New research published by the San Francisco Federal Reserve reveals that Americans are rapidly depleting the excess savings they accumulated during the COVID-19 pandemic. The study indicates that households may exhaust their cash reserves by the third quarter of 2023, eliminating a vital safety net that has helped many families weather the ongoing inflation crisis.
The Federal Reserve has credited the savings buildup with keeping the economy afloat despite the challenges posed by high inflation and rising interest rates. However, policymakers anticipate a slowdown in consumer spending as the pandemic-era funds continue to dwindle. The minutes from the Fed's July meeting highlight factors such as declining excess savings, softening labor market conditions, and increased price sensitivity among consumers that could contribute to this anticipated decline in consumption.
The increasing reliance on credit cards to cover everyday expenses further underscores the depletion of savings. According to the New York Fed, credit card debt surpassed $1 trillion for the first time ever at the end of June. This represents a significant reversal from just a few years ago when households were using stimulus payments to pay off credit card debt.
While delinquency rates remain relatively low, there has been a slight uptick in borrowers struggling with credit card and auto loan payments. As of June, about 2.7% of outstanding debt was in some stage of delinquency, slightly higher than the previous quarter but still lower than pre-pandemic levels.
Experts express concern about the rising delinquency rates, particularly as student loan payments resume in the fall. The Supreme Court's decision to strike down President Biden's student loan relief plan may put additional financial strain on cardholders, reducing the amount they can dedicate to paying off credit card debt and potentially leaving some individuals unable to make minimum payments.
Overall, the depletion of excess savings and the increasing reliance on credit cards highlight the challenges faced by American households amid the ongoing inflation crisis. The upcoming months will be crucial in determining how consumers navigate these financial pressures and whether the economy can sustain its momentum.