Understanding the Impact of Normalized Interest Rates on Everyday Americans

• • • • • •

How will normalized interest rates change consumer behavior?

By Corey Wagner, VP of Sales

In the ever-evolving landscape of the US economy, where the currents of interest rates and personal financial stress intersect, Americans find themselves navigating turbulent waters. With the Federal Reserve holding interest rates steady between 5.25% and 5.5%, a significant portion of the population is grappling with financial stress. Despite this, consumer spending remains resilient—a dance between economic challenges and the pursuit of happiness. 

In this blog, the main themes we’re about to dig into include what all the economic ups and downs mean for consumers, how are consumers navigating these turbulent changes, and what the implications of normalized interest rates mean for mortgage payments, credit card debts, and the resurgence of student loan repayments. Let’s get started.

The Current Financial Landscape

Interest Rate Stability

The Federal Reserve's decision to maintain interest rates in the range of 5.25% to 5.5% is a pivotal factor shaping the economic backdrop. This deliberate balancing act aims to promote economic growth while preventing inflation from spiraling out of control. Historically, interest rates have been a crucial lever in influencing consumer behavior and the overall health of the economy.

Financial Stress in America

A striking 84% of Americans are feeling the pinch of financial stress, with concerns ranging from everyday expenses to long-term financial security. Despite these challenges, a resilient 63% of the population continues to spend on what brings them joy—a phenomenon typically referred to as the lipstick effect. In short, the lipstick effect is when consumers splurge on small luxury items to help them forget their financial problems. This paradoxical scenario highlights the complex interplay between economic pressures and the pursuit of happiness, showcasing the adaptability of the American consumer.

Spending on "Nice to Haves"

Interestingly, 62% of Americans regularly indulge in "nice to haves." This category includes non-essential purchases that contribute to a sense of well-being and satisfaction. Just like we referenced above, the lipstick effect can help consumers satiate their short-term needs for overall well-being & satisfaction without the purchase being a financial strain. That said, understanding this spending behavior becomes essential as we explore the potential implications of normalized interest rates on various financial aspects of Americans' lives.

The Return to Normalized Interest Rates

Mortgage Payments

One of the most significant implications of higher interest rates, comparatively speaking to rates that Americans have experienced over the past 20 years, is the impact it will have on housing costs. With mortgages often being the most substantial financial commitment for individuals and families, even a slight increase in interest rates can have a notable impact—in turn, impacting how much consumers can spend in the other areas of their lives. 

For those in the market to buy a home, higher interest rates mean increased borrowing costs, influencing their purchasing power and potentially cooling the housing market. This shift may necessitate a reassessment of household budgets, potentially leading to cutbacks in discretionary spending.

The Federal Reserve has hinted at interest rate cuts in the latter part of 2024. This adjustment should lead to a flood of new buyers into the housing market. As a result, this will likely lead to increased competitive bidding on housing, which in turn could keep household budgets steady.

Credit Card Payments

Credit cards, often a double-edged sword in personal finance, become more challenging to manage as interest rates climb. The current average annual percentage yield (APY) for new credit offers stands at a staggering 24.5%. According to data from LendingTree, this marks the first month since February 2022 in which new credit card offer APRs haven’t increased.

Higher interest rates translate to increased finance charges on outstanding credit card balances, amplifying the financial burden on those who carry debt. Individuals relying on credit to maintain their lifestyles may find their behavior squeezed between rising interest costs and the desire to continue spending on non-essential items.

Student Loan Repayments

Finally, student loans are back—with interest. This will pose a unique challenge for many Americans, especially considering the rising cost of education in recent years. This shift comes at a time when many individuals are still grappling with the economic fallout from the COVID-19 pandemic.

For recent graduates entering the workforce, the resumption of interest on student loans adds a layer of financial pressure. Balancing loan repayments with pursuing career growth and other financial goals becomes more intricate, potentially delaying major life milestones such as homebuying or starting a family.

What Normalized Interest Rates Mean for Consumer Behavior

As the financial landscape weaves through the currents of interest rates and consumer spending patterns, everyday Americans are tasked with adapting to a changing economic environment. The return to normalized interest rates, while a necessary step in maintaining economic stability, poses challenges across various facets of personal finance.

From mortgage payments to credit card debts and student loan repayments, each arena requires careful navigation in the face of rising interest rates. As individuals and families evaluate their financial strategies, the key lies in striking a balance between responsible fiscal management and the pursuit of happiness. In these uncertain waters, financial literacy and proactive planning become the compass guiding Americans through the challenges of the present and the promise of a stable financial future.

So, What Can Financial Services Companies Do to Help?

1. Empower Through Education:
Prioritize consumer education with resources, webinars, and tools. Informed customers make better financial decisions, enhancing loyalty.

2. Adapt Products for Today's Needs:
Tailor loan structures, credit card terms, and mortgage options to meet the evolving needs of customers in the changing economic landscape.

3. Promote Financial Wellness:
Stand out by offering services that support financial wellness, such as budgeting tools, debt management programs, and personalized financial advice. Strengthen customer relationships through a commitment to their well-being.

The Suzy Difference

At Suzy, we can help your brand dive into economic scenarios affecting your target consumers and give you actionable research for each business unit. Tap into Suzy Insights for quick yet robust quantitative insights about how consumers feel about the economic situation right now, and get context with qualitative insights through Suzy Live. Want to see how it works? Book a demo with our team today!