Fundamentals for Consumption
Macro Perspectives
It's Fed week.
The Fed is expected to raise another quarter point (25bps) tomorrow. That will take the Fed Funds rate to the range of 4.5%-4.75%.
And as we discussed in yesterday’s Macro Perspectives, that would take short term rates ABOVE the rate of inflation, which is historically the formula for beating inflation - please refer to yesterday’s note for Effective Fed Funds Rate > Core PCE chart.Â
In this case, instead of chasing inflation, the Fed used a new mix of tools (which included help from the White House on gas prices) to manufacture a (somewhat) meeting in the middle of inflation and interest rates.
If we step back and take an objective look at the "point-in-time" data for Q4, 2022;
We have an economy that grew at a near 3% pace.
Inflation expectations remain tame.
The job market is tight.
Household net worth has dipped, but from record levels - it's still 23% higher than it was pre-pandemic.
Consumers are taking on more credit, but doing so with record high credit scores and historically strong balance sheets. With that, as you can see in the chart below, household debt service has returned to pre-pandemic levels (which were record lows at the time).
Bottom line: The fundamentals for consumption remain very solid, even with the introduction of an historically normal/average interest rate (for the first time in 15-years).
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