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U.S. consumers felt more confident in May, Conference Board data showed Tuesday.
The main factor in this reading helps explain why other surveys show that Americans feel pessimistic about their economic prospects. And it reveals the backwards problem facing the Federal Reserve’s interest rate policy.
Which means high rates are helping the richest Americans who are driving the economy’s surprising growth and making it harder for the Fed to enact the rate cuts it wants.
The simplified theory behind raising and lowering interest rates is simple: lower rates help the economy grow faster and higher rates slow the economy. The last 18 months of US economic experience, however, make the second premise more difficult to accept at this point.
“In terms of income, those earning more than $100,000 expressed the greatest increase in confidence,” said Dana Peterson, chief economist at the Conference Board, in a statement. “Based on the six-month moving average, confidence continued to be highest among younger (under 35) and wealthier (earning more than $100,000) consumers.”
Financial commentator Josh Brown suggested that High rates could prolong the current bout of inflationgiven the benefits that higher rates confer on wealthier Americans.
Rich families right now can earn more than 4.5% in a high-yield savings account, see their stock portfolios rise 20% in a year, and are watching the value of their real estate holdings rise even further.
These people want nothing more than for rates to stay high.
Robust spending by wealthy consumers has also kept services inflation high, which keeps global inflation above the Fed’s 2% target.
All of this follows the idea of Jack Manley, from JPMorgan predicted last month that high rates could be the source of persistent inflation and that the Fed may have a better chance of crushing price pressures by cutting rates rather than keeping them high.
Given the amount of wealth concentrated in a handful of North American families and the distort income distribution in the USVirtually any change in monetary policy will be regressive, benefiting those who have more at the expense of those who have less.
But after rejecting the idea that low rates were “harming savers,” the Fed now finds itself faced with a situation in which high rates offer outsized benefits to savers at the expense of those without.
And the fact that Fed policy may be accomplishing exactly the opposite of what it intends explains why a recent Guardian-Harris poll, covered by Yahoo Finance’s Rick Newman, showed that 56% of respondents said the US economy USA is currently in recession, even when economic data clearly shows the opposite.
That survey also showed that nearly half of those surveyed – 49% – think the S&P 500 is down this year. In fact, the index is up more than 11% this year and was up 23% last year.
Furthermore, Tuesday’s reading on consumer confidence – although it posted a three-month high – was far from a clear assessment by Americans that things are getting better, from an economic perspective.
“The increase in confidence was likely fueled by lower gas prices and rising stock prices last month, but the underlying details of the survey reveal that consumer confidence could easily be [shaken] moving forward,” wrote Grace Zwemmer, US associate economist at Oxford Economics, in a note on Tuesday.
“The perceived likelihood of a recession increased in May, concerns about the current and future financial situation worsened, and home purchase plans remained at their lowest level since August 2012, reflecting the impact of higher interest rates.”
As Rick noted, one of Biden’s biggest problems as he seeks reelection is “convincing Americans that the economy is working for them, without talking down or appearing dismissive.”
Achieving this under normal circumstances is a difficult task for any politician. But when the expected outcome of a key part of the country’s economic policy is reversed, the task may be out of reach.
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