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U.S. consumers became more confident in May, according to data released Tuesday by the Conference Board.
The key drivers of this figure help explain why other surveys have shown Americans to be more pessimistic about the economic outlook — and they also highlight the regressive problems facing the Federal Reserve’s interest rate policy.
In other words, high interest rates help the wealthiest Americans who are driving the economy’s phenomenal growth and make it harder for the Fed to implement the interest rate cuts it wants to make.
The simplistic theory behind raising and lowering interest rates is straightforward: lower interest rates lead to faster economic growth and higher interest rates lead to slower growth. But the experience of the U.S. economy over the past 18 months makes the second premise difficult to accept at this point.
“In terms of income, confidence increased the most among those earning more than $100,000,” Dana Peterson, chief economist at the Conference Board, said in a statement. “On a six-month rolling basis, confidence remained highest among the youngest (under 35) and wealthiest consumers (earning more than $100,000).”
Financial commentator Josh Brown suggests High interest rates could prolong the current inflationThis comes as no surprise, given the benefits that high tax rates provide to the wealthiest Americans.
Wealthy households today can earn 4.5% or more on high-yield savings accounts, their stock portfolios can rise 20% in a year, and they can see their real estate holdings soar in value.
These people just want interest rates to stay high.
Strong spending by wealthy consumers has also kept services inflation high, pushing overall inflation above the Fed’s 2% target.
All of this is in line with the thinking of JP Morgan’s Jack Manley. Scheduled last month High interest rates sauce Inflation may persist, and the Fed may be more likely to tame upward price pressures by lowering interest rates rather than keeping them higher.
The concentration of wealth in America in the hands of a few households Income distribution in the United States is skewedAlmost any change in monetary policy will be regressive, favoring the rich at the expense of the poor.
But after refuting the notion that low interest rates are “harming savers,” the Fed now finds itself in the predicament that high interest rates greatly benefit savers at the expense of non-savers.
And the fact that the Fed’s policies may be having the exact opposite effect to its intentions explains why a recent Guardian-Harris Poll, as covered by Yahoo Finance’s Rick Newman, found that 56% of respondents said the U.S. economy is currently in a recession, despite economic data clearly indicating the opposite.
The survey also found that nearly half of respondents (49%) believe the S&P 500 will fall this year. The index is actually up more than 11% this year and up 23% last year.
And while consumer confidence hit a three-month high on Tuesday, it was far from a clear indication that Americans are seeing things improve economically.
“The rise in confidence is likely due to the drop in gasoline prices and rising stock prices last month, but the underlying details of the survey suggest that consumer confidence is simply [shaken] “We expect progress to be made going forward,” Grace Zwemer, associate U.S. economist at Oxford Economics, wrote in a note Tuesday.
“The likelihood of a recession increased in May, exacerbating concerns about current and future financial situations, and home buying plans remained at their lowest level since August 2012, reflecting the impact of rising interest rates.”
As Rick points out, one of Biden’s biggest challenges in his reelection bid will be “convincing the American people that the economy is working for them, without belittling or ignoring it.”
Achieving this under normal circumstances would be a tall order for any politician, but if the outcomes of fundamental parts of the country’s economic policy are upended, the task may become out of reach.
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