The Federal Reserve Bank of San Francisco has warned that high credit stress and a lack of financial cushion among lower-income households could pose a threat to the economy. According to a report from the Federal Reserve Bank of San Francisco, middle- and lower-income Americans have accumulated less wealth during the COVID-19 pandemic compared to their higher-income counterparts and are depleting their disposable wealth at a faster rate.
The report stated that starting in 2020, American households amassed more liquid assets, such as cash, checking and savings accounts, and money market funds, than they would have in a scenario without the pandemic. However, upper-income households gained more wealth relative to other income classes. By early 2021, the top 20 percentile of households had acquired 11 percent more liquid assets compared to a no-pandemic scenario, while the bottom 80 percent had only gained an additional 6 percent.
Researchers estimated that middle- and lower-income households had spent all the wealth gained during the pandemic by late 2021, while higher-income households were able to stretch their pandemic-era funds until the second half of 2022. As of the first quarter of 2024, the liquid asset levels of higher-income households were only 2 percent lower than they would have been without the pandemic, whereas middle- and lower-income households were 13 percent below the no-pandemic scenario.
The researchers highlighted a significant increase in credit card delinquency rates, particularly among middle- and lower-income households, due to depleted household liquid wealth. This, coupled with smaller financial cushions and heightened credit stress for households in the bottom 80 percent of the income distribution, poses a risk to future consumer spending growth.
Despite the depletion of pandemic wealth, a survey from the Federal Reserve Bank of New York found that many Americans are optimistic about their financial situation. Respondents felt that it would be easier to obtain credit in the future than at present.
The report comes at a time of concern over high interest rates set by the U.S. Federal Reserve. The longer interest rates remain elevated, the longer credit card rates could stay high, putting strain on household budgets and potentially leading to more delinquencies.
The Federal Reserve has maintained interest rates in the range of 5.25 to 5.5 percent for over a year, with no clear indication of when they will begin reducing rates. Rising interest rates can impact households differently depending on their savings and debts, making monthly debt repayments more expensive for some while providing more generous returns on savings for others.
A Bankrate survey found that rising interest rates have led some respondents to save less, while others have increased their savings. Inflation has been a barrier to saving progress, but rising interest rates have offered better returns on savings.
The survey also revealed that a significant number of Americans have more credit card debt than emergency savings, with millennials and Gen Xers more likely to have credit card debts exceeding savings. Could you please rephrase that?
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