Consumers' Savings Are Down, But So Is Their Debt

If the Federal Reserve fails to account for the drop in household liabilities, it risks making the wrong call on rates.

The piggy banks are starting to empty.

Photographer: Ron Antonelli/Bloomberg via Getty Images

Even with elevated consumer prices and high borrowing costs, Americans continue to spend at a solid clip, complicating the Federal Reserve’s efforts to tame inflation. One reason that central bank officials cite for this phenomenon is the “excess savings“ accumulated during the pandemic, which are the byproduct of fiscal relief such as the stimulus checks and foregone spending when the economy was shuttered. So, it’s of great interest to the Fed to figure out when those savings run out and consumers are forced to cut back on their spending.

New research from Federal Reserve Bank of San Francisco economists Hamza Abdelrahman and Luiz Oliveira concludes it’s happening now. They tracked saving relative to the pre-pandemic trend and found that it peaked in the summer of 2021 at $2 trillion, then fell steadily. But it's a mistake to think of excess savings as just more money sitting in the bank; it is also about having less debt. And those with a lot of debt are more interest-rate sensitive. That’s who the Fed should keep a closer eye on.