Fed Puts Off Interest Rate Cuts As Consumers Keep Spending Like It’s 2022

MARY HIGHTOWER

LITTLE ROCK, ARKANSAS

The Fed’s painstaking decisions to boost interest rates helped slow the economy, but a holiday-fueled acceleration may mean any cuts to the interest rates may be pushed past the second or third quarter this year.

In 2023, the Federal Open Market Committee raised interest rates four times:

• February — from 4.5 percent to 4.75 percent
• March — 5.75 percent to 5 percent
• May — 5 percent to 5.25 percent
• July — 5.25 percent to 5.5 percent.

“Toward the end of last year, the Fed was pretty optimistic,” said Ryan Loy, extension economist for the University of Arkansas System Division of Agriculture. “They were going to be able to cut rates with the amount of inflation that was coming down. The unadjusted 12-month percentage for the Consumer Price Index from October was 3.2 percent.”

In November, “it went back down to 3.1 percent,” he said. However, the CPI rose 3.4 percent in December, and it appeared the economy was not slowing down as quickly as the Federal Open Market Committee was comfortable with.”

Big holiday spending

The 2023 holiday shopping season was a big one. The National Retail Federation projected 2023 holiday sales to be 3 to 4 percent higher than the record $929.5 billion spent during the 2022 holiday shopping season. The federation noted that growth in holiday spending has slowed since “trillions of dollars of stimulus led to unprecedented rates of retail spending during the pandemic” between 2020-2022 but said the growth in 2023 spending was consistent with growth seen between 2010 and 2019.

“We have an economy where we are spending in a way we shouldn’t be spending,” Loy said. “During COVID, we were putting a lot of money in our bank accounts and after COVID, people were spending cash on hand. But now you see a switch over where most people are spending — not necessarily cash they have on hand — but cash that they're expecting to get at some point. What’s happening is that we’re basically at the highest credit card debt levels that we’ve had in a very long time.”

Housing also played a role in the quickening economy, with median home prices up 4.4 percent in December over the previous year.

“The Fed is confident we’ve hit the peak of the rate hikes, however, the viewpoint that they would change the rates in the second quarter or even the third quarter of this year — well that may be moved down the road a little bit more,” Loy said.

The next meeting will be at the end of March, “so we’ll have a better feel for if we’ll see another rate hike or if the rate decreases,” he said.

A trillion-plus in debt

Consumer debt has followed consumer spending, as have delinquencies, according to the Federal Reserve Bank of New York.

Its Quarterly Report on Household Debt and Credit found that total household debt rose $212 billion in the fourth quarter of 2023, a rise of 1.2 percent. The report also said credit card balances increased by $50 billion to $1.13 trillion. Auto loan balances rose by $12 billion, continuing the upward trajectory seen since 2020, and now stand at $1.61 trillion.

Consumers aged 18-29 saw the highest rate of transition to delinquency in credit card and auto loans, followed by those aged 30-39. This has reversed a downward trend that began in 2019 and began to creep upward in 2021 or 2022, depending on the age group.

“Credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels,” said Wilbert van der Klaauw, economic research adviser at the New York Fed. “This signals increased financial stress, especially among younger and lower-income households.”

The Cooperative Extension Service has information to help reduce credit card debt. Visit uaexMoney to find additional tips to managing personal finance.  ∆

MARY HIGHTOWER: University of Arkansas