April 23, 2024
Economy

Could Consumer Spending Stall Rate Cuts?


Consumers Are Still Spending—Potentially Stalling Rate Cuts

1 hour ago

Friday’s report on Personal Consumption Expenditures from the Bureau of Economic Analysis highlighted one big obstacle in the Federal Reserve’s efforts to get inflation under control: consumers seemingly keep spending no matter what.

Consumer spending jumped 0.8% in February, a slowdown from the 1% increase the month before but still the second-largest percentage increase in a single month since January 2023.

The Federal Reserve’s anti-inflation interest rate hikes haven’t stopped people from spending—despite making borrowing much more costly for credit cards, mortgages and other kinds of consumer debt, hurting household budgets.

High interest rates are meant to stifle inflation at the risk of slowing the economy and sending it into a recession. Instead, the economy is staying resilient, largely due to continued consumer spending. The trouble is, that surging spending also could help keep inflation running hot.

After all, why would companies stop raising prices when customers keep on buying?

Economists have outlined a possible scenario where inflation stays just a bit too high for the Fed’s liking, prompting the Fed to keep interest rates at a 23-year high for longer instead of cutting them as they currently plan. Surging consumer spending in February is part of the equation that could make that happen.

“The days are getting longer and so is the wait for the Fed to lower interest rates,” Tim Quinlan and Shannon Seery Grein, economists at Wells Fargo Securities, wrote in a commentary. “That is partly because consumer outlays have not been slowed by higher borrowing costs as evidenced by the 0.8% increase in nominal spending in February.” 

Correction: This blog post has been corrected to refer to the likely next steps by the Federal Reserve—rate cuts.



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