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US consumers felt more confident in May, data from the Conference Board showed on Tuesday.
The main driver of this reading helps explain why other surveys show Americans feel dour about their economic prospects. And it reveals the backward problem facing the Federal Reserve’s interest rate policy.
Which is that high rates are helping the wealthiest Americans who are powering the economy’s surprising growth and making it hard for the Fed to enact the rate cuts it wants.
The simplified theory behind raising and lowering interest rates is straightforward — lower rates help the economy grow faster, and higher rates slow the economy down. The last 18 months of US economic experience, however, make the second premise harder to accept right now.
“In terms of income, those making over $100K expressed the largest rise in confidence,” Dana Peterson, chief economist at the Conference Board, said in a release. “On a six-month moving average basis, confidence continued to be highest among the youngest (under 35) and wealthiest (making over $100K) consumers.”
Financial commentator Josh Brown has suggested that high rates could prolong the current bout of inflation, given the benefits that higher rates confer on the wealthiest Americans.
Wealthy households right now can earn upwards of 4.5% in a high-yield savings account, see their equity portfolios go up 20% in a year, and are watching the value of their real estate holdings rip higher.
These folks want nothing more than for rates to stay high.
Robust spending from wealthy consumers has also kept services inflation elevated, which is keeping overall inflation above the Fed’s 2% target.
All of which tracks with the idea JPMorgan’s Jack Manley set forward last month that high rates may be the source of persistent inflation and that the Fed might have a better shot at squashing price pressures by cutting rates rather than keeping them high.
Given the amount of wealth concentrated among a handful of US households and the skew on the income distribution in the US, just about any change in monetary policy will be regressive, advantaging those with more at the expense of those with less.
But after pushing back against the view that low rates were “hurting savers,” the Fed is now faced with a predicament in which high rates offer outsized advantages to savers at the expense of those without.
And the fact that Fed policy may be accomplishing the exact opposite of what it intends explains why a recent Guardian-Harris poll covered by Yahoo Finance’s Rick Newman showed 56% of respondents said the US economy is currently in recession, even as economic data clearly shows the opposite.
That poll also showed nearly half of respondents — 49% — think the S&P 500 is down this year. The index is actually up over 11% this year and rose 23% last year.
Moreover, Tuesday’s consumer confidence reading — while registering a three-month high — was far from a clear-cut judgment from Americans that things are looking up, economically speaking.
“The rise in confidence was likely fueled by easing gas prices and rising equity prices last month, but the underlying details of the survey reveal that consumer confidence may be easily [shaken] moving forward,” wrote Grace Zwemmer, associate US economist at Oxford Economics, in a note on Tuesday.
“The perceived likelihood of a recession rose in May, worry over current and future financial situations worsened, and purchasing plans for homes remained at their lowest level since August 2012, reflecting the impact of higher interest rates.”
As Rick noted, one of Biden’s biggest problems in seeking reelection is “convincing Americans that the economy is working for them without talking down or sounding dismissive.”
Pulling this off under normal circumstances is a tall order for any politician. But when the expected outcome of a foundational part of the nation’s economic policy has been turned on its head, the task may be out of reach.
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