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American consumers felt more confident in May, data from the Conference Board showed on Tuesday.
The main driver behind this reading helps explain why other surveys show that Americans are gloomy about their economic prospects. And it reveals the underlying problem facing the Federal Reserve’s interest rate policy.
That is, high interest rates help the wealthiest Americans, driving the economy’s surprising growth and making it difficult for the Fed to make the rate cuts it wants.
The simplified theory behind raising and lowering interest rates is simple: lower interest rates help the economy grow faster, and higher interest rates slow the economy down. However, the economic experiences of the past eighteen months in the US make the second premise more difficult to accept at this time.
“In terms of income, those earning more than $100,000 showed the largest increases in confidence,” Dana Peterson, chief economist at the Conference Board, said in a news release. “On a six-month rolling average basis, confidence remained highest among the youngest (under 35) and wealthiest (earning more than $100,000) consumers.”
Financial commentator Josh Brown has suggested that high interest rates could extend the current inflationary period, given the benefits that higher interest rates bring to the wealthiest Americans.
Wealthy households can currently earn more than 4.5% on a high-yield savings account, see their stock portfolios increase by 20% in a year and see the value of their real estate assets rise.
These people want nothing more than for rates to remain high.
Robust spending by wealthy consumers has also kept inflation in the services sector high, keeping headline inflation above the Fed’s 2% target.
This all fits in with the idea put forward by JPMorgan’s Jack Manley last month that high interest rates could be the answer source of persistent inflation and that the Fed may have a better chance of suppressing price pressures by cutting rates rather than keeping them high.
Given the amount of wealth concentrated among a handful of US households and the skewed income distribution in the US, virtually any change in monetary policy will be regressive, benefiting those with more at the expense of those with less.
But after pushing back against the view that low rates would “hurt savers,” the Fed now faces a predicament in which high rates provide enormous benefits to savers at the expense of savers without savings.
And the fact that Fed policy may be achieving exactly the opposite of what it aims to do explains why a recent Guardian-Harris poll, conducted by Yahoo Finance’s Rick Newman, found that 56% of respondents said the U.S. economy is currently in a recession, even though economic data clearly shows the opposite.
That poll also showed that almost half of respondents – 49% – think the S&P 500 has fallen this year. The index has even risen more than 11% this year and 23% last year.
Moreover, Tuesday’s consumer sentiment — while registering a three-month high — was far from a clear assessment from Americans that things are looking up economically.
‘The rise in confidence was likely fueled by last month’s easing in gas prices and rising stock prices, but the underlying details of the survey show that consumer confidence can easily be shaken. [shaken] We are moving forward,” Grace Zwemmer, U.S. economist at Oxford Economics, wrote in a note on Tuesday.
“The perceived likelihood of a recession increased in May, concerns about current and future financial conditions increased, and residential purchase plans remained at their lowest levels 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 works for them without talking down or sounding dismissive.”
Achieving this under normal circumstances is a tall order for any politician. But when the expected outcome of a fundamental part of the country’s economic policy is turned upside down, the task may be out of reach.
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