Fear of a Fed Error Is on the Rise as American Consumers Pinch Pennies

A nudge to the FOMC: ‘A bit of courage here’

Consumers have been saying they’re exhausted by higher prices for some time.

Now they’re actually ratcheting back their spending more materially, as shown in today’s May retail sales data. The question for markets is whether this is a welcome pullback that allows the US economy to cool just enough to tame inflation, or a more pernicious trend that hints at deeper weakness.

Gregory Daco of Ernst & Young is worried about the latter, namely, a more material slowdown and the risk that the Federal Reserve is falling behind in cutting interest rates.

“The Fed has to be careful to recalibrate monetary policy and adjust to that environment and not be so backward looking,” Daco said. “Backward looking can be very dangerous in an environment where you have a lot of noise in the data.”

Ian Shepherdson of Pantheon Macroeconomics had a similar take — “Greg and I are going to have an agreement-fest here,” he joked — and elaborated on an argument advanced by Surveillance guests such as Mohamed El-Erian.

Fed policymakers are “very backward looking, constantly talking about what the data has been doing,” Shepherdson said. “If you carry on doing that, by definition you’re going to be late when you start cutting rates.”

At issue is a Fed that’s only penciling in one rate cut this year in the face of ongoing economic resilience. The difficulty, as we talked about on Surveillance today, is a complete lack of certainty by analysts and Fed officials alike. Citigroup’s Andrew Hollenhorst pointed to Philadelphia Fed President Patrick Harker‘s description yesterday of being surrounded by “air soaked in uncertainty.”

Retail Sales Edge Higher

Source: Bloomberg

Shepherdson’s prescription for the Federal Open Market Committee: Show “a bit of courage here” by moving promptly to cut rates. “We are not at a point when everything is falling apart,” he said. “That is not the story here. But we have to get out of the mindset of, it’s just been constant upside surprises for the consumer. Constant. Not anymore.”

Viewed through one lens, the softer retail print — May’s increase was 0.1%, and the two prior months were revised downward — could be considered “a positive story,” as Daco put it. Yields on 10-year US Treasuries promptly clanked to a session low on the news, as investors read the news as dovish for a future Fed cut.

“All the fund indicators in terms of inflation are pointing toward further disinflation,” Daco said. “So if you have a forward-looking perspective that is the right type of mix that you’d want to see from a Fed perspective in terms of easing monetary money — not to bring rates down to zero, but to recalibrate monetary policy to today’s reality.”

The rub, as economists like Daco and Shepherdson see it, is that the Fed is concentrating more on the rearview mirror and spending too little time peering through the windshield.

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By Published On: June 19, 2024Categories: UncategorizedComments Off on Fear of a Fed Error Is on the Rise as American Consumers Pinch Pennies

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About the Author: Patriotman

Patriotman currently ekes out a survivalist lifestyle in a suburban northeastern state as best as he can. He has varied experience in political science, public policy, biological sciences, and higher education. Proudly Catholic and an Eagle Scout, he has no military experience and thus offers a relatable perspective for the average suburban prepper who is preparing for troubled times on the horizon with less than ideal teams and in less than ideal locations. Brushbeater Store Page: http://bit.ly/BrushbeaterStore

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