US household strength could prolong Fed’s inflation fight

A person pushes purchases into a cart at a supermarket in Brooklyn, New York, U.S., March 29, 2022. REUTERS/Andrew Kelly

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May 11 (Reuters) – Accumulated financial strength in U.S. households has limited the damage from the coronavirus pandemic, but could now worsen – and prolong – the Federal Reserve’s inflation fight as the central bank waits for people lack purchasing power.

The recent fall in stock prices – a source of household wealth that has widened its influence on income levels in recent years – could eventually help dampen consumption, but this week’s reports on household debt, financial conditions and inflation have made little sense to consumers. a breaking point.

April inflation data released Wednesday by the Labor Department highlighted the Fed conundrum. As expected, headline consumer price growth has moderated significantly from the strongest pace recorded in March since 2005, but not as much as expected. And under the hood were further indications of continuing inflationary pressures in key areas like rent and travel. Read more

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“This is another upside inflation surprise and suggests the deceleration is going to be extremely slow,” said Seema Shah, chief strategist at Principal Global Investors.

The Fed raised interest rates by half a percentage point last week and Chairman Jerome Powell has signaled hikes of the same magnitude at his upcoming meetings in June and July as officials pledge to act “quickly” to fight inflation. Wednesday’s upside surprise in the consumer price index was enough to stir up market prices for even more aggressive action.

Officials will benefit from another month’s inflation and employment data ahead of their mid-June meeting, when they will also release policymakers’ collective projections for interest rates and the inflation outlook. .

The pressure — from consumers, businesses and elected officials — is clearly mounting for the Fed to show progress in a fight that Powell warned last week would be nasty.

President Joe Biden called inflation “unacceptably high” in a statement Wednesday and said the Fed was playing a “primary role” in slowing price increases and criticized Republicans as having no plan to thwart inflation.

“While it is encouraging to see that annual inflation moderated in April, the fact remains that inflation is at an unacceptably high level,” Biden said. “While I will never interfere with the independence of the Fed, I believe we have built a strong economy and a strong labor market, and I agree with what Chairman Powell said last week that the No. 1 threat to this strength – is inflation. I am confident that the Fed will do its job with this in mind. Beyond the Fed, my inflation plan is focused on reducing the costs that families are faced and on reducing the federal deficit.


Data from the New York Fed showed on Tuesday that while household debt levels hit a new record high in the first quarter, there was still little evidence that households were stretched.

There was an uptick in the number of households in the early stages of delinquency, but the level remains “very low by historical standards,” the New York Fed said. In addition, the most significant levels of over-indebtedness – such as new bankruptcies or debt collection proceedings – are the lowest since data collection began in 1999. read more

Several Fed policymakers noted that they are watching household balance sheets carefully as they assess how much longer Americans could remain cash-strapped.

Minneapolis Fed Chairman Neel Kashkari said Monday he expected more evidence now that household balance sheets were being stretched lower. “It is possible that the economy has now been pushed into a higher balance of pressure than before. And if that is the case, we will have even more work to do” to bring inflation down, he said. -he declares.

While overall output in the United States contracted in the first quarter – largely due to technical factors related to corporate inventory management – few signs are evident elsewhere of a slowdown in activity, in level of consumption in particular.

Bank of America‘s latest snapshot of consumer spending and financial well-being, gleaned from their database of 67 million consumers and small businesses, showed that the amount spent with credit and debit cards exceeds inflation. Credit and debit card spending rose 13% in April on an annual basis, while overall card spending per household was 23.7% higher than pre-pandemic levels.

More Americans are also traveling with visitors processed through Transportation Security Administration checkpoints on Tuesday, down just 15% from pre-pandemic levels, compared with a 40% drop on the same day one year ago. Tourist sites like Las Vegas are seeing visitors and spending rebound.

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The Fed raised interest rates in hopes it could rein in “excess” demand and slow inflation without necessarily forcing the economy to contract, as it has often done in the wake of the tightening of the credit from the central bank.

The Fed is watching “how our policies are starting to materialize. Are we seeing a pullback in demand in important spaces?” Atlanta Fed President Raphael Bostic said Tuesday evening. So far “we don’t see that. The demand is super strong.”

However, Bostic said demand could also wane rapidly as families adjust to higher prices, and also see their wealth shaken by what he called the “incredibly fast and incredibly robust” changes in prices. financial markets in recent weeks as stock and bond indices fell.

Just as the strength of household and corporate balance sheets can make it harder for the Fed to influence spending behavior, increasing household exposure to investment markets can reinforce the “wealth effect” of policy. monetary, as the decline in asset values ​​leads to lower consumption and more prudent decision-making.

“There is more and more the idea that asset prices directly drive consumer behavior,” said Roger Aliaga-Diaz, chief economist for the Americas at investment giant Vanguard, who estimated that the trillions of dollars of wealth wiped out in recent weeks could already account for a percentage point in US economic growth.

“I’m sure they’re counting on that impact,” he said.

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Reporting by Lindsay Dunsmuir, Howard Schneider and Ann Saphir; Editing by Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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