The Federal Reserve starts a two-day meeting on interest rates on Tuesday. But it’s facing significant headwinds that are out of its control, and could affect consumer behavior and the broader economy. This all complicates the Fed’s plan to raise interest rates just enough to cool inflation without causing a recession.
Just look at what consumers are facing right now: Gas prices averaging about $3.80 a gallon, according to AAA.
“There is a strong correlation between what’s going on at the pump and how people feel about the economy,” said Elizabeth Renter, a data analyst at NerdWallet.
If consumers feel like inflation is getting out of hand, Renter said they might spend less.
Other consumers are losing income. Picketing United Auto Workers get strike pay, but it’s usually less than their regular check. Plus, nearly a million federal workers could be furloughed without pay if there’s a government shutdown, according to Oxford Economics lead U.S. economist Nancy Vanden Houten.
“They will have to cut back on their spending,” she said.
Even more consumers will cut back next month, Houten added, when student loan repayments start up again after a pause during the pandemic. Falling spending could help the Fed cool the economy, since consumers drive about 70% of economic growth.
“They might think those are doing enough work to hold prices down by themselves — maybe they won’t have to raise rates again,” said Laura Veldkamp, who teaches economics at Columbia.
But the Fed hopes these headwinds don’t send us into a recession, said Veldkamp. That would jeopardize their dreams of a soft landing, where the economy slows just enough to conquer inflation without sputtering into a downturn.
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