Consumer Says: Are rates still too high? Most consumers think so

What's new in the economy?

Year-over-year inflation ticked up to 2.9% in December as measured by the Consumer Price Index. This continues an upward trend since the rate hit its most recent low in September at 2.4%. Although services and housing continue to be the strongest upward pressures on inflation, we wrote late last year about upside risks to inflation from goods categories, which may become heightened with potential future tariffs. 

Uncertainty looms as tariff policies are still not yet clear. Although President Trump previously promised tariffs on day one of his presidency, on his first day in office he instead said tariffs would be coming down the pipeline on February 1st. As we approach that date, official tariff policy still seems uncertain – the USA’s largest trading partners, Canada, Mexico, and China appear most likely to face some sort of tariff. Instead of immediate 10-20% broad-based tariffs, new Treasury Secretary Scott Bessent favors a gradual increase of tariffs starting at 2.5%. 

The Fed will most likely announce no rate cuts today. Rebounding inflation and hints from its press release language following the FOMC December meeting are causing markets to price in a 99% chance of no rate cuts later today. In fact, markets expect only one more rate cut through the entirety of 2025.

Consumer says...

We ran a survey last June on how consumers were perceiving interest rates – whether current rate levels were viewed as too high, how they affected personal finances and spending habits, etc. After several rate cuts from the Fed, we reran the survey in December to see if consumers’ views have changed. See the full breakdown in our report here and our podcast conversation discussing the results here.

How have rate cuts changed since mid-2024?

After holding rates steady at a more than two decade high for 14 months, signs of a cooling labor market and easing inflation prompted the Fed to begin its interest rate cutting cycle at its September 2024 meeting. While many consumer rates have declined somewhat as a result, mortgage rates have paradoxically increased alongside longer-term government yields as fears of rebounding inflation grow.

How are consumers reacting?

Most consumers (62%) still say that rates are too high, but that share is down 6 percentage points from 6 months prior. Still very few respondents believe that rates are too low, and a somewhat increased share think rates are now “about right.” 

Among those who believe current interest rates are too high, 3 out of 4 said that high interest rates have affected their household finances. Furthermore, 72% said they cut back on non-essential spending. Discretionary spending is usually first to be reduced when budgets get tight and this trend aligns with other Morning Consult data: consumers pulled back on many discretionary purchases, especially during the summer. 

Who is noticing rate changes and following Fed policy?

Only 1 out of 4 adults said that they knew that the Fed reduced interest rates in the past month (at the time of the survey, the Fed had announced a rate cut a little over a week prior). High-income, older, and more educated adults were most likely to be aware of the latest interest rate cut, but still a majority were not, highlighting further that changes in interest rates likely are noticed by consumers on a lag. Although millennials were most likely (82%) to say that high interest rates have affected their household finances, they were among the least likely to be attuned to Fed policy – perhaps because they are more likely to get their news from less traditional media sources.

Further reading:

• As we await more concrete news about upcoming tariff policy, read our tariff analysis exploring opposition to tariffs with the backdrop of price sensitivity to higher prices.
• Good news on the jobs front – Morning Consult’s unemployment index continues to ease. Check out our analysis on the thawing labor market.
• High income travelers shape the travel industry, read about these consumers more here and about dampened travel spending at the end of 2024 here.

… Stay tuned, and we’ll be back with more economic insights & research updates in two weeks.