Wait and see approach for consumers

As the S&P 500 index flirts with almost daily new highs, economic data continues to muddle along—not too hot and not too cold.

The keys for the Federal Reserve are the labor market and inflation, and here the news last week was, on balance, good. The labor market continues to show no signs of softness, as weekly jobless claims actually fell last week, from 222,000 to 218,000, right in-line with their year-to-date average.

Inflation is moving in the right direction, but perhaps not as fast as some would hope. Inflation data in the income and spending report were better than expected, as both the headline and the core reading rose by 0.1% in August. Over the last year, headline inflation fell from 2.5% to 2.2%, but the core result stubbornly ticked up, from 2.6% to 2.7%, Over the last three months, however, this core measure has risen at a 2.1% clip, very close to the Fed’s 2% target.

Probably more important is that consumer sentiment as measured by the University of Michigan survey shows that consumers feel a greater level of optimism. Though consumers still complain about high prices, they are fully aware that inflation has continued to slow. In the latest report, many say that their expectations for the economy hinge on the results of the upcoming election. Year-ahead inflation expectations fell for the fourth straight month, rising at 2.7%, right in the middle of the 2.3-3.0% pre-pandemic band. Long-run inflation expectations ticked up from 3.0% to 3.1%. 

In this context, the Fed will continue to monitor incoming economic data against market expectations for a further 75 basis ponts of fed funds rate cuts by year-end 2024. The Federal Open Market Committee next meets on November 7.