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As the Federal Reserve prepares to lower interest rates once again at the end of its two-day meeting this week, Americans’ assessments of the future are improving.
Although a prolonged period of high inflation took a toll on household budgets, consumers are feeling increasingly optimistic about their financial situation, according to a new report by the New York Federal Reserve.
The share of households expecting their financial situation to be better a year from now jumped to 37.6% in November, the highest since February 2020, just before the Covid-19 pandemic’s effects hit.
The Conference Board’s consumer confidence index also rose in November, to the highest level since July 2023.
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In recent months, other studies show Americans have been making progress toward key financial goals, from building up savings to paying down debt.
Nearly half of Americans, or 47%, have paid off debt, while 39% established an emergency fund and 32% have saved for retirement, according to a separate survey by Empower, which polled more than 1,000 adults in September.
Roughly 60% of Americans feel confident about reaching their financial goals, Empower also found.
Optimism is high
“Optimism has certainly increased in recent weeks,” said Greg McBride, chief financial analyst at Bankrate.com.
Nearly half, or 44%, of Americans believe their personal financial situation will get better in 2025, including 14% who said it will get significantly better, according to another Bankrate poll of nearly 2,500 adults in November.
Overall, most people have jobs and are taking home more pay. Average hourly earnings are up 1.3% from a year ago, according to the Bureau of Labor Statistics, and the unemployment rate remains low at 4.2%.
“That’s where the ability to pay down debt comes from,” McBride said.
The ‘vibecession’ is over
“The economy as a whole has fared far better in 2024 than the consensus expected, and we have seen inflation come down and consumer spending remain strong — not withstanding a bit of a ‘vibecession’ in the beginning of the year,” said Brett House, economics professor at Columbia Business School.
The so-called vibecession was often used to describe a disconnect between how well the economy was doing and how badly people felt about their financial standing. That appears no longer the case, according to House.
Despite earlier expectations of a recession, the U.S. has dodged a downturn, House said.
Meanwhile, “the stock market has charged ahead, people are feeling positive wealth effects and interest rates are coming down,” he said.
Perhaps most importantly, inflation has cooled considerably since hitting a 40-year high in mid-2022.
“People look most closely at the one economic data point they see every day and that is prices at the grocery store,” House said.
Food costs still rose 0.4% in November and 2.4% year over year, but within that group, cereals and bakery products fell 1.1% in November, the single-biggest monthly decline in the consumer price index‘s history going back to 1989, according to the BLS.