The financial landscape of middle- and low-income families in the United States has been significantly altered by the COVID-19 pandemic, with liquid resources such as bank deposits dwindling to worrisome levels. These changes have far-reaching implications on consumer spending, a key driver of the economy.
Research from the Federal Reserve Bank of San Francisco paints a stark picture of the disparities in liquid assets among different income groups. Here are the key highlights of the study:
- The top 20% of households by income saw a sharp increase in liquid assets in 2020, followed by a gradual decline that now sits at 2% below pre-pandemic levels.
- In contrast, the majority of American households experienced a less pronounced rise in liquid assets, depleting earlier and now standing at 13% lower than pre-pandemic projections.
- Credit card delinquencies surged among middle- and low-income families, surpassing the rates observed in high-income households.
Economists Hamza Abdelrahman, Luiz Edgard Oliveira, and Adam Shapiro caution that the reduced financial buffers and increased credit stress for the bottom 80% of income earners could hinder future growth in consumer spending, a critical component of the U.S. economy.
Despite the Federal Reserve’s campaign to raise interest rates from 2022 to 2023, consumer spending and the labor market remained resilient, fueling hopes for a controlled inflation and stable economic growth. However, recent economic indicators, such as rising unemployment rates and a slowdown in hiring, are signaling potential challenges ahead.
The research findings from the San Francisco Fed underscore the growing concerns about the economic landscape. While consumer spending played a crucial role in boosting economic growth in the second quarter, its growth rate has been tapering off. This trend, coupled with increasing credit card delinquencies, has prompted some policymakers to question the tightness of current monetary policy.
Chicago Fed President Austan Goolsbee highlighted credit card delinquencies as a red flag indicating overly restrictive policy measures. Federal Reserve Chair Jerome Powell has hinted at potential rate cuts in response to inflation nearing the central bank’s target of 2%.
As policymakers navigate the complex economic terrain, addressing the challenges faced by middle- and low-income families will be crucial to sustaining consumer spending and ensuring a balanced economic recovery. It is imperative to monitor these trends closely and implement targeted measures to support vulnerable households in the post-pandemic era.
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