Treasury Secretary Janet Yellen believes that the Federal Reserve’s high interest-rate policy will effectively bring inflation down to the central bank’s target of 2 percent without causing a recession. In an interview with Yahoo Finance, Yellen stated that she expects inflation to fall to 2 percent by next year and sees no grounds for a recession. She emphasized that the economy is strong, unemployment is low, and there is no basis for a recession in the outlook.
Yellen did not provide a specific timeline for rate cuts, as the Federal Reserve wants to see inflation on a stable downward trend before making any adjustments. The Fed has maintained a benchmark interest rate range of 5.25-5.50 percent since July of last year in an effort to lower inflation. The latest data shows that the core Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge, dropped to 2.8 percent in April, the lowest level since March 2021.
As inflation has been decreasing in recent months, market expectations for rate cuts have increased. The CME Fed Watch Tool indicates that investors are pricing in two 0.25 percentage-point rate cuts this year, with one expected in September and another in December. This suggests that interest rates will be within a range of 4.75-5.0 percent by the end of the year.
However, several Fed officials have expressed the need for more confidence in the downward trend of inflation before considering rate cuts. Some officials, including Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, and Federal Reserve Governor Michelle Bowman, have even stated that they would consider raising rates if incoming data show an increase in inflation.
There have been warning signs for the economy and consumer spending in recent months. The Conference Board’s Leading Economic Index (LEI), which consists of 10 individual economic indicators, declined by 0.5 percent in May. This decline was driven by a drop in new orders, weak consumer sentiment about future business conditions, and lower building permits. Justina Zabinska-La Monica, senior manager of business cycle indicators at The Conference Board, noted that while the index’s six-month growth rate remained negative, it does not currently signal a recession. However, The Conference Board projects that real GDP growth will slow to under 1 percent over the second and third quarters of 2024 due to elevated inflation and high interest rates affecting consumer spending.
Retail sales, a proxy for consumer spending, have also shown weak growth. In May, retail sales rose by only 0.1 percent after falling 0.2 percent in April. Economist David Rosenberg pointed out that the pace of retail sales is at its weakest since the Great Recession, and there are signs of fatigue in experience spending and receding demand for air travel.
Reports from consulting companies McKinsey and Deloitte further support the concerns about consumer spending. McKinsey’s report revealed a decrease in consumer optimism in the second quarter of 2024, with consumers planning to reduce spending on discretionary items. Deloitte’s report showed that while the financial well-being index of consumers held steady, future spending intentions indicated a focus on saving rather than overspending.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, also expressed concerns about the economy. He highlighted rising unemployment claims, increases in debt delinquency rates, and signs of cooling in consumer spending as warning signs. Goolsbee suggested that it is worth considering where interest rates currently stand in relation to these factors.
Unemployment claims have been trending upward in recent months, indicating potential job market challenges. Debt distress has also become a concern, with a report from the Federal Reserve Bank of Philadelphia showing that credit card accounts with past due debt payments reached all-time highs in the fourth quarter of 2023. Additionally, consumer expectations from the Federal Reserve Bank of New York revealed increased concern about job security and the ability to make minimum debt payments.
In conclusion, while Treasury Secretary Janet Yellen believes that the Federal Reserve’s high interest-rate policy will bring inflation down without causing a recession, there are warning signs and concerns about the economy and consumer spending. Market expectations for rate cuts have increased, but Fed officials emphasize the need for more confidence in the downward trend of inflation. The decline in the Leading Economic Index and weak retail sales indicate potential challenges for consumer spending. Reports from McKinsey and Deloitte further highlight consumer spending concerns. Additionally, rising unemployment claims and debt delinquency rates raise questions about the state of the economy. These factors suggest that policymakers should carefully consider the current restrictiveness of interest rates.
