Will More Fed Rate Cuts Affect Your Holiday Shopping? Experts Weigh In
Written by
Marc Guberti
Edited by
Jenna Klaverweiden
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The Federal Reserve has already cut interest rates multiple times this year, with another rate cut projected in December.
Most people may be done with their holiday shopping by the time that rate drop arrives, but are the recent rate cuts enough to spark more spending?
Also see three ways your holiday shopping needs to change in the Trump economy.
Rate Cuts Make It Cheaper To Borrow Money
Rate cuts make it cheaper to borrow money, which can make several financial products more attractive. However, Austin Kilgore, a consumer finance expert and analyst with the Achieve Center for Consumer Insights, told GOBankingRates that credit cards won’t be affected as much, which can limit the impact of rate cuts for holiday shoppers who make most of their purchases with credit cards.
“Over time, [the Fed’s rate cuts] can lead to lower borrowing costs for consumers, such as on personal loans, mortgages and credit cards,” Kilgore said. “However, consumers should expect to see only a very small drop in their credit card rates, if at all. Credit card companies are likely to keep rates up to help lessen risks with high-risk borrowers.”
Kilgore also said that it may take a few months for rate cuts to show up on loans and credit cards, which would put them past the holiday season. “Rate cuts may not happen before the holiday shopping period, and if they do, they won’t be substantial. It’s never a good idea to carry credit card debt, and this holiday is no exception,” he said.
The Wealth Effect Can Boost Holiday Spending
Lower interest rates make it more affordable for people to borrow money, but even if it takes lower rates several months to show up on loans and credit cards, there is still hope for higher holiday spending.
Stocks and other assets tend to go up amid rate cuts because it’s cheaper to borrow money. People also have less of an incentive to keep their cash in money market accounts, which can boost investments and create a wealth effect.
“Rate cuts will likely stimulate holiday shopping, and it will be attributable to the wealth effect,” said Robert R. Johnson, Ph.D., CFA, CAIA, professor of finance at Creighton University’s Heider College of Business. “The stock market affects the economy largely through the wealth effect. The wealth effect is the behavioral economics theory that when asset values rise and household wealth increases because of rising asset values (like stocks, bonds and home values), households feel richer and spend more, which stimulates the broader economy.”
Johnson warned that the reverse scenario can also play out, where declining stock prices hurt holiday spending. That may not be the case this year, but it is a tidbit to keep in mind in the event the stock market is reeling during a future holiday season.
“A falling stock market can have a negative impact on broader economic spending. Market historians may point to 1987 and note that the stock market crash did not result in markedly lower Christmas spending. However, there is a huge difference in stock ownership by Americans in the 1980s versus today,” Johnson said.
How To Stay Out of Debt While Holiday Shopping
While the holiday season usually comes with higher consumer spending, it’s important not to get carried away. Doing so can keep you in debt longer and delay your progress toward long-term financial goals. Johnson and Kilgore outlined some of the strategies you can use to keep your finances in check.
“Purchases of goods and services must be intentional. That is, people should budget holiday purchases. The key to effective money management is to budget and budget realistically,” Johnson said.
“Think about what you really want your holiday to be,” Kilgore said. “For most people, holidays are less about purchasing lots of gifts than they are about rest, relaxation, fun, peace and religious aspects.”
Kilgore also suggested buying affordable experiences like cooking classes, offering to give a helping hand (e.g., cleaning the house) instead of spending money on a gift, and picking up a side hustle if you anticipate having to spend extra money.
“We all know that retail spending increases this time of year, but there is no reason to think that a quarter-point drop by the Fed will make a significant difference to credit card issuers,” Kilgore said. “Particularly with the uncertain economy, continuing inflation and more worries about job cuts, consumers would be wise to keep spending in line with household budgets.”
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