The Federal Reserve will have to take into consideration increased consumer spending in their September 19-20th meeting.
Fresh economic data released on Thursday reveals a positive outlook for the US economy as consumer spending rises more than expected. This data will be crucial for the Federal Reserve to decide future monetary policies in their upcoming September meeting.
Consumer spending increased in the United States by 0.8% in August, exceeding market expectations which had put it at 0.7%. Real consumer spending (the same measure adjusted for inflation) increased by 0.4%, the longest jump since January.
Consumer spending amounts to two-thirds of the US economic activity, signaling a GDP increase for the third quarter as well. Analysts and markets are confident the US economy will continue growing until the end of the year, avoiding a recession. In the second quarter (April-June), the US economy defied expectations growing 2.1% instead of the 1.8% predicted.
Spending mostly increased on short-life span goods including groceries, pharmaceuticals, and recreational items.
Personal Consumption Expenditure (PCE), a useful measure to track inflation, rose by 0.2% compared to the previous month. Year-on-year, the PCE index increased by 3.3%, mostly driven by food and energy prices.
Markets welcomed the positive news. After the bell, the S&P 500 rose by 0.33%, the Nasdaq Composite by 0.58% and the Dow Jones by 0.32%.
“Demand is on fire and inflation is cooling," said chief economist at FWDBONDS Christopher Rupkey, "How long inflation can continue to come down with consumer spending this strong is an open question.”
The Fed’s upcoming meeting
Uncertainty still surrounds the Federal Reserve regarding their upcoming September 19-20th meeting. Last Friday, Fed chairman Jerome Powell said a new interest rate hike was likely coming, though they were still waiting for new data.
The Federal Reserve has steadily increased interest rates since March 2022 to battle rampant inflation. June 2023 was the only exception with a temporary pause giving respite to banks and corporations. So far, interest rates have been raised to 5.5%.
Following improved consumer spending and better-than-expected unemployment data, the only piece missing is the actual inflationary data for August. In July, headline inflation jumped 0.2% monthly to 3.2% year-on-year, still far from the 2% Fed target but in a good position to reach it.
Already on Thursday, however, Atlanta Federal Reserve chairman Raphael Bostic argued that interest rates were at the right level and need not be increased.
In no case will a rate cut be announced in September. At his Jackson Hole speech, Powell was adamant that interest rates will remain high until inflation is safely coming down. That point, given July’s small inflationary jump, has not been reached yet.