The Federal Reserve reported that financial well-being over the past year has reached the highest level since at least 2013, underscoring the impact of the economic stimulus, some of which has also led to high inflation.
About 78% of the approximately 11,000 households surveyed by the Fed said they were either “financially fine” or “comfortable,” the highest since the Fed survey began in 2013.
The report found that household strength was particularly high among parents, partly due to the 2021 child tax credit.
Fed officials noted that children returning to school also freed up time and resources for parents who otherwise would have had to spend money on childcare. Three-quarters of parents with children under 18 said they meet both financial health benchmarks, while 79% of all other adults said the same.
The central bank’s survey was conducted in October and November last year when consumer prices started to rise.
According to the Federal Reserve’s most recent report, 78% of American adults said they either feel “okay” or “have a comfortable life” in 2021. (Source: US Federal Reserve)
“Low-income parents saw an even more significant increase in their financial well-being in 2021,” the report said.
Improving financial health also reduced the number of households reporting that they were struggling with an emergency expense.
In 2021, 32% of households said they couldn’t cover an unexpected $400 expense — or would have to borrow (or sell) something to cover it. That was down from the 36% reported in 2020.
The Fed itself may also have been a factor in improved household health, as low interest rates allowed almost a quarter of all homeowners with a mortgage to refinance their mortgages in 2021. The report finds that higher-income borrowers have been driving the trend.
…as inflation accelerated
Overall, the Fed survey shows a US household comfortable with spending, which may have fueled the high consumption that allowed companies to hike prices.
The pace of price increases accelerated throughout 2021, but supply chain issues combined with encouraging readings over the summer prompted Fed officials to classify the higher readings as “temporary.” Fed Chair Jerome Powell stepped down as inflation data showed inflation continued to accelerate in the fall. In January 2021, CPI data showed that consumer prices increased by 1.4% yoy; Through January 2022, this data showed a 7.5% annual increase in consumer prices.
The story goes on
Persistent inflation has prompted the Fed to raise short-term interest rates to restrain spending, which has already made borrowing (like mortgages) more expensive.
Despite fears of an impending recession, Powell has noted that households appear to have the savings to weather an economic shock.
“I think we have a good chance of getting a soft or soft landing or a soft outcome,” Powell said on May 4, adding that households are “in very strong financial shape.”
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Brian Cheung is a reporter covering the Fed, the economy and banks for Yahoo Finance. You can follow him on Twitter @bcheungz.
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