Many households have experienced a squeeze from both sides: little relief on their debts and falling income from their assets.
Year-end looms on the horizon, and for many, excitement around the holiday season is mixing with curiosity around financial markets. Black Friday, the traditional start of the holiday shopping season and the busiest single shopping day of the year, makes for an apt intersection of these two feelings. Recent surveys suggest that this Black Friday will be a disappointment, with consumers set to tighten their purse strings and spend less than they did in 2024. If realized, it would mark the first contraction in holiday spending since 2021.
This softer backdrop has been quietly visible in the broader data as well. Consumer sentiment has plunged in recent months, hovering around pandemic lows, and has weighed on household spending. In fact, despite consumption accounting for three-fourths of the economy, its contribution to growth this year has lagged business investment, which is a much smaller slice of the economy.
At first glance, this feels at odds with the interest-rate environment. Since September 2024, the Federal Reserve has been easing monetary policy. Conventional wisdom would suggest that a more dovish Fed should support consumers. Why hasn’t that happened?
The answer is that the linkage between overnight rates and consumer-focused rates isn’t linear. Between the first rate cut in 3Q 2024 and 3Q 2025, the federal funds rate fell 125 bps; over the same time period, auto loan rates fell by 76 bps and credit card rates by 37 bps. 30-year mortgage rates actually rose modestly over this window, a meaningful headwind as mortgage debt makes up 70% of household debt.
Put simply, a more dovish Fed has not translated one-for-one into a better lending environment for American consumers. In many ways, that environment has actually gotten tougher.
Moreover, rate cuts have squeezed the liquid side of household balance sheets. Interest-bearing assets, like bank deposits and money-market funds, feel any decline in short rates almost immediately. Households hold nearly $19 trillion of these assets. Assuming a simple pass-through, that 125 bps decline in the policy rate eliminated roughly $238 billion of annual interest income for households.
As a result, many households have experienced a squeeze from both sides: little relief on their debts and falling income from their assets. Combined with weaker sentiment and a cooling labor market, the appetite to borrow has faded, slowing credit growth across nearly every major loan segment. That deceleration is now showing up as a drag on spending.
All told, while markets might cheer for another rate cut in December, the biggest winners will likely be stocks and short-duration bonds. The household sector, by comparison, won’t fare as well and will have to wait even longer for any kind of meaningful relief.