The Federal Reserve has a dual mandate - goals of maximum employment and stable prices. In other words, the Federal Reserve tries to balance economic growth (to maximize employment) with an inflation target of 2% for Personal Consumption Expenditures (PCE), which are the products and services that consumers are purchasing. In March 2022, the Federal Reserve began the upward trek for interest rates, with eleven rate increases occurring through November 2023. The objective of the rate increases was to lower consumer and business spending, which in turn would lower inflation through reduced demand for products and services. Although global factors outside the control of the Federal Reserve were the primary drivers of recent inflation, the Federal Reserve was focusing on increasing interest rates to lower inflation to its 2% targeted level. Since early 2022, the labor market has been a key focus for the Federal Reserve in forming interest rate policy. Unemployment, wage and job growth, and available jobs have played an important role in determining Federal Reserve policy and interest rate levels. The strength of the labor market affects consumer spending, which in turn affects the demand for products and services and consequently inflation. While inflation currently remains above the Federal Reserve’s targeted 2% level, softening of the labor and housing markets in 2023 contributed to the Federal Reserve’s decision to pause interest rate increases following a July rate hike. Further rate hikes, however, are possible, depending on changing economic conditions. Central banks around the world have responded similarly to inflation, with interest rate increases beginning in 2022. In September 2023, the European Central Bank raised interest rates by a quarter of a percentage point to 4%, the highest level ever since the launch of the euro currency in 1999. The European Central Bank raised interest rates at ten consecutive meetings before pausing in October. The Canadian central bank gradually raised its policy interest rate from 1.5% in June 2022 to 5.0% in July 2023 before pausing interest rate hikes. The Bank of England began raising its bank rate from 0.10% in November 2022 to 5.25% in August 2023 before ending rate hikes. Australia’s central bank gradually raised interest rates from 0.10% in April 2022 to 4.1% in June 2023. Inflation was a global problem; central banks around the world raised interest rates to decrease interest rate sensitive consumer and business spending. An exception to rising interest rates has been China, which has reduced interest rates to counter sluggish economic growth. Have American Family (Household) Finances Gotten Better? In October 2023 the Federal Reserve released its triennial Survey of Consumer Finances , which compared American family (household) finances in 2022 relative to 2019. Data in the survey is presented in 2022 dollars, meaning that 2019 numbers have been adjusted for inflation. A summary of the survey is presented below: • Between 2019 and 2022, real median net worth surged 37 percent, and real mean net worth increased 23 percent. Real median net worth grew from $141,100 to $192,900 while real mean net worth increased from $868,000 to $1.063 million. The growth in median net worth was the largest three-year increase since the survey in its current form began in 1992. Increases in both median and mean net worth were consistent across different types of families, grouped by either economic or demographic characteristics. • Both financial and nonfinancial asset values rose significantly over the period. Overall, the real median asset value rose 26% from $263,800 to $332,600. • The percentage of families with some type of debt remained approximately constant at 77%. However, the median leverage ratio (a family’s total debt relative to its total assets) declined to a 20-year low of 29.2 percent (down from 33.9 percent in 2019) for those families with debt. The median payment-to-income ratio dropped to 13.4 percent (down from 15.3% in 2019), the lowest level ever recorded in the survey. • Between 2019 and 2022, the share of families with credit card debt remained approximately constant at 45 percent. However, the median balance for families with credit card debt declined from $3,100 to $2,700 and the mean balance declined from $7,300 to $6,100. • The median net housing value (the value of a home minus home secured debt) increased significantly over the period as housing prices rose substantially and debt remained relatively flat. For families that owned a home, the median net housing value rose from $139,100 in 2019 to $201,000 in 2022. The homeownership rate increased slightly to 66.1 percent. However, home affordability declined significantly, as the surge in housing prices meant that the median home was worth over 4.6 times median family income in 2022, surpassing the previous high of 4.2 in 2007.
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Center for Business and Economic Insight
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