Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What the Fed Makes of the Household Financial Anxiety Spike
Transcript
- Lucas: The New York Fed's Survey of Consumer Expectations came out last Monday, and one number jumped out at me: the share of households that expect to be worse off financially a year from now hit its highest level since July 2022. Luna: That is a pretty stark shift. And this isn't just a generic 'are you worried about the economy' question — it's about their own household finances. Lucas: Exactly. The survey asks about personal financial situations, not just the macro outlook. And the reading now is roughly on par with what we saw during the peak inflation scare in mid-2022, when headline CPI was running above 9%. Luna: So households are feeling real pain even though inflation has come down. Core PCE is at 2.8% — still above the Fed's target, but way off those 2022 highs. What's driving that anxiety? Lucas: A few things. First, the cumulative price level is still elevated — prices haven't gone down, they've just stopped rising as fast. So households are still adjusting to the fact that their purchasing power took a big hit over the past few years. Luna: Right, that 'level vs. rate' gap is real. The price index is up over 20% from early 2020. Even if inflation is moderating, you don't get that 20% back. Lucas: And then there's the credit side. Another part of the same survey showed a sharp increase in the share of households reporting it's harder to get credit than a year ago. That number is now higher than it was at any point during the 2020 recession. Luna: That's striking. Because the economy isn't in a recession — GDP is still growing, albeit slowly. But people feel like the door to borrowing is closing. And if you're a household that relies on credit to smooth spending, that's a real constraint. Lucas: If today's show helped you understand how the Fed reads these household anxiety signals, and if that insight was worth the price of a coffee to you, there's a simple way to support the show and keep it ad-free. It's buy me a coffee dot com slash fexingo. Luna: Honestly, that kind of listener support is what lets us keep digging into these data points without worrying about sponsors. It's a small thing that makes a big difference for us. Lucas: So back to those credit conditions. We've got the Senior Loan Officer Opinion Survey coming out later this month, and if that confirms the tightening that households are reporting, the Fed's job gets more complicated. They've held rates steady since the last cut in March, and the effective fed funds rate is sitting at 3.63%. Luna: And the market is pricing in a cut at the July meeting, but not this week's FOMC. So the question is: does the Fed update its forward guidance based on what consumers are saying? Lucas: I think they pay more attention to this kind of sentiment data than they let on. Because consumer spending is two-thirds of GDP. If households pull back because they feel financially squeezed and can't access credit, that shows up in the real economy before the official data catches up. Luna: And we've already seen some signs of a slowdown. The ADP jobs report last Wednesday showed 122,000 private payrolls added in May — that's stronger than expected, but the trend has been softening. The three-month average is about 140,000 compared to over 200,000 a year ago. Lucas: So the labor market is still adding jobs, but at a slower pace. And the New York Fed survey suggests households are bracing for that slowdown to hit their own finances. The share expecting their income to be lower a year from now also ticked up. Luna: That's the kind of expectation that can become self-fulfilling. If people think they'll earn less, they spend less. And if they spend less, businesses hire less. The Fed has to watch that loop. Lucas: Right. And one more data point from the survey: inflation expectations at the one-year horizon edged down to 3.0% from 3.1%, but the five-year median held at 2.8%. So longer-term expectations remain slightly above the Fed's 2% target. Luna: That's the sticky part. The Fed can't declare victory on inflation if long-term expectations drift above target. But if household anxiety is weighing on spending, that could help cool demand and bring inflation down — a delicate balance. Lucas: It's a tricky signal for the FOMC. On one hand, the economy is still growing, the labor market is still adding jobs, and core inflation is gradually coming down. On the other hand, households are more worried than they've been in years, and credit conditions are tightening. Luna: So where does that leave the Fed? Do they lean into the anxiety and cut preemptively? Or do they hold firm because inflation isn't all the way down? Lucas: I think they hold firm for now. The dot plot from the March meeting showed two cuts priced in for the year, but the data since then hasn't been weak enough to force their hand. The CPI print on Wednesday will be key — if it shows a continued moderation, that gives them cover to cut later. Luna: And if it comes in hot? Then the anxiety spike might actually be welcome from the Fed's perspective — it could mean demand is cooling, which helps them fight inflation without having to raise rates further. Lucas: Exactly. That's the uncomfortable truth: a more anxious consumer is a less spendy consumer, and that's what the Fed needs right now to get inflation back to 2% without causing a recession. But it's a fine line. Luna: And the May jobs report on Friday will give another data point. If the unemployment rate ticks up from the current 3.9%, that could amplify the household anxiety and put more pressure on the Fed to act. Lucas: So we've got CPI on Wednesday, the FOMC decision on Thursday, and the jobs report on Friday — a packed week. This New York Fed survey is the prelude to all of that, setting the tone. Luna: It's interesting that the survey came out before all those data points. It's almost like a preview of the narrative we'll hear in the coming days. Lucas: One thing I'll be watching is whether the Fed's statement on Thursday acknowledges the household anxiety at all. They usually talk about labor market conditions and inflation expectations, but they rarely cite survey sentiment directly. Luna: If they do, it would be a signal that they're paying attention to the 'vibecession' — even if the hard data is still okay, the soft data is deteriorating. Lucas: The 10-year breakeven inflation rate is at 2.33%, which is down from 2.35% last week. That suggests bond markets are also seeing some moderation in inflation expectations. So the sentiment data and the market data are aligning. Luna: But the 10-year Treasury yield itself is at 4.53%, up a bit from last week. So the real yield — the nominal yield minus breakevens — is actually rising. That's a tightening of financial conditions even without the Fed moving. Lucas: And that's exactly the channel the Fed is hoping works: higher real rates restrain demand without the Fed having to hike. If households are feeling that pinch, the policy is working — even if it's painful. Luna: The challenge is that this pain isn't evenly distributed. Lower-income households are more likely to report difficulty accessing credit and more likely to be worse off a year from now. That could lead to a political economy problem for the Fed. Lucas: Absolutely. The Fed is supposed to be apolitical, but when your policies are causing real distress for a significant portion of the population, the pressure to ease mounts. We've seen that in past cycles. Luna: So far, Chair Powell has been pretty consistent: we'll follow the data. And the data is mixed. The household survey is one piece, but the actual spending and employment numbers still look okay. Lucas: I think the key question for this FOMC is whether they revise their economic projections. The March median GDP forecast was 2.1% for 2026. If they downgrade that, it signals they're worried about the sentiment spillover. Luna: And the inflation forecast — they had core PCE at 2.6% for year-end. If that comes down, it's easier to cut. If it stays, they're stuck. Lucas: Right. So the New York Fed survey is a leading indicator, not a lagging one. It tells us where households think we're headed. And right now, they're not optimistic. Luna: One more thing: the survey also showed that the share of households expecting stock prices to be higher a year from now dropped. That's interesting because this show is about the Fed, but the stock market is a key transmission mechanism. Lucas: It is. The wealth effect works in both directions. If households expect stocks to fall, they may cut spending, especially at the high end. The S&P 500 is at 7,387 as of this morning, down from recent highs. Not a crash, but a plateau. Luna: And the Russell 2000, which tracks small caps, is down 1.3% over five days. That's where the domestic, consumer-sensitive companies live. That index is a better read on Main Street sentiment than the S&P. Lucas: Good point. So the small-cap weakness lines up with the household anxiety. Investors are pricing in slower growth, tighter credit, and more cautious consumers. Luna: I think the bottom line is that the Fed is in a wait and see mode, but the data from the New York Fed survey is a yellow flag. It doesn't force a cut, but it warns that the soft underbelly of the economy is getting softer. Lucas: And that's exactly the kind of nuanced signal we try to highlight on this show. The Fed doesn't react to one data point, but when multiple indicators start pointing in the same direction — household anxiety, weaker small-cap performance, falling breakevens — it starts to form a pattern. Luna: We'll see if that pattern shows up in the CPI and jobs data later this week. If so, the July cut becomes much more likely. Lucas: And we'll be here to walk through it all as it comes in. For now, the message is: the Fed is watching what households are feeling, and those feelings are starting to matter.