How the Consumer Saved the Fed

Last Edited by: LPL Financial

Last Updated: February 23, 2024

Video Transcript

Jeffrey Roach:

How did the Fed do it? Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, and in this latest edition of the Street View, I'll give you the reasons why the Fed could tighten and not inflict the pain that they thought would come.

Jeffrey Roach:

First off, homeowners who refinanced after the Fed slashed rates are in an incredibly robust position. As you see on the chart, mortgage payments as a percent of disposable personal income is below 4%, the lowest on record outside of the recent pandemic-induced blip. For context, the mortgage debt service ratio was pushing 7% before the great financial crisis. But looking at the other metric on the chart, consumers don't look quite as good. Rising card usage seems to be the way a lot of people were funding their spending habits recently. Now we will keep this chart up on the screen. So you can see that card payments as a percent of disposable income isn't at its peak from 2001, but the rate of increase is unnerving. We are currently sitting just above pre-pandemic norms and also remember the economy was slowing in 2019 and the Fed cut rates three times in the back half of 2019.

Jeffrey Roach:

Yes, that does seem like an eternity ago, but it's important context for what we see now with card usage. So how did the Fed pull off an unusual tightening cycle without much pain? In part, it was likely from homeowners who could take advantage of low rates and slash mortgage expenses during a time of high inflation and economy adjusting to the new normal of a post-covid world. The strong labor market also helped buffer the impact of higher rates. So now investors need to keep a close watch on the job market since a lot rides on the labor market as the Fed debates the pace of rate cuts this year. Looking ahead, businesses will not likely add payrolls at the same pace as last year, likely putting a little bit of a crimp on consumer spending for 2024 and pulling up these debt service ratios. Well, that's all for now, but please continue to follow us on social media for up to date analysis on the investment landscape.

I'll give you the reasons why the Fed could tighten and not inflict the pain that they thought would come.

First off, homeowners who refinanced after the Fed slashed rates are in an incredibly robust position. But looking at the other metric on the chart, consumers don't look quite as good. Rising card usage seems to be the way a lot of people were funding their spending habits recently. So you can see that card payments as a percent of disposable income isn't at its peak from 2001, but the rate of increase is unnerving. We are currently sitting just above pre-pandemic norms and also remember the economy was slowing in 2019 and the Fed cut rates three times in the back half of 2019.

So how did the Fed pull off an unusual tightening cycle without much pain? In part, it was likely from homeowners who could take advantage of low rates and slash mortgage expenses during a time of high inflation and economy adjusting to the new normal of a post-covid world. The strong labor market also helped buffer the impact of higher rates. Looking ahead, businesses will not likely add payrolls at the same pace as last year, likely putting a little bit of a crimp on consumer spending for 2024 and pulling up these debt service ratios.

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