According to this argument, higher rates will boost required monthly payments, which in turn will lead to a jump in loan defaults, severe strains on financial institutions, and a sharp cutback in household spending. It is important to recognize, however, that an increase in short-term interest rates does not automatically increase household debt payments across the board.
A rise in rates will indeed increase borrowing costs on new credit extensions. However, most outstanding debt will not be affected by changes in the federal funds rate because the majority of mortgages carry a fixed rate, as do the bulk of other loans to consumers. Moreover, as short-term rates rise, households will take out smaller loans or take out loans with longer maturities.