Fed’s Easing Cycle Exposes a Broken Credit Channel, Analysts Warn

TLDR:

• Credit card rates remain above 21% despite Fed rate cuts.
• Analysts say banks no longer transmit policy easing to consumers.
• Borrowing costs now rise faster than they fall, widening inequality.
• The middle class is increasingly treated as risk collateral by lenders.

The Federal Reserve’s latest easing cycle was expected to lower borrowing costs across the economy. Instead, consumer debt rates remain elevated, raising concerns over a fractured credit transmission system. 

Despite policy rate cuts, credit card interest averages above 21%, widening the gap between central bank policy and consumer lending. Analysts now suggest the Fed’s influence over household credit is weakening as banks prioritize profit over policy.

Consumer Credit Decouples From Fed Policy Rates

Analysts including @The_Prophet_ argue that the traditional link between Fed actions and consumer credit costs has broken. 

Banks, they note, are no longer passing on lower reserve costs to borrowers, maintaining record-high credit card and loan rates. According to Federal Reserve data, the average consumer interest rate sits near historical peaks despite easing policy conditions.

This divergence signals that the banking sector may now treat consumer debt as a profit center rather than a monetary policy channel. 

As @The_Prophet__ explains, banks have priced in “psychological premiums” amid stagnant wages and depleted savings, leaving consumers with few options for affordable credit. The result is a system where lower Fed rates benefit institutions while consumers face rising costs.

The asymmetry has become pronounced in recent cycles. When the Fed raises rates, lenders quickly adjust consumer debt upward. Yet when rates fall, borrowing costs remain sticky, amplifying the divide between institutional and retail finance. 

This structure effectively channels monetary relief to capital markets while extracting value from households.

Middle-Class Borrowers Become Risk Collateral

The credit system’s shift has turned household debt into a securitized asset class. 

Analysts note that banks are offsetting delinquency risk by preemptively widening spreads, transforming consumer distress into yield opportunities. Rising defaults in auto loans, student loans, and credit cards show that easing policy no longer translates into financial relief for ordinary borrowers.

As @The_Prophet_ described, each rate cut now boosts asset prices while tightening credit at the household level. This dual effect supports equity markets but erodes consumer sentiment,now near multi-year lows despite resilient market indices. 

The mechanism has inverted, positioning the Federal Reserve as a liquidity engine for capital rather than a support system for labor.

Observers say this dynamic signals a deeper macroeconomic shift. Monetary easing no longer stimulates demand but redistributes value upward through financial channels. 

The traditional “credit channel” that once guided economic expansion appears to have broken, replaced by a feedback loop of extraction and concentration.

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