Consumer Data Before Tomorrow’s FOMC Meeting
The Conference Board’s Consumer Confidence index jumped to 135.7, its highest reading since October of 2018 and close to highs set in 2000. Core PCE firmed to .248 on a month over month basis in June, rounding down to 0.2%. Further, inflation undershot the Fed’s 2% target, which is the primary reason the market is looking for a 25 basis point cut tomorrow. The slightly firmer PCE reading is another factor that makes a 50 bp cut less likely.
As many are asking, with data like this, why is the Fed cutting rates at all, and further, as a small but growing number ask, why not a hike?
The reasons are plentiful and go beyond the scope of our own shores. First, consumer confidence is a gauge of what consumers will spend, not a gauge of markets or investor confidence. The larger bellwethers for the U.S. economy are mixed to down, especially in manufacturing. And despite all the bullish consumer attitudes, major purchases like cars and houses are down.
A Hedge Against Global Contraction
Next, the current iteration of the Fed is much more global in scope. Fed Chairman Jerome Powell is focused on how the U.S. economy is inextricably linked to the health of the global economy, much more so than his predecessor Janet Yellen, for instance. The market has labeled the presumptive cut tomorrow an “insurance cut,” meaning that it doesn’t have so much to do with the current health of the U.S. economy as with the downward trend of the global economy. The cut is seen as a way to prevent the global downturn from bleeding into the U.S. economy.
Which raises the question: is 25 basis points enough to spur the U.S. economy? As far as the Fed fulfilling its dual mandate of controlling inflation and promoting employment, a 25 bp cut should assist in moving inflation higher, but is it enough to stave off what looks increasingly like global contraction? That is the question almost certainly on the minds of Fed board heading into tomorrow’s FOMC meeting.