So here are two things to consider today…
First on Kevin Warsh’s Fed Chair hearing, there were a few things he said today that we will no doubt come back to over the coming weeks (and really months once he finally gets confirmed). But there is one thing that really stood out. He has been on record saying he dislikes the idea of forward guidance—and he said it again today. We have some sympathy for that, but mostly because we think forward guidance has been overused. When used sparingly, it can be quite powerful. As we all appreciate, that has not been the case with the Fed over recent years.
But here’s the thing. Isn’t he using forward guidance right now? He continues to highlight that AI will allow the Fed to cut rates, as it will usher in disinflation. Leaving aside that, we think the timing on that impact is longer than his comments seem to suggest, the simple act of saying you’re going to cut for “x” reason is in fact forward guidance. We’ll have more to say about Warsh in the coming weeks and months.
Okay now on the consumer. Where does the consumer stand at the moment? We have data through March and, at the moment, the consumer is hanging in there just fine in the wake of the Iran conflict. Gas prices are higher, inflation fatigue is real, and sentiment has softened as inflation expectations moved up following the conflict. And yet with all of that, the hard data continues to point to resilient consumer spending, at least for the moment.
Control retail sales (ex gas, autos, and building materials) have been sturdy through March, and keep in mind, too, with core goods prices close to flat in March, that nominal strength is NOT an inflation story.
The consumer is still spending, and this is partially due to larger tax refunds offsetting the initial hit from higher gasoline prices. Right now refunds are up over $40 billion versus last year, which is a 17% increase over the prior year (and pretty darn close to our forecast of about 18%). And the total number of refunds sent is up 3 million MORE versus the same time last year. So it would be hard to ignore this reality, especially as it relates to the state of spending today.
And remember too, the refund story was an important part of our narrative that growth would look solid this year prior to the war. Right now fiscal is still a tailwind. And credit card spending through mid-April (chart below) suggests a still sturdy pace of spending. Just keep in mind, the longer this war endures and energy prices remain elevated, the more fiscal becomes a shock absorber.
. But there is one thing that really stood out. He has been on record saying he dislikes the idea of forward guidance—and he said it again today. We have some sympathy for that, but mostly because we think forward guidance has been overused. When used sparingly, it can be quite powerful. As we all appreciate, that has not been the case with the Fed over recent years.){kind=link}