Motivating Consumer Behavior with Interest Rates: The Implications for the Job Market and the Labor Deficit in the Twelve Months of March
Oren Klachkin, financial market economist at Nationwide says, “That’s one of the reasons why the consumer remains fairly willing to go out to restaurants and get to the mall.” “They’re not feeling that pain of the high-rate environment. Of course, that means that inflation is not going to come down as fast. But that’s kind of the tradeoff that we’re in right now.”
Federal Reserve chairman Jerome Powell has said the central bank can afford to be patient in battling inflation, since high interest rates have so far not hurt the job market. Employers added 276,000 jobs per month in the month of January, February and March, which is up from 212,000 jobs in the three previous months. The April jobs numbers will be released on Friday.
Employers’ cost for labor rose 4.2% in the 12 months ending in March, according to figures released Monday by the Labor Department. While rising wages could put more upward pressure on prices, they’re also a big reason that people keep spending money.
Interest Rate Sensitive Consumer Prices and Implications for the Fed’s Rate-Settling Committee on Inflationary Policy
What’s more, tens of millions of Americans are largely insulated from the Fed’s rate hikes, because they locked in low, fixed-rate mortgages and don’t carry a lot of credit card debt.
Goolsbee said the interest rates had one tool. “If you ask the question, ‘How interest rate-sensitive are elective plastic surgeries?’ I have no idea. It’s not simple to match our tools to the moment.
While the prices of many goods such as cars and furniture have fallen, the prices of services such as restaurant meals and car repair continue to climb. It’s more difficult for the Fed to bring prices under control when interest rates are higher.
“You typically take out a loan for when you make a big goods purchase, like a car, certainly a house,” Tedeschi says. “Services spending is usually less sensitive to interest rates.”
The job market remains strong, with unemployment under 4%. And while the economy grew more slowly in the first three months of the year than forecasters expected, consumer spending is still robust.
“Inflation has been lower over the past year, but it remains high,” the Fed’s rate-setting committee said. There has been a lack of further progress toward the Committee’s 2% inflation objective.
Inflation numbers released by the Commerce Department last week showed prices climbing 2.7% during the 12 months ending in March — the biggest annual increase in four months. Former White House economist Ernie Tedeschi says he’s not worried that inflation is picking up steam, but he agrees with Goolsbee that it’s no longer cooling.
Inflation fell sharply in the second half of last year, leading some to believe the Fed would soon be ready to take its foot off the brake and start cutting interest rates. But that progress on prices has since slowed, and Fed watchers now expect the Fed to keep its benchmark interest rate at a 23-year high, at least through the summer.
What is the First Rule? When is the Fed President going to office? A Case Study with Consumer Prices and the Fed’s Inflationary Measures
If you want to join a kennel of data dogs, what is the first rule? Goolsbee said recently that Chicago Fed president. If you are unclear, stop walking and start sniffing. We need to do more sniffing with the numbers.
As they try to sift through sometimes contradictory economic signals, Fed policymakers are likely to stick with their go-slow approach, leaving interest rates unchanged this week — and possibly for months to come.
The Federal Reserve has promised to be “data driven” in deciding when to cut interest rates. The central bank is following some recent economic data.
The consumer price index for the month of March was 2.7% higher than it was a year earlier, according to the Commerce Department’s inflation yardstick.