As U.S. central bank policymakers attempt to assess whether consumer spending will suffer as households assess the possible blow to their net worth and increased difficulty in obtaining loans, the Federal Reserve’s job may become even more challenging this week due to plunging stock markets and indications of tightening credit.
In the final batch of hard economic data Fed members will view before beginning their two-day policy meeting on Tuesday, U.S. retail sales for February were lower than anticipated. The data was released on Monday. The decrease in spending on discretionary items like restaurant meals was interpreted by some analysts as an indication that consumers in general, not just those from lower-income households, were starting to cut back on their purchases.
The Fed may become more concerned about growth and be more likely to lower rates if consumer spending slows down. However, Fed members now face the possible conundrum of a weaker economy and an acceleration of inflation due to the instability surrounding Trump’s trade policies, which run the risk of rising prices.
Consumer spending may increase by just 0.4% in the first quarter, according to the Atlanta Fed’s GDPNow tracker, which was updated following the retail sales data. The previous forecast was 1.1%.
TIGHTENING CONDITIONS
Fed officials frequently emphasize that their role is to ensure maximum employment and stable inflation, not to sustain high stock values, during periods of market turbulence.
However, the behavior of the whole economy is influenced by stock prices and financial markets generally, and in recent weeks, there have been indications of tightening lending conditions.
Bank loan growth has slowed, and lower-rated company bond yields have increased. The last two months have seen a minor tightening of a Fed financial conditions measure.
Consumers were less optimistic about credit availability, and loan rejection rates have been on the rise, according to a recent New York Fed study.
Last Monday, economists at Deutsche Bank stated, “Equities are down… Credit spreads remain tight but have started to widen.” Fed rate reduction “may represent the remaining policy lever that could eventually prevent more disruptive moves in financial markets that threaten the growth outlook,” unless the administration’s tariff proposals change or the markets begin to see them differently.
