Pedestrians carry shopping bags in New York on Sept. 6.Michael Nagle / Bloomberg via Getty Images

Consumers increasingly report feeling glum about the economy. Still, data suggests there has been no significant slowdown in their spending habits.

The conflicting trends have made for an increasingly difficult landscape for the Federal Reserve to navigate as it meets Tuesday and Wednesday to decide where to set its key interest rate. Investors say a rate cut is virtually guaranteed amid signs of a weakening labor market.

There are also concerns about where consumer spending is coming from. In an interview on CNBC this month, McDonald's CEO Chris Kempczinski referred to a "two-tier economy," in which upper-income groups spend largely free of financial constraints, while middle- and lower-income households feel squeezed.

The stock market continues to set records, thanks mainly to optimism for returns on big investments in artificial intelligence. Stock holdings are disproportionately concentrated among the more well-off and give them greater financial flexibility. According to data from Moody's Analytics, the top 10% of household wealth holders now account for about 50% of all spending in the economy.

"The economy can move forward simply with folks in the top continuing to buy, even if the ones in the middle and lower are struggling, simply because so much spending is done by the well-to-do," said Mark Zandi, chief economist at Moody's Analytics. "But it can't flourish."

The question is what happens after the Fed's rate announcement, including whether it will cut rates at its October and December meetings. The central bank's benchmark interest rate is used to set other borrowing rates throughout the economy. To determine where to set it, the Fed looks at inflation and unemployment rates.

Right now, the Fed's preferred inflation gauge remains above its 2% target, but it has shown some signs of stability even as it has ticked up. The unemployment rate has been creeping up, too. At 4.3%, it is now at its highest point since October 2021.

In part because of concerns about the inflationary impact of President Donald Trump's sweeping tariffs, the Fed has left its key interest rate unchanged since December, before Trump returned to office. The Bureau of Labor Statistics reported Tuesday that import prices were up 0.3% in August, an increase from July and evidence that foreign exporters are not eating much tariff costs.

But last month, Fed Chair Jerome Powell indicated policymakers were more open to cutting the rate, which he said was at a "restrictive" level, meaning it may be holding back economic activity.

Bill Adams, chief economist at Comerica financial services group, said, "Lower interest rates will help the economy stabilize into the turn of the year."

Recent labor reports have shown that just 22,000 jobs were added in August -- far below forecasts -- and the official hiring rate remains stuck at levels last seen in 2013. It now takes about 10 weeks at the median for someone out of a job to find a new one, with the share taking at least six months now making up 26% of all unemployed workers. According to the New York Federal Reserve, workers say there is just a 44.9% probability they would find other jobs if they lost their current ones, the lowest in the survey's history.

The lackluster jobs market is making consumers feel increasingly concerned about their financial prospects, according to sentiment surveys. The University of Michigan said Friday that its consumer-sentiment gauge deteriorated in early September to a level only slightly above pandemic-era lows, while the Conference Board research group's consumer-confidence survey reported rising worries about jobs and income.

Lowering interest rates would help reduce the cost of interest payments on regular purchases like auto loans and credit cards, which should help increase overall economic activity and ultimately boost employment as businesses are able to borrow money for less.

Trump and others have argued a lower Fed rate would help boost the housing market by making it more affordable to own a home. The Fed's rate does not directly influence mortgage rates, which instead tend to move in tandem with the rate on the 10-year Treasury note.

Right now, the 10-year rate is near its lowest point of Trump's second term as investors have dialed back inflation expectations. As a result, mortgage rates are also falling, and at 6.35% they are at their lowest level since April.

A lower Fed rate would help make it cheaper for homebuilders to borrow money, which would directly help lower overall housing costs somewhat.

There is a chance that lowering rates too much, or too quickly, risks causing inflation to surge -- especially as inflation lingers and people keep spending.

"It's a delicate balancing act," said Adams, of Comerica.

Many financial groups continue to report that spending is largely holding up. According to data from Bank of America, spending per household rose 0.4% month-over-month in August -- the third increase in a row.

On Tuesday, the Commerce Department reported retail sales for August climbed 0.6%, well ahead of estimates for a 0.2% increase.

"The consumer at this point appears to be exactly where we were, resilient, doing well, in a good position," Alastair Borthwick, chief financial officer at Bank of America, said at a conference last week.

Economists are also keeping an eye on how many new jobs must be created in the economy each month to satisfy demand for goods and services from businesses and consumers. This is also called the "breakeven rate."

Because of Trump's crackdown on immigration, along with an aging population, some analysts say the breakeven rate is rapidly trending downward and may even be close to zero. It is the main reason lower monthly jobs growth has not translated into a rapidly increasing unemployment rate.

"Generally speaking, people who want to work are working," said Jed Kolko, an economist who served in the Biden administration. Most jobs data suggests the economy "is providing jobs for people who want them -- but it's not overheating," he said.

At the same time, qualified workers "are just harder to come by," said Holly Wade, executive director of the National Federation of Independent Businesses' Research Center.

Small businesses, especially those in skilled-trade industries like manufacturing and construction, have continually cited challenges with labor quality as their top concern, according to the NFIB. Many businesses have been forced to leave roles unfilled, even as they have also beefed up training courses, since many immigrant workers caught up in Trump's crackdown have skilled-trade experience.

College graduates now account for an increasing share of the long-term unemployed population, suggesting the need for knowledge and administrative work may be declining. That has created concerns that artificial intelligence is eliminating certain jobs -- though there remains debate about how significant the technology's impact is.

There is also evidence that Trump's federal job cuts have disproportionately affected college-educated workers.

Many of those workers may be further along in their careers while also handling child care and elder care responsibilities, which make it more difficult for them to take on roles in sectors with more open positions, said Kira Khazatsky, president and CEO of JVS Boston, a job placement and workforce development agency.

"You can't flip a switch and say, 'We're going to train these people because they're standing by and waiting to be trained,'" she said.

The economy is chugging along, but consumers are uneasy