Fed Rate Cuts Loom as Consumer Woes Rise
The current economic landscape in the United States is marked by significant shifts, with a growing focus on the health of consumers and the implications of Federal Reserve policies. Despite aggressive rate hikes in recent years, consumer spending has remained relatively robust, bolstered by pandemic-era stimulus support. However, there is increasing concern about the sustainability of this resilience, particularly as proxies for consumer health, such as tightening lending standards and rising delinquency rates, suggest potential weakness.
Recent data from the Phili. Fed reveals that the percentage of credit card balances past due has reached its highest level since 2012. Specifically, the share of balances over 60 days overdue has increased to 2.6%, up from 1.1% in 2021 when consumers benefited from significant pandemic-related financial support. Moreover, readers will also recall us highlighting the potential “debt snowball” resulting from the understated household debt levels, (https://www.epicip.com/markets/DailyUpdatesData/115). These trends highlight the growing financial strain on households, exacerbated by higher borrowing costs and dwindling pandemic savings.
In response to these economic signals, there is a mounting call for the Fed to pivot towards a more accommodative monetary policy, cutting rates. William Dudley, former President of the New York Fed, recently advocated for an immediate rate cut, suggesting that delaying further could increase the risk of a recession. This represents a notable shift in sentiment, as Dudley had previously been a proponent of maintaining higher-for-longer rates for an extended period.
Dudley’s comments also came ahead of the Q2’24 GDP print which hugely surprised to the upside at 2.8%qoq (exp. 2%, prev. 1.4%). Consumer spending was the largest tailwind to growth, up 1.57% in the quarter; the broader economic picture therefore remains complex.
Furthermore, while some argue that the labour market is simply returning to normalcy after an unusual post-pandemic boom, others point out that the softening job market makes it harder for workers to find employment, shifting the balance of power towards employers. This dynamic is reflected in the modest increases in average hourly earnings, which have risen at the slowest pace since 2022.
In summary, the US economic outlook hinges on the Fed’s actions and its timing. With consumer confidence under scrutiny and various economic indicators pointing to potential weaknesses, the debate over the necessity and timing of rate cuts is intensifying. For the fixed income markets, such a policy shift could offer a much-needed reprieve and should lead to a more favourable investment environment.
If you would like to receive The Daily Update to your inbox, please email markets@epicip.com or click the link below.