financetom
Economy
financetom
/
Economy
/
Weak spending, sticky prices, rising inflation expectations a bad mix for Fed
News World Market Environment Technology Personal Finance Politics Retail Business Economy Cryptocurrency Forex Stocks Market Commodities
Weak spending, sticky prices, rising inflation expectations a bad mix for Fed
Mar 28, 2025 10:18 AM

WASHINGTON (Reuters) -The U.S. Federal Reserve's seemingly locked-in path to a soft landing, already roiled by the arrival of the Trump administration, may be growing even more complicated as evidence of consumer caution about spending starts to align with new inflation risks and another jump in inflation expectations.

Consumer spending and inflation data for February accentuated the point, with spending near zero once adjusted for inflation and a key measure of inflation itself increasing.

"No matter how you want to slice it, it's shaping up to be a very weak quarter for real spending, and it may end up being the weakest quarter since the depths of the (pandemic) lockdowns," Inflation Insights President Omair Sharif wrote.

Goldman Sachs economists following the data's release cut their forecast for first-quarter growth nearly in half, to 0.6% from 1%.

For the Fed, it could point to the worst of both worlds emerging, with a potential slowdown in growth, prices moving higher, and firms perhaps contemplating more sticker shock as President Donald Trump's new taxes on imports are put in place.

In the background: Consumer expectations about inflation are grinding higher, while market-based prices for Treasury Inflation-Protected Securities show the outlook for inflation 10 years from now also rising.

Those figures are closely watched by the Fed, and are perhaps even more likely to make policymakers nervous about their grip on inflation and less likely to cut interest rates.

The latest University of Michigan consumer survey showed long-run inflation expectations topped 4% in March, double the Fed's target. While central bankers don't like to react to a single month's data, "long-run expectations have climbed sharply for three consecutive months and are now comparable to the peak readings from the post-pandemic inflationary episode," survey Director Joanne Hsu wrote. "They exhibit substantial uncertainty, particularly in light of frequent developments and changes with economic policy."

In the wake of the latest Personal Consumption Expenditures (PCE) data, analysts again tuned into the risk of "stagflation" - or inflation coupled with rising unemployment, a particular dilemma for the central bank.

Fed officials have begun noting the possible tension that may arise between their goals of keeping stable inflation and maximum employment. While comfortable waiting longer for inflation to fall while keeping their current policy rate stable, a steady rise in inflation expectations could shift the bias and put rate hikes back in play.

The Fed's main narrative until recently has been for a continued low unemployment rate and gradually falling inflation allowing for further cuts to a Fed policy rate currently held steady in a range between 4.25% and 4.5% - a generally "good news" outlook with cuts matching the drop in inflation.

"The PCE report for February makes grim reading," wrote Evercore ISI Vice Chair Krishna Guha. "Consumers - like businesses - are pulling back amid...uncertainty and an expected hit to real income from tariff-driven price increases. With core PCE (prices) 2.8% year-on-year even before the main effect of tariffs has hit, there is currently no scope for good news rate cuts."

Comments
Welcome to financetom comments! Please keep conversations courteous and on-topic. To fosterproductive and respectful conversations, you may see comments from our Community Managers.
Sign up to post
Sort by
Show More Comments
Related Articles >
Moody's pushes U.S. out of elite 'AAA' club citing rising debt
Moody's pushes U.S. out of elite 'AAA' club citing rising debt
May 26, 2025
(Reuters) -Moody's on Friday downgraded its credit rating of the United States by a notch to Aa1 from Aaa, citing rising debt and interest that are significantly higher than similarly rated sovereigns. Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs, Moody's said. Moody's was...
Trump pushes US Federal Reserve for rate cuts, criticizes Powell
Trump pushes US Federal Reserve for rate cuts, criticizes Powell
May 26, 2025
WASHINGTON (Reuters) -President Donald Trump on Saturday said in a social media post the U.S. Federal Reserve should cut rates sooner, rather than later. Trump also criticized the head of the central bank, Jerome Powell. THE CONSENSUS OF ALMOST EVERYBODY IS THAT, 'THE FED SHOULD CUT RATES SOONER, RATHER THAN LATER,' Trump said in the post. Too Late Powell, a...
Republicans split on US credit downgrade as party's tax bill lingers
Republicans split on US credit downgrade as party's tax bill lingers
May 26, 2025
WASHINGTON (Reuters) -Moody's downgrade of the U.S. sovereign credit rating has elicited mixed responses among Republicans in Congress, with some questioning the motive behind the change and others depicting it as a warning that lawmakers should heed as they wrestle with a sweeping tax and budget bill. The downgrade, announced on Friday evening, came only hours after a handful of...
Republicans spike Trump tax bill over spending worries, Moody's cuts US rating
Republicans spike Trump tax bill over spending worries, Moody's cuts US rating
May 26, 2025
WASHINGTON (Reuters) -Hardline Republicans in the U.S. House of Representatives blocked President Donald Trump's sweeping tax bill on Friday over concerns it did not do enough to cut spending hours before Moody's stripped the federal government of its once top-tier credit rating. Trump is pushing lawmakers in the Republican-controlled Congress to pass a bill extending the 2017 tax cuts that...
Copyright 2023-2026 - www.financetom.com All Rights Reserved