Rate Cuts Aren’t Helping Poorer Families. It’s a Bad Sign for Consumer Spending.

Wage gains for low-wage workers are now at near-parity with inflation, stunting purchasing power. Above, a discount store in Manhattan. (Spencer Platt/Getty Images)

Key Points

• The Federal Reserve has cut interest rates twice this year by a quarter percentage point each time, aiming to boost consumer spending.
• The top 20% of households account for 35% of total spending and are less affected by economic shifts, while the bottom 60% represent 45% of consumption and are more sensitive to prices and financing.
• Household debt increased by $197 billion in the third quarter to $18.59 trillion, with rising delinquencies in credit cards and auto loans among lower-income borrowers.

The Federal Reserve has cut interest rates by a quarter percentage point twice this year, and investors are hoping that easier policy will help reinvigorate consumer spending. But that might not match the reality on the ground. The households most sensitive to borrowing costs are also those being hit with new tariff-driven price increases and slowing wage growth. Any boost from lower rates will come with a lag, and may not arrive in time to help people who need relief most.

The U.S. is a consumer-driven economy, and the consumer is still spending. But most of that spending is now coming from a smaller and wealthier slice of the population—a level of concentration that weakens the transmission of monetary policy. Lower rates usually help lower-income consumers by reducing the cost of credit and boosting monthly cash flow. But that channel has been partially blocked by the structure of household debt, much of it fixed-rate; elevated prices for essentials, and a labor market that no longer delivers outsize wage gains to the bottom half of the distribution.

“As goes the consumer, so goes the cycle,” Jared Bernstein, a former White House economic advisor, wrote in a recent analysis, referencing the fact that nearly 70% of U.S. GDP is driven by personal consumption. For years, even during the pandemic inflation spike, strong wage gains and fiscal support (including stimulus checks) helped keep spending elevated. But that cushion has eroded.

Federal Reserve Governor Christopher Waller described the divide in an October speech. “The highest-earning 10% of households are responsible for 22% of personal consumption,” he said. “The top 20% of households spend 35% of the total. Their share of stock market wealth is even more skewed, and lots of research shows that these consumers are fairly unaffected by higher prices, higher unemployment, or a slower economy.”

By contrast, he said, “the bottom 60% of earners represent 45% of consumption and hold only 15% of wealth. Their spending decisions are much more likely to be affected by prices, financing conditions, and job availability.”

Waller said his business contacts are already reporting behavioral shifts among this group. “Lower- and middle-income households continued to seek discounts and promotions in the face of rising prices and elevated economic uncertainty,” he said.

Wage gains for low-wage workers are now at near-parity with the latest inflation readings, which means purchasing power is flattening. At the same time, pandemic-era savings have been depleted, and consumer debt has risen, especially among lower-income borrowers. That has shown up in rising credit-card and auto-loan delinquencies and the shift toward cheaper retail choices.

Total household debt increased by $197 billion in this year’s third quarter, to $18.59 trillion, according to the New York Fed. Credit card balances rose by $24 billion from the previous quarter, to $1.23 trillion. The number of subprime borrowers with credit scores under 670 who are at least 60 days behind on auto loans has doubled since 2021, according to a recent analysis by Fitch Ratings.

The Fed can cut interest rates, but its tools are blunt. It can’t make groceries instantly cheaper or accelerate wage growth for a particular segment of the workforce. Even if lower rates eventually boost spending, the channel for immediate relief is limited.

About 85% of household debt is fixed-rate, according to a recent Morgan Stanley analysis. That means lower policy rates don’t automatically lower monthly payments. Credit cards are an exception because their rates adjust with the Fed, but the benefit is small. Historically, a one percentage point cut in the federal-funds rate lowers credit card interest rates by only about two-thirds of that amount, they found.

Auto loans tell a similar story. The Fed found that over the past four years, the increase in monthly auto-loan payments was driven almost entirely by higher loan sizes, not higher interest rates. Morgan Stanley economists estimate that a percentage point decline in auto-loan rates would lower the average monthly payment by about $20. When the average monthly payment is nearly $750, such a decrease is unlikely to meaningfully change behavior.

Lower rates also can’t overcome a lending environment that has grown more cautious, the firm’s analysts found. Banks have tightened consumer credit standards for three years. Even if standards ease slightly, lenders remain on guard. The Fed is reducing restraint but it isn’t stimulating loan growth.

Lower-income consumers would benefit most from cheaper credit on durable goods such as cars, televisions, and refrigerators; durable-goods spending is one of the most rate-sensitive categories. But these same households are most directly affected by the new round of tariffs driving up the cost of those items. That pushes real income lower as wage growth slows.

The Fed has been cutting rates to try to prevent layoffs, support demand, and avoid an economic slowdown. But monetary policy can’t fully offset tariff-driven inflation, or singularly restore wage gains. Nor can it alter the distribution of spending power.

Rate cuts will help, eventually. But for many Americans, monetary easing will offer more promise than it delivers.

Write to Nicole Goodkind at nicole.goodkind@barrons.com