Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What the Fed Sees in the New York Fed Household Survey
Transcript
- Lucas: So the New York Fed dropped its Survey of Consumer Expectations yesterday — June eighth — and the headline number jumped out: household financial worries hit their highest level since July 2022. That's right at the peak of the last inflation scare cycle. Luna: And what's interesting is the labor market is still objectively strong. We've got the ADP report last week showing 122,000 private payrolls, the unemployment rate is still historically low. So what gives? Lucas: Right, that's the puzzle the Fed is staring at. The survey's index of household financial stress — it's a composite of things like how likely people think they are to miss a debt payment, their expectations for earnings growth, and their overall perception of credit access. And all three legs are bending. Luna: Let's talk about that debt payment number because it shocked me. The average perceived probability of missing a minimum debt payment over the next three months rose to 11.5 percent. That's the highest since April 2020, during the pandemic lockdowns. Lucas: And that's an average across all households, but it's much higher for people under forty and for those with incomes below fifty thousand. The Fed watches the distribution, not just the mean. Because if a material chunk of the population is starting to feel like they're one car repair away from missing a credit card payment, that changes the spending calculus. Luna: And consumer spending is still the engine of this economy — it's about two-thirds of GDP. So if people start pulling back because they're worried about their own finances, that could slow things more than the official employment data suggests. Lucas: Exactly. The Fed's dual mandate is maximum employment and price stability. On employment, the headline numbers are fine. But the New York Fed survey is a leading indicator of stress that might not show up in the unemployment rate for another six months. And on the price stability side, look at what happened to inflation expectations in this same survey. Luna: Year-ahead inflation expectations actually ticked down to 3.0 percent from 3.2 percent. And the five-year-ahead measure stayed at 2.8 percent. So people still think inflation is going to be above the Fed's two percent target, but they're not panicking about it getting worse. Lucas: That's the sweet spot the Fed wants — anchored but not complacent. The worry would be if inflation expectations started drifting up again, because then you'd get a wage-price spiral dynamic. But right now, the bigger shift is on the real economy side: people are getting more pessimistic about their own financial situation. Luna: And that pessimism shows up in the earnings growth expectations. The survey's median one-year-ahead expected earnings growth fell to 2.8 percent from 3.0 percent. That's the lowest since September 2021. Lucas: So workers are telling you they don't expect big raises going forward. That's consistent with a labor market that's cooling, even if the overall jobs numbers still look okay. And if wage growth slows, that helps the Fed on inflation — but it also means consumers have less cushion if prices stay sticky. Luna: And then there's the credit access piece. The survey's perceived probability of finding a job if you lost your current one — that's called the job-finding probability — it dropped to 54.7 percent. That's the lowest since April 2021. Lucas: People are getting more nervous about their employment prospects even while the economy is still adding jobs. That's the kind of disconnect that makes the Fed cautious. Because if households start building precautionary savings — pulling back on spending to pad their emergency funds — that's a headwind to growth that the Fed has to factor in. Luna: And we haven't even talked about the housing market part of the survey. Home price growth expectations stayed at 3.0 percent year-ahead. That's down from the peak of 5.1 percent in 2022 but still above the pre-pandemic average. Lucas: Yeah, housing is its own beast because it's both a cost and an asset. If people think home prices will keep rising, that's good for homeowner wealth — but it also keeps rents high, which feeds into core services inflation. The Fed's preferred measure, core PCE, is still running at 2.8 percent year-over-year as of April. That's above target. Luna: So combine sticky core inflation with rising household financial stress... what does that tell us about the next FOMC meeting? They're meeting next week, June 16 and 17. Lucas: The fed funds rate is at 3.63 percent effective. The market is pricing in almost no chance of a cut. And I think the Fed will hold steady. The data since the last meeting — the jobs report, the inflation numbers — they don't give them enough confidence that inflation is sustainably headed to two percent. But the household survey data should make them wary of sounding too hawkish. Luna: Because if they signal that more hikes could come, that might further spook consumers who are already feeling squeezed. Lucas: Exactly. The Fed's communication is a tool in itself. Chair Powell will likely emphasize that they are data dependent and watching the real economy closely. The household survey is exactly the kind of soft data that can shift the narrative even if the hard data hasn't turned yet. Luna: It reminds me of 2019, when the Fed started cutting rates even though the economy was still growing, because they saw risks from trade uncertainty and weak business investment. They were being preemptive. Lucas: Right, and the comparison is apt. In 2019, the inversion of the yield curve was screaming recession, but the actual economy held up for another year. The Fed cut three times that year as insurance. Now, we don't have a yield curve inversion screaming — in fact, the ten-year is at 4.55 percent, the two-year at 4.28 percent, so it's actually positively sloped again. But we have this consumer stress signal flashing yellow. Luna: So maybe the Fed doesn't need to cut now, but they need to leave the door open for cuts later this year if the data softens further. Lucas: That's exactly the middle path. Hold rates steady, acknowledge that progress on inflation has been slow, but also note that they are monitoring household financial conditions. And if the New York Fed survey continues to deteriorate, that could tip the balance toward a cut in the second half of the year. Luna: And for listeners who want to dig into the raw numbers, the New York Fed publishes the full microdata on their website. It's fascinating to see the cross-tabs by age, income, and region. Lucas: Absolutely. And speaking of digging in — one of the things that makes this show possible is that it's supported entirely by listeners, not advertisers. So if you found today's breakdown useful, and you want to keep it ad-free, there's a simple way to help. Luna: Yeah, if this episode was worth a coffee to you, you can support the show at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. It really does make a difference. Lucas: And it keeps us independent, so we can keep bringing you these deep dives without any corporate sponsors. Now back to the Fed — one thing I want to add about the survey is the regional variation. The New York Fed's survey covers the whole country, but the stress is concentrated in certain areas. Luna: Which regions are most affected? Lucas: The South and the Midwest showed the biggest increases in debt payment difficulty. That tracks with where we've seen the largest increases in auto loan and credit card delinquencies in the quarterly data from the New York Fed's Consumer Credit Panel. So it's not just a survey artifact — it's showing up in actual payment behavior. Luna: And those are also regions where the housing cost burden is high relative to income. So you've got a triple squeeze: higher rents, higher food prices, and higher interest costs on variable-rate debt. Lucas: Exactly. And that's why the Fed can't just look at the national averages. The distribution matters. If a significant share of households is under strain, that creates a vulnerability in the economy that could amplify any shock. Luna: So the takeaway for me is that the Fed is in a holding pattern, but the household survey is a reason for them to tilt dovish if the data continues to soften. Lucas: I think that's the right read. They're not going to cut next week. But the minutes from the May meeting already showed some participants expressing concern about consumer spending. This survey gives them more evidence to lean on if they need to justify a cut later. Luna: And at the same time, the inflation numbers aren't giving them an all-clear. So they're stuck between a rock and a hard place. Lucas: That's the central banker's dilemma right now. The classic approach is to wait for the data to resolve the uncertainty. But sometimes the data itself is contradictory — strong jobs, weak consumer sentiment. You have to pick which signal you trust more. Luna: And historically, the consumer sentiment numbers have been more predictive of turning points than the lagging labor market data. Lucas: That's been the case in the last three recessions. Consumer confidence peaked before the economy did. So the Fed is probably giving more weight to this survey than they would say publicly. Luna: Thanks, Lucas. Good conversation. Lucas: Thanks, Luna. For the listeners, we'll be back next week with a full breakdown of the FOMC decision.