Incorporate OpenAl o1 model to your financial research today 🎉🎉

Federal Reserve Rate Cuts: Impacts on Consumer Spending

September 24, 2024

Note: We reveal investment insights through the quotes of top business leaders.

Key Takeaways

  • Federal Reserve rate cuts historically correlate with increased consumer spending, as seen in retailers like Target and Walmart lowering prices to stimulate demand.
  • Consumer sentiment remains mixed, with lower-income groups feeling financial stress, while sectors like technology and financial services show optimism.
  • Credit availability is crucial for spending; premium consumers with better credit scores are driving growth, despite a higher interest-rate environment limiting loan demand.
  • Inflation and economic uncertainties are pressuring consumer budgets, leading to a shift towards non-discretionary spending.
  • Regional variations in spending behavior highlight differing consumer responses to economic conditions, with essential items taking precedence over discretionary purchases.

cover_img

Historical Impacts of Rate Cuts on Spending

Historical rate cuts have led retailers like Target to lower prices on essential items, reflecting increased consumer spending. McDonald's reported a rise in restaurant margins despite a pressured spending environment, while Walmart noted significant increases in consumer spending rates, indicating a positive correlation between rate cuts and spending behavior.

"Shoppers will enjoy lower prices on food, beverages and household essentials MINNEAPOLIS, May 20, 2024 /PRNewswire/ -- Target Corporation (NYSE:TGT) announced today it will lower everyday regular prices on approximately 5,000 frequently shopped items across its assortment.1 The retailer has just reduced prices on about 1,500 items, with thousands more price cuts planned to take effect over the course of the summer." --- (TGT, press release, 2024/05/20)

"Adjusted operating margin for the quarter was nearly 45%. Despite the pressured consumer spending environment we've discussed this morning, top line results generated nearly $3.5 billion of restaurant margin for the quarter, an increase of about 4% in constant currency." --- (MCD, earning call, 2024/Q1)

"sub three-hour delivery. We really see spend rates and the amount of time and energy money people are spending with us go up significantly." --- (WMT, earning call, 2025/Q2)

"These risks and uncertainties include, but are not limited to, domestic and international economic conditions, including exchange rates, inflation or deflation, the effects of competition and regulation, uncertainties in the financial markets, consumer and small business spending patterns and debt levels, breaches of security or privacy of member or business information, conditions affecting the acquisition, development, ownership or use of real." --- (COST, press release, 2024/07/10)

"To help our guests in the face of these pressures, this week, we announced that we've made price cuts on 1,500 frequently shopped items in many markets, and we're planning additional price cuts on 1,000 more items this summer." --- (TGT, earning call, 2025/Q1)

Consumer Sentiment and Future Spending Expectations

Consumer sentiment is mixed, with lower-income consumers feeling stressed, while overall optimism persists in sectors like financial services and technology. Companies like Disney and Amazon are adapting to these shifts, focusing on lower-priced products and leveraging strong entertainment offerings to maintain spending expectations.

"And we talked about the fact that the lower income consumer is feeling a little bit of stress." --- (DIS, earning call, 2024/Q3)

"In addition, economic conditions and actions by policymaking bodies are contributing to changing interest rates and significant capital market volatility, which, along with any increases in our borrowing levels, could increase our future borrowing costs." --- (AMZN, sec filing, 2024/Q1)

"But overall I would just call this as a bit of a slowdown that's being more than offset by the entertainment business both what we've seen so far and our expectations for Moana 2 as well as Mufasa." --- (DIS, earning call, 2024/Q1)

"And -- so it's -- lower ASP products are more of the mix right now. And we like that because, again, our speed allows us to deliver, especially everyday essentials, quickly, and we'd like to be in the consideration set for consumers on those items. We're not going to quantify Kuiper today, but thank you for your question." --- (AMZN, earning call, 2024/Q2)

"So certainly feeling very, very positively in that regard. And in terms of the categories, financial services, consumer products doing very well, consumer services doing very well and technology doing very well." --- (DIS, earning call, 2024/Q1)

Role of Credit Availability in Consumer Spending

Credit availability significantly influences consumer spending, as evidenced by trends in credit performance and delinquency rates. Premium customers with better credit scores drive spending growth, while initiatives to improve credit health aim to enhance access. However, a higher interest-rate environment has tempered loan demand, affecting overall consumer credit availability.

"Additionally, our premium consumer customers have better credit performance with lower delinquency rates than the industry as exemplified by Australia and the U. K. Our product value propositions attract higher spending customers that are willing to pay a fee for the products and services that they enjoy." --- (AXP, investor day, 2024/04/30)

"We included a credit card delinquency slide, No. 28 in our appendix, and we’re encouraged by the trend of delinquencies because the late stage increases slowed and early stage delinquencies improved as well, and that leads us to believe we should begin to see consumer net charge-offs start to level out over the next quarter or so. All of this is still well within our risk appetite." --- (BAC, earning call, 2024/Q1)

"Additionally, to support the financial health of consumers as part of this program and beyond, the firm is working with behavioral design nonprofit ideas42 to help consumers better protect and improve their credit, including preparing families for homeownership. Advancing Policy Solutions to Increase Homeownership." --- (JPM, press release, 2024/04/08)

"When we look across our consumer clients, only the highest income quartile has more savings than they did at the beginning of 2019, and it is the over 740 FICO score customers that are driving the spend growth and maintaining high payment rates." --- (C, earning call, 2024/Q2)

"The higher interest-rate environment and anticipation of rate cuts continued to result in tepid commercial loan demand, and we have not changed our underwriting standards to chase growth. Balanced growth in our credit card portfolio was more than offset by declines across our other consumer portfolios." --- (WFC, earning call, 2024/Q2)

Inflation and Economic Environment's Influence on Spending

Inflation and various economic factors, including geopolitical tensions and supply chain disruptions, are creating uncertainty that negatively impacts consumer spending. Companies like Procter & Gamble, Walmart, and Coca-Cola highlight how rising costs affect consumers' ability to afford goods, ultimately influencing sales and economic confidence.

"More broadly, there could be additional negative impacts to our net sales, earnings and cash flows should the situation escalate beyond its current scope, including, among other potential impacts, economic recessions in certain neighboring countries or globally due to inflationary pressures and supply chain cost increases or the geographic proximity of the war relative to the rest of Europe." --- (PG, sec filing, 2024/Q1)

"Other Information ." We expect continued uncertainty in our business and the global economy due to inflationary trends, a challenging macro environment, geopolitical conditions, supply chain disruptions, volatility in employment trends and consumer confidence." --- (WMT, sec filing, 2025/Q2)

"And not surprisingly, when you look at the cumulative impact that inflation has had on their baskets of goods and services and their ability to continue to afford them." --- (KO, conference, 2024/09/05)

"A number of external factors, including the ongoing conflict in Ukraine, the inflationary cost environment, adverse weather conditions, supply chain disruptions and labor shortages, have impacted and may continue to impact transportation and labor costs." --- (PEP, sec filing, 2024/Q1)

"Sales comparisons can also be particularly influenced by certain factors that are beyond our control: fluctuations in currency exchange rates (with respect to our international operations); and inflation or deflation and changes in the cost of gasoline and associated competitive conditions." --- (COST, sec filing, 2024/Q1)

Behavioral Changes in Spending Patterns

Recent insights indicate that consumer spending patterns are shifting in response to economic changes, including Federal Reserve rate cuts. Companies like Amazon and McDonald's emphasize the need to adapt pricing and marketing strategies to evolving consumer behaviors, while Walmart highlights a focus on discretionary spending adjustments.

"Third, our seller fees are a little lower than expected given the behavior changes we've seen from our latest fee changes." --- (AMZN, earning call, 2024/Q2)

"Our ability to build upon our strengths and advantages also depends on the impact of pricing, promotional and marketing plans across the System, and the ability to adjust these plans to respond quickly and effectively to evolving customer behavior and preferences, as well as shifting economic and competitive conditions." --- (MCD, sec filing, 2024/Q1)

"And if any in spending within the categories reflect anything about whether the consumer is making any incremental changes in their discretionary spending?" --- (WMT, earning call, 2025/Q1)

"It's also while they're watching TV. And again, things that are relevant to them that are based upon their preferences and predilections so that we can surface something to them that may affect their behavior that they want." --- (WMT, conference, 2024/06/25)

Impact of Rate Cuts on Savings Rates

Rate cuts by the Federal Reserve are expected to compress deposit margins, leading to lower savings rates. Wells Fargo anticipates a slowdown in deposit pricing, while Citigroup notes a decrease in net interest income due to lower deposit spreads, indicating a direct impact on consumer savings.

"So we're continuing to monitor. We still have rate hikes in the or I'm sorry, rate cuts in the near future that we potentially expect. However, we know that it could stay higher for longer." --- (JPM, event transcript, 2024/05/20)

"This slowed the pace of growth in deposit pricing with our average deposit cost up 10 basis points in the second quarter after increasing 16 basis points in the first quarter. If the Fed were to start cutting rates later this year, we expect that" --- (WFC, earning call, 2024/Q2)

"On slide 15, we show the results for wealth for the first quarter. Wealth revenues decreased 4%, driven by a 13% decrease in NII from lower deposit spreads and higher mortgage funding costs, partially offset by higher investment fee revenue." --- (C, earning call, 2024/Q1)

"That says that interest rate cuts will start in September. We will expect another one in November and December in the curve." --- (BAC, earning call, 2024/Q2)

"Revenue of $5.3 billion was up 6% year-on-year, driven by growth in management fees on higher average market levels and strong net inflows, as well as higher brokerage activity, largely offset by deposit margin compression." --- (JPM, earning call, 2024/Q2)

Regional Variations in Consumer Spending Responses

Regional variations in consumer spending responses are evident, with retailers noting shifts towards non-discretionary spending due to economic pressures. For instance, Walmart highlights that consumers are allocating more of their budgets to essential items, reflecting differing regional behaviors influenced by local economic conditions.

"And so we have a number of those other opportunities. Another example of that is regionalizing our inbound network, which is also going to lower our cost to serve and get items more close to end users and diminish the amount of time it takes to get them to customers." --- (AMZN, earning call, 2024/Q2)

"So one question that we are getting from the suppliers that are subscribing to Luminate is help me understand that if I'm seeing this particular purchasing or trends in terms of sales in one particular region, and it could be timely, let's say that it's seasonal candy might be an example." --- (WMT, conference, 2024/09/11)

"So we've heard from some other retailers that maybe West Coast sort of started a correction first, both on the consumer side and your regional performance, how would you describe and are you seeing any of that factor?" --- (HD, conference, 2024/04/04)

"In the U. S, this was due in part to our regionalization efforts where we re architected the network from 1 national region to 8 separate regions, enabling shorter distances and fewer product touches to get items to customers." --- (AMZN, event transcript, 2024/05/22)

"Many consumer pocketbooks are still stretched, and we see the effect of that in our business mix, as they're spending more of their paychecks on non-discretionary categories and less on general merchandise." --- (WMT, earning call, 2025/Q1)

See also