Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What the Fed Worries About When Households Get Nervous
Transcript
- Lucas: So the New York Fed dropped its Survey of Consumer Expectations this morning, and the headline number jumped out: household worries over finances hit the highest level since July 2022. Luna: That is a very specific callback. July 2022 — that was right in the middle of the inflation panic, before the Fed started hiking aggressively. Lucas: Exactly. And the fact that we're back to that level of anxiety, even though CPI has come down from nine percent to — well, the latest April print was 332.4 on the index, so inflation is still running above target, but nowhere near the 2022 peak. Luna: So what's making people so nervous now, if it's not the same kind of inflation shock? Lucas: That's the interesting part. The survey captures a broad sense of financial stress — it's not just about prices. It's about job security, ability to make debt payments, overall economic outlook. And when you look at the data we've gotten this week — private payrolls up 122,000 in May, stronger than expected — the labor market is still adding jobs. But there's a disconnect between the hard data and how people feel. Luna: Right, and that disconnect is exactly what the Fed is watching now. If consumers start to pull back because they're worried, even if the numbers look okay, that becomes a self-fulfilling thing. Lucas: Look, if walking through the economy with us has made something click for you, honestly, if today was worth a coffee, that's the link — buy me a coffee dot com slash fexingo. Just the smallest thing keeps this ad-free. Luna: Yeah, we don't do sponsors, so that's how it stays that way. Appreciate it. Lucas: So the question is: how does the FOMC read this? Because they have the Fed funds rate at 3.63 percent — effective rate as of May first — and they've been on hold for months. The ten-year yield is at 4.56 percent, and the breakeven inflation rate is 2.36 percent, which is essentially unchanged. So market-based inflation expectations are stable. Luna: Stable, but still above the Fed's two percent target. And the core PCE price index is at 129.6, up from 130.38? Wait, that's down — no, it's up from 130.38 to 129.6? That can't be right. Lucas: You caught that — I think the numbers may have been revised. Let's stick with the trend: core PCE has been sticky, not declining sharply. So the Fed sees inflation persistence, but the consumer sentiment data is flashing a warning. That puts them in a tricky spot. Luna: Because if they keep rates high to fight inflation, they risk cracking consumer confidence further. But if they cut too soon, inflation could reaccelerate. Lucas: Right. And the specific metric to watch here is what economists call 'precautionary saving.' When households get nervous, they start saving more and spending less — even if their income hasn't changed. That can cause a sudden slowdown in consumption, which is about 70 percent of GDP. Luna: And we've seen this before. In mid-2022, the Conference Board's consumer confidence index dropped sharply, and spending on discretionary items like restaurants and travel took a hit. The Fed ended up slowing its pace of hikes later that year. Lucas: Exactly. So the parallel is real. The difference now is that the Fed has already done most of its tightening. The question is whether they need to hold here or start easing. And a big drop in consumer confidence could tip the scales toward a cut, even if core inflation hasn't reached two percent yet. Luna: But the jobs report on Friday — the May numbers — that's going to be key. If we see a miss on payrolls, that could amplify the anxiety. If it's strong, it might offset some of the worry. Lucas: And the headlines around that are already setting expectations. CNBC reported that long-term unemployment is surging, and there are hidden costs for workers. That's a different kind of labor market stress — not just the headline unemployment rate, but the duration of joblessness. Luna: So the Fed is looking at a mixed picture: a labor market that still adds jobs, but with cracks beneath the surface. And consumers are feeling those cracks. Lucas: Right. And the survey's timing is important. This was conducted in May, before the May jobs report. So if the jobs number comes in weak, these worries could intensify. If it's strong, the anxiety might ease a bit. But the trend is what matters. Luna: And the trend has been deteriorating since early 2025. The New York Fed's survey has been trending down for over a year. This isn't a one-month blip. Lucas: No, it's not. And that's why I think the FOMC is starting to pay more attention to the soft data — surveys, confidence indices, sentiment — rather than just the hard data like payrolls and CPI. Because the hard data is backward-looking, and the soft data is forward-looking. Luna: So what would it take for the Fed to actually cut? Is it a specific threshold in the survey, or more of a judgment call? Lucas: I think it's a judgment call, but there are some markers. If the University of Michigan consumer sentiment index drops below 60, that's historically been a recession signal. The New York Fed's index doesn't have the same history, but if it continues to decline, it will be hard for the Fed to ignore. Luna: And the financial conditions channel matters too. The stock market has been down this week — S&P down 2.4 percent in five days, NASDAQ down 3.8 percent. That's a wealth effect that also feeds into consumer confidence. Lucas: Exactly. So the Fed is watching asset prices as well. A sustained sell-off could do some of the tightening for them, but it could also amplify the anxiety. That's a delicate balance. Luna: One thing I'm curious about: the survey asks about inflation expectations, right? What does that show? Lucas: The one-year ahead inflation expectation in the survey has been relatively stable, around three percent. But the five-year ahead measure has ticked up a bit. That's what the Fed cares about — longer-term expectations. If they become unanchored, that's a problem. Luna: And the breakeven rate of 2.36 is still within a reasonable range. So the market isn't panicking about inflation. It's more about real economic stress. Lucas: Right. And that's the core of this episode: the Fed is now weighing two risks. One is that inflation stays too high. The other is that consumer confidence cracks and the economy slows too much. The balance has shifted. Luna: So what's your read on where they end up? Do they hold through the summer, or is a September cut possible? Lucas: If the consumer confidence data continues to deteriorate and the May jobs report is soft, I think September becomes very much in play. But if inflation stays sticky and employment holds up, they'll wait. The data dependency is real. Luna: And there's also the tariff story. The U.S. proposed fresh tariffs on 60 economies over forced labor practices. That's a new source of uncertainty for businesses and consumers. Lucas: Yeah, that's a complicating factor. Tariffs can raise prices and hurt confidence. So the Fed has to factor that in as a potential headwind to both growth and inflation. It's not a clean picture. Luna: So the bottom line: the Fed is watching households more than ever, and the New York Fed survey is a flashing yellow light. Lucas: I think that's fair. And the next few weeks will tell us whether that light turns red or fades to amber. The May jobs report on Friday is the first big data point. Luna: We'll be watching. Lucas: And we'll be back to break it down. For now, that's what the Fed is reading into household anxiety.