That said, the Fed’s work is already being felt in financial conditions, a measure of stress across equity and fixed-income markets. Di Maggio, a professor of finance at Harvard Business School, says it’s top of mind for policy makers when they’re thinking about how their actions ripple down to the consumer.
“They always think about, if we set rates, we change market conditions,” he said by phone. “And a key way this percolates through the real economy is through portfolios.”
How declining stock prices impact consumer sentiment -- already at the weakest level since 2011 -- may be a point of debate, but one thing that isn’t is the link between very big market drops and the economy. Almost never has a 20% drop in the S&P 500 not come with a recession in the last 100 years, a fact that could imply a limit to how hard the Fed is willing to push on monetary policy.
To date, the central bank’s actions have only barely slowed a robust jobs market, where there are more open positions than there are people willing to fill them, and where the unemployment rate sits at 3.6%, near a 50-year low.
Di Maggio says there’s a lagging effect. “We are in a very good economy right now. The stock market is falling down, but the job market is still strong.”
Trillions in losses of stock wealth have yet to show up in retail spending. Data out on Tuesday showed US retail sales grew at a solid pace in April, suggesting demand remains resilient despite rampant inflation. Bank of America data, meanwhile, shows payments were up 25% year-over-year in April, with total credit- and debit-card spending up 13%. Spending on travel and entertainment has continued to trend higher, the bank said.
“The consumer momentum and strength has been much stronger than just about anyone would have thought,” said Dennis DeBusschere, the founder of 22V Research. “This has been a worry of ours -- the consumer staying too hot for the Fed.”
Fed chief Jerome Powell has endorsed the retreat in financial conditions, and one of his colleagues, Mary Daly, said she’d like a further tightening.
Lauren Goodwin, economist and portfolio strategist at New York Life Investments, says she foresees a few more months of strong consumer trends. On the bright side, lower-wage workers have seen a particularly pronounced uptick in pay during the pandemic recovery. Her main concern, however, is that higher costs for everyday essentials, like gas or baby formula, could depress sentiment.
“The key question for investors is does that drag in consumer sentiment start to create a real drag on consumer spending, which then ripples through the economy,” she said in an interview. “I would expect that the strong support consumers have had up to this point and the real cash savings that the consumer generated during the pandemic on aggregate, that these drags on sentiment, including the wealth effect, are outweighed by those positive factors, but that is, of course, the critical question for moving forward.”
--With assistance from Reade Pickert and Lu Wang.
This article was provided by Bloomberg News.