The Fed has moved on from inflation. People are still worried
The Federal Reserve framed its big interest rate cut last week as a “recalibration” of policy, shifting its focus from inflation to employment as the labor market begins to soften. But Americans are still concerned about rising prices.
The Conference Board’s Consumer Confidence Index, released Tuesday, fell 6.9 points in September to 98.7 — its biggest decline in three years. All five components of the index — including an assessment of present business and labor conditions, expectations for inflation, stock prices, and interest rates, and buying plans — deteriorated.
“Consumer confidence dropped in September to near the bottom of the narrow range that has prevailed over the past two years,” said Dana Peterson, chief economist at The Conference Board, in a statement.
The Federal Open Market Committee voted last Wednesday to lower interest rates by 50 basis points, bringing the federal funds rate to 4.75-5.0% from more than two-decade highs. In the committee’s statement following the decision, it said it made the decision to carry out a bigger rate cut as it balanced considerable progress on inflation and rising employment risks.
Following the decision, Fed Chair Jerome Powell said the aggressive first cut was a sign that the central bank was confident about inflation heading toward its 2% target.
“This recalibration of our policy stance will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation as we begin the process of moving toward a more neutral stance,” Powell said.
Still, Americans’ average 12-month inflation expectations rose to 5.2% in September, according to The Conference Board. That’s still well below the March 2022 peak of 7.9%. Their view of the labor market — both present and future — also became more pessimistic this month.
“The deterioration across the Index’s main components likely reflected consumers concerns about the labor market and reactions to fewer hours, slower payroll increases, fewer job openings—even if the labor market remains quite healthy, with low unemployment, few layoffs and elevated wages,” Peterson said.
There was also a slight uptick in expectations of a recession over the next year, according to the index.
In August, overall inflation rose just 2.5% over the past year, a considerable sign of cooling. And unemployment, which jumped to 4.3% in July, stayed at around 4.2% last month — remaining slightly above earlier projections.
Last week’s Federal Open Market Committee vote was not unanimous, however. In the first dissent since 2005, Fed Governor Michelle Bowman opted for a 25 basis-point cut.
In prepared remarks Tuesday explaining her decision, Bowman said the current 2.5% inflation rate is still “uncomfortably above” the Fed’s 2% target and that “the upside risks to inflation remain prominent.” She also expressed concern over whether the 50 basis-point cut “could be interpreted as a premature declaration of victory on our price-stability mandate.”
Lowering rates too quickly risks unleashing pent-up demand and cash, which would send inflation upward again, Bowman cautioned. There are ongoing risks to price stability going forward, she said, including threats to global supply chains and a surge in housing market activity.
The Fed has a slightly more optimistic view of things. An updated Summary of Economic Projections sees the personal consumption expenditures, the Fed’s preferred inflation metric, falling to 2.3% this year, down from its June projection of 2.6%. It also expects the median for next year to drop to 2.1%.
