economy and the financial well-being of American households, specifically. At the end of today’s post, I have some comments on yesterday’s much-expected interest rate hike by the Fed policy committee.

A new report from the Federal Reserve released last week found that US household net worth climbed to a record $92.8 trillion at the end of last year. That’s up $5.5 trillion, or 12%, last year alone. The end-of-year surge in stock prices and the steady climb in home values added more than $2 trillion to household balance sheets in 2016. That is great news!

The biggest contributor to the increase in household wealth was the stock market, which added $728 billion to household balance sheets in the 4Q alone, according to the Federal Reserve’s quarterly financial accounts report.

The stock market rallied by about 8% in the 4Q of last year, following the election of President Donald Trump, with many investors anticipating tax cuts, regulatory relief and fiscal stimulus. The market has climbed an additional 6% so far this year, which isn’t captured in Thursday’s household wealth report for 2016.

Real-estate gains contributed significantly to the rise in household wealth last year. The value of real estate owned by households and non-profit organizations climbed by $557 billion in the 4Q alone, reaching a record $26.5 trillion. That exceeds the housing bubble’s peak by $1.6 trillion.

US households lost nearly $13 trillion of wealth during the Great Recession of 2007-09. Yet since the 1Q of 2009, household wealth has soared by a record $38 trillion, driven by an eight-year rally in stocks and eventually by a robust recovery in home prices as noted above.

In inflation-adjusted terms, US household net worth has grown at an amazing rate of 3.5% annually for the past 65 years, as seen in the chart below (courtesy of blogspot.com). That works out to a nearly 10-fold gain in wealth, which is the most impressive in the world by far. Life in the US has been getting better and better for generations, although not in a straight line.

The ratio of household net worth to disposable personal income also reached a new peak last year. Household net worth is now 6.5 times higher than personal income, a milestone that has now surpassed the previous peak set during the headiest days of the housing bubble. That ratio shows the surge in wealth over the past five years has rapidly outstripped the much more modest gains in most households’ income.

The latest report from the Fed provided no information on the distribution of wealth among households. We know, for example, that stock ownership is highly concentrated in wealthy households. Likewise the most valuable real estate in the US is concentrated in the coastal states and is largely owned by wealthy households.

Yet the national rise in home prices benefits the vast majority of Americans who own homes, and rising equities benefit many middle-class households with savings in 401(k) and IRA accounts.

The bottom line is that household net worth was at a record high of nearly $93 trillion at the end of last year, despite eight years of President Obama’s anti-growth policies.

Fed Raises Short-Term Rate By 0.25% – No Surprise

To no one’s surprise, the Fed Open Market Committee (FOMC) voted to raise the Fed Funds rate by 0.25% yesterday, thus moving the target range to 0.75%-1.00%. The policy statement noted that the economy has continued to strengthen since the last FOMC meeting which concluded on February 1, so the Committee felt comfortable raising rates now.

The Fed’s latest projections released yesterday indicated that the FOMC is still committed to two more rate hikes this year (for a total of three). Some analysts had worried that the Fed might hint of more than three rate hikes this year, but that didn’t happen.

The Fed’s latest projections also suggest another three rate hikes in 2018. Assuming the Fed follows through on these projections and each rate hike is 0.25% – and that’s a big assumption – the Fed Funds rate would only be at 2.25% by the end of next year. That’s still below the average of 2.75% over the last 25 years.

Maybe that explains why both stocks and bonds rallied immediately after the rate hike was announced yesterday.

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