Fed Holds Firm While Consumer Credit Crumbles
In the minutes from the January FOMC meeting, released yesterday, Fed officials expressed their confidence in maintaining steady interest rates amidst persistent inflation and economic policy uncertainty. "Many participants noted that the committee could maintain the policy rate at a restrictive level if the economy remained robust and inflation remained elevated." The meeting minutes highlighted the cautious approach Fed policymakers have adopted following their decision to reduce interest rates by a percentage point in the latter months of 2024.
Several officials voiced concerns regarding risks posed by the prospect of another debt ceiling confrontation in Washington. "Participants cited the possible effects of potential changes to trade and immigration policy, the potential for geopolitical developments to disrupt supply chains, or stronger-than-expected household expenditure." Counterbalancing concerns over tariffs and inflation, the minutes noted "substantial optimism about the economic outlook, stemming in part from an expectation of a loosening of government regulations or changes to tax policies."
Meanwhile, the US consumer's financial health is deteriorating at an alarming pace, according to both The New York Fed's "Household Debt and Credit" report and industry data from BankRegData, with credit card defaults surging to levels not seen since the aftermath of the GFC. In just the first nine months of 2024, lenders were forced to write off a staggering $46bn in seriously delinquent credit card debt - a 50% jump from the previous year.
This troubling development is particularly acute among lower-income households, with Moody's Analytics chief Mark Zandi noting that "the bottom third of US consumers are tapped out" with a savings rate of zero. The situation appears set to worsen, with $37bn in credit card debt already at least one month overdue.
This distress stems from a perfect storm of factors: aggressive lending during the post-pandemic spending boom pushed total credit card debt above $1tn, while persistent inflation and elevated interest rates have left consumers paying $170bn in annual card interest (yoy to September 2024). With the Fed indicating fewer rate cuts than previously expected for 2025, and Donald Trump's proposed tariffs threatening to drive inflation even higher, the outlook for stretched US consumers appears increasingly grim.
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