Here's Why Low Unemployment Could Cost Consumers Money

Many financial experts are continuing to warn consumers about an impending recession. Even the Federal Reserve itself anticipates a near-term economic slowdown, albeit a mild one.

What's confusing about those unpleasant warnings, though, is the solid state of the labor market. In April, the U.S. unemployment rate fell to 3.4%, and the U.S. economy added 253,000 jobs. That figure may get adjusted upward or downward slightly, as that tends to happen with job-related data. But either way, these numbers certainly paint a positive picture.

That's not necessarily something for consumers to celebrate, though. While you'd think that a low level of unemployment and an abundance of jobs would be a good thing for the economy, all of this positive data could set the stage for additional interest rate hikes on the part of the Federal Reserve.

Consumer borrowing costs could soar

On May 3, the Federal Reserve raised its benchmark interest rate by 0.25% for the third time this year. That means the cost of borrowing across the board now has the potential to rise even more.

The Federal Reserve does not directly set consumer interest rates. But when it raises its federal funds rate, which is what banks charge one another for short-term borrowing, it tends to drive consumer borrowing costs upward. So in the coming months, it might become even more expensive to borrow money, whether in the form of an auto loan, a personal loan, or a home equity loan.

How do rate hikes relate to unemployment data? It's simple. April's positive numbers are an indication that the U.S. economy is not slowing down. But the Fed needs the economy to slow down in order to cool inflation. The whole reason the central bank has been hiking up interest rates is to bring inflation down to a more moderate level.

In fact, the addition of more than 250,000 jobs is a sign that consumer spending has the potential to increase in the coming weeks rather than decrease, which is what the Fed wants. And in light of this news, the Fed might have to raise interest rates yet again to get closer to its inflation target, thereby hurting consumers who need to borrow.

Be careful when signing a loan right now

It's a nice thing that the U.S. labor market seems to have plenty of jobs. But a healthy jobs report could set the stage for even more expensive borrowing, so those looking to make big purchases in the coming months and finance them may want to hold off.

Meanwhile, rising interest rates are a big problem for consumers carrying variable-interest debt, like credit card balances. Paying those balances off before the Fed's next rate hike would be ideal for those who can swing it.

And for those who can't, today's strong labor market extends to the gig economy. A side hustle could be the ticket to shedding credit card debt before it becomes even more expensive.