By Dr. Irwin Kellner, CBS MarketWatch.com
HEMPSTEAD, N.Y. (CBS.MW) -- The Federal Reserve may think it has untied its hands to raise interest rates by changing the wording of its recent policy statement, but conditions in the real world suggest otherwise.
It is no secret that the Fed along with the rest of us has been very concerned about the jobless recovery. While the economy is now growing faster than it has at this point in previous recoveries, job creation is far worse than average.
It's even behind the poor performance in the expansion that followed the 1990-91 recession.
Because of this dearth of new jobs, consumer spending is not growing as fast as it usually does, two years after the end of a recession. Yet at the same time, just to support the spending that has taken place, people have had to take on debt at a much greater rate than usual.
The latest data from the Fed show that total consumer debt has reached a record $9,185 billion. That's a whopping 110 percent of peoples' take-home pay adjusted for inflation, also a record.
Ten years ago, household debt equaled 85 percent of disposable personal incomes; twenty years ago it was 65 percent.
To make matters worse, more and more of this debt is sensitive to changes in interest rates. This means that any hike in rates, no matter how small, is going to make it more difficult for people to service their debts.
Right now, these financial obligations, as the Fed calls them, have actually fallen relative to incomes over the last two years even as total consumer debt has soared to record levels.
The share of take-home pay that households must set aside to service existing debt including automobile leases is no higher today than it was three years ago.
The reason: as much as 40 percent of total consumer debt these days is based on floating, rather than on fixed, interest rates. A floating rate loan costs less than a fixed rate loan because short-term rates are far below long-term rates.
Home mortgages are a case in point. The Mortgage Bankers Association reports that the share of new mortgage applications to be financed by adjustable rate, or ARM, jumped from 13.5 percent in January 2003, to over 30 percent by yearend.
Add to this the increased use of credit cards, installment loans, and other low-interest financing to buy or lease motor vehicles, all of which are sensitive to changes in short-term interest rates, and you can see why a number of households could run into a problem servicing their debts if rates were to rise.
Which takes me back to my earlier statement about the Fed's concern over the lack of job growth. In order for any increase in interest rates to be absorbed by the household sector, people will first need to get back to work, so they can earn enough money to service this increase in the cost of their debts.
Message to the markets: don't panic just yet. It will be a quite while before the economy creates enough jobs to allow the Fed to start raising rates.