US consumers show the Fed its backward problem with high rates: Morning Brief

US consumers show the Fed its backward problem with high rates: Morning Brief

Here are the takeaways from today’s Morning Brief, which you can register to receive every morning in your mailbox accompanied by:

U.S. consumers felt more confident in May, data from the Conference Board showed Tuesday.

The main driver of this reading helps explain why other surveys show Americans feeling pessimistic about their economic prospects. And it reveals the backward problem facing the Federal Reserve’s interest rate policy.

That is, high rates are helping the richest Americans which fuel the surprising growth of the economy and make the task of the Fed difficult adopt the rate cuts he wants.

The simplified theory behind raising and lowering interest rates is simple: lower rates help the economy grow faster, while higher rates slow the economy. The last 18 months of the American economic experience, however, make the second hypothesis more difficult to accept at present.

“In terms of income, those earning more than $100,000 expressed the largest increase in confidence,” said Dana Peterson, chief economist at the Conference Board. said in a press release. “On a six-month rolling average basis, confidence remained highest among the youngest (under 35) and wealthiest (earning more than $100,000) consumers.”

Financial commentator Josh Brown suggested that high rates could prolong the current inflation surgegiven the benefits that higher rates confer on wealthier Americans.

Wealthy households can currently earn more than 4.5% in a high-yield savings account, see their stock portfolios increase by 20% in a year, and see the value of their real estate holdings increase.

These people want nothing more than for rates to stay high.

US consumers show the Fed its backward problem with high rates: Morning Brief

Federal Reserve Chairman Jerome Powell attends a news conference in Washington, DC, May 1, 2024. (Liu Jie/Xinhua via Getty Images) (Xinhua News Agency via Getty Images)

Robust spending by wealthy consumers also kept high service inflationwho keeps headline inflation above Fed’s 2% target.

This all follows the idea of ​​JPMorgan’s Jack Manley advanced last month that high rates could be the cause source of persistent inflation and that the Fed may have a better chance of crushing price pressures by cutting rates rather than keeping them high.

Given the amount of wealth concentrated among a handful of American households and the asymmetry in the distribution of income in the United StatesVirtually any change in monetary policy will be regressive, favoring those who have more at the expense of those who have less.

But after rejecting the idea that low rates were “harm savers“, the Fed now faces a difficult situation in which high rates provide outsized benefits to savers at the expense of those without.

And the fact that Fed policy can accomplish exactly the opposite of what it aims to do explains why a recent Guardian-Harris poll covered by Rick Newman of Yahoo Finance showed that 56% of respondents said the U.S. economy is currently in recession, even though economic data clearly shows the opposite.

That poll also showed that nearly half of respondents – 49% – think the S&P 500 is down this year. The index is actually up more than 11% this year and 23% last year.

Moreover, the consumer confidence index released Tuesday, although reaching its highest level in three months, is far from a clear judgment by Americans that the economic situation is improving.

“The rise in confidence was likely fueled by falling gas prices and rising stock prices last month, but the underlying details of the survey reveal that consumer confidence could easily be ( shaken) in the future,” wrote Grace Zwemmer, associate U.S. economist at Oxford Economics. , in a note Tuesday.

“The perceived likelihood of a recession increased in May, concerns about the current and future financial situation worsened, and home purchase plans remained at their lowest level since August 2012, reflecting the impact of the rising interest rates.”

As Rick pointed out, one of Biden’s biggest problems in his re-election quest is “convincing Americans that the economy is working for them without criticizing or appearing dismissive.”

Achieving this under normal circumstances is a daunting challenge for any politician. But when the expected outcome of a fundamental element of the country’s economic policy is reversed, the task can become out of reach.

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