Consumers Feel Heat Ahead of Fed Meeting

As the Federal Reserve prepares for its two-day policy meeting, it faces significant pressure, and at least for this moment, not the political kind. The Trump Tariffs, despite the 90-day pause and concessions made to specific industries, have already slowed down economic growth. First quarter real gross domestic product (GDP) decreased at an annual rate of 0.3 percent, a substantial slide from the 2.4 percent expansion in the fourth quarter of 2024. Before you panic, the drop was largely due to a surge in pre-tariff imports, which is likely to reverse in Q2.

Separately, the inflation rate, as measured by the March Personal Consumption Expenditure Index (PCE) was a somewhat stronger than expected 2.3 percent from a year ago. Prices at the core level, which excludes food and energy, increased 2.6 percent from a year ago, still above the Fed’s 2 percent target. The tension between a slowdown in growth and potentially accelerating inflation, puts the Fed’s dual mandate (to promote economic/labor market growth and to keep prices in check) in conflict. It also means that the central bank will need to wait to see the continued impact on data, which could take some months, which is why the central bank is unlikely to take any action at the upcoming meeting.

The Fed will continue to pour over hard economic data as well as various reports on the health of the consumer. When some of the nation’s biggest banks recently released their quarterly earnings, they highlighted that many credit card holders are not able to keep up with their payments. J.P. Morgan Chase reported that the portion of credit card balances that it does not expect to recover increased to a level not seen in more than a dozen years.

The 2025 uptick in credit card distress continues a trend that started last year.  Analysis released by the Federal Reserve Bank of Philadelphia for the fourth quarter of 2024 found that the percentages of credit card accounts 30, 60, and 90 days past due increased and “the share of credit card accounts making the minimum payment has hit series highs in each of the past two quarters. Collectively, these trends, along with a new series high for revolving card balances, indicate greater consumer stress.”

That stress will not go unnoticed by the Fed, because with its benchmark lending rate at 4.25-4.50%, the average credit card rate charged on those who carry a balance is a sky-high 21.9%. (As a comparison, prior to the pandemic, when Fed interest rates stood at 1.50-1.75%, the credit card interest rate was about 15%.) The Fed knows that it’s awfully difficult to pay down existing debt when rates are this high, but it has to balance that fact with the potential for higher prices, which will impact not just those in debt, but all Americans.

The Fed highlighted inflation in its recent Beige Book of economic conditions, noting that industries of all kinds are preparing for tariff-related price increases and “most businesses expected to pass through additional costs to customers.” To be clear, no economist is predicting that the inflation rate will return to the horrible levels of mid-2022 as a result of tariffs, but it could rise from the current level of 2.5 percent or so to 4 percent, and that’s going to be hard to absorb for many families.

As a reminder, inflation is regressive, meaning it hurts lower-income Americans disproportionately. Consider a household living paycheck to paycheck, earning $60,000 a year. Most of that income is gobbled up by essentials, like food, housing, transportation, utilities, the very things that often see the biggest price increases, when inflation rises. Compare that household with one that earns $400,000. Sure, that wealthier family has to absorb higher costs, but they typically spend a smaller portion of their income on necessities. Additionally, they have financial cushions, in the form of savings, investments and likely a chunk of equity in a home. For those with limited resources who live on tight budgets, inflation isn't just an economic indicator, it's a daily struggle that forces impossible choices about which necessities to prioritize.

Finally, inflation not only affects day to day spending, but it can also eat away at our ability to fund future goals like saving for a rainy day or retirement. According to Allianz Life’s 2025 Annual Retirement Study, 64 percent of Americans “worry more about running out of money than death.” Separately, Consumer Confidence tumbled to its lowest level since May 2020, when Covid-19 pandemic was raging. Within the report, consumers reported that they are expecting a dark period for the next six months. The so-called “Expectations Index” tumbled to the lowest level since October 2011 and now stands well below the threshold that usually signals a recession ahead.”