Confidence Sours Ahead of Fed Meeting

Well, that was quite a week! Aren’t you glad that you had that trusty Panic Protection Plan? While the stock market is not the economy and vice versa, amid chaotic times, there is something to the notion that the market is a big information processing machine. “Here’s the interesting thing about the stock market,” wrote Michael Cembalest of JP Morgan Chase, “it cannot be intimidated, threatened or bullied; it has no gender, ethnicity or religion; it cannot be fired, furloughed or defunded; it cannot be primaried before the next midterm elections. It’s the ultimate voting machine, reflecting prospects for earnings growth, stability, liquidity, inflation, taxation and predictable rule of law.”

Stocks have given back the post-election bump as investors have slowly come to realize that Trump Administration policies might eat into growth, hurt consumers and ultimately, reduce earnings. Corporations like Dollar General, Kohls, Macy’s, Walmart, and Costco have said that consumers are under pressure, and the National Federation of Independent Business (NFIB) small business survey showed weakness, due to “high and rising” uncertainty on Main Street.

For a heat check on where things stand, I turned to Diane Swonk, the Chief Economist at KPMG, who has always been a go-to source to make sense of short, and long-term, trends. When we spoke on Friday, the University of Michigan Sentiment Index had just been released and it was a doozy. The index fell to the lowest level since November 2022 and what was more striking, according to Swonk, is that confidence is cratering across political parties, which has not been the case for some time. “Rapid changes in policy can be destabilizing”, and as human beings, those feelings can lead to hesitation, which may explain why consumers of all income levels appear to be pulling back on their spending.

The Conference Board’s February Confidence Survey showed similar results, as “pessimism about the future returned.” Both of these confidence readings reported a sharp rise in inflation expectations, due to looming tariffs. The Michigan survey showed consumers’ one-year inflation expectations have increased to a two-year high of 4.3 percent and their five-year expectations have surged to a 30-year high of 3.5 percent. Consumers are sensing what Swonk sees as a risk to the economy: “the embers of inflation are still smoldering, and tariffs could easily reignite them.”

All of this anxiety is coming to the fore, just days ahead of the Federal Reserve’s policy meeting next week. It is widely expected the central bankers will hold rates steady at 4.25-4.50 percent, Chair Powell recently said, “we do not need to be in a hurry and are well positioned to wait for greater clarity.” 

I asked Swonk which part of the Fed’s dual mandate (keep prices in check and create enough growth to keep the job market growing) is more important right now? Should they keep rates high to fend off a tariff-induced inflationary spike or should they look beyond that and lower rates to ease the pain of a slowing economy? Swonk reminded me that during his tenure as Fed Chair, Jerome Powell has said that his hero is Paul Volcker, the slayer of 1970’s inflation through high interest rates. That might mean that the Fed under Powell would prefer to see a clear signal that inflation is returning to its target before resuming rate cuts.