Even with elevated consumer prices and high borrowing costs, Americans continue to spend at a solid clip, complicating the Federal Reserve’s efforts to tame inflation. One reason that central bank officials cite for this phenomenon is the “excess savings” accumulated during the pandemic, which are the byproduct of fiscal relief such as the stimulus checks and foregone spending when the economy was shuttered. So, it’s of great interest to the Fed to figure out when those savings run out and consumers are forced to cut back on their spending.

New research from Federal Reserve Bank of San Francisco economists Hamza  Abdelrahman and Luiz Oliveira concludes it’s happening now. They tracked saving relative to the pre-pandemic trend and found that it peaked in the summer of 2021 at $2 trillion, then fell steadily. But it’s a mistake to think of excess savings as just more money sitting in the bank; it is also about having less debt. And those with a lot of debt are more interest-rate sensitive. That’s who the Fed should keep a closer eye on.

There are several signs that households hold less debt than the pre-pandemic trend, including some very high-interest debt. Payday loans declined 65% during the first year of the pandemic, according to the Consumer Financial Protection Bureau. The growth in credit-card balances also fell early in the pandemic, according to the Federal Reserve Bank of New York. That lowered debt servicing costs, freed up money for spending and made many consumers less sensitive to increases in interest rates.

Delinquency rates are another sign that consumers have been managing their debt better even as interest rates rise. During the pandemic, delinquencies on credit cards fell to their lowest in the 20 years of the series. That was true of all consumer loans. Even now, with the Fed’s target federal funds rate and consumer interest rates notably higher, the delinquency rate on credit cards has only just returned to its pre-pandemic level.

Research on stimulus checks directly connects the extra income with paying down debt. In my research with a survey of households on the 2021 checks, the most common use (45%) was paying down debt and then savings (31%). The least common use was to increase spending (24%). Note that the aggregate increase in spending is still substantial, given how large the payments were.

Credit-card debt was the most common debt that was paid down, but payday and auto title loans, among others, were also mentioned. The pattern in uses was similar for the stimulus checks in March 2020. Adding the three rounds of stimulus checks together, an eligible family of four received $11,400, which would have allowed for a substantial debt reduction.

Other research by Duke University economics professor Laura Pilossoph and her co-authors found that households used one-third of their stimulus checks to reduce debt. That was particularly so among households with less wealth relative to income. They showed why it makes sense for those with high debt to pay it down as opposed to spending the stimulus money or putting it in a bank account — it gives them a larger financial cushion by avoiding having to make interest payments.

Households that lowered their debt with their stimulus money did not show a pop in spending. Instead, they could increase spending gradually with lower debt payments. That is consistent with the resilience in spending we have seen. But the stimulus checks were more than two years ago, and almost all of the pandemic relief programs are over. Credit-card levels relative to income are starting to rise, although they remain below pre-pandemic levels.

So, what does this mean for the Fed? The effects of its rate hikes have been muted so far, in part, because households with less debt have had a cushion, unlike prior recessions, to buffer higher borrowing costs. People who, instead, put their excess savings in the bank have a cushion too, but interest rates matter less to them than those who paid down debt. Both are running out and should lead to reduced spending. But if the Fed doesn’t track the debt separately, it could underestimate the effects of excess savings running out on demand and make a policy mistake.

And someone faced with cutting spending or taking on more debt must consider the 20% interest rate that comes with credit-card debt these says. Debt balances rising back to the pre-pandemic trend would make those households responsive to the Fed hikes. The day “excess savings” overall run out is less important than when “less debt” ends.

Claudia Sahm is the founder of Sahm Consulting and a former Federal Reserve economist. She is the creator of the Sahm rule, a recession indicator.