Slowing US consumer spending and inflation might give a tightening Federal Reserve food for thought

 
Jasper Jolly
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Federal Reserve Chairwoman Janet Yellen Testifies To Senate Committee On Dept's Semiannual Monetary Policy Report
Fed boss Janet Yellen has prepared the market for unwinding the balance sheet (Source: Getty)

Growth in US consumer spending slowed in May while the Federal Reserve’s preferred measure of inflation fell, giving the central bank food for thought as it prepares to gradually remove monetary stimulus.

Consumer spending grew by 0.1 per cent in May after a 0.4 per cent expansion in April, according to the US Bureau of Economic Analysis (BEA).

Inflation as measured by the personal consumption expenditures index slowed in May, falling 0.1 per cent. The annual rate dipped to 1.4 per cent, below the two per cent rate targeted by the Fed.

Yet despite some signs of cooling in the world's largest economy confidence from businesses and consumers remains healthy.

The MNI Chicago Business Barometer index rose to a reading of 65.7, the highest level in more than three years.

Read more: US Fed hikes interest rates and reveals bond sell down plans

Meanwhile the Michigan consumer sentiment index fell slightly, but still came in higher than forecast at 95.1 points. While that represents the lowest reading of 2017, it still remains above 2016 levels.

The US economy has performed relatively well in the last three quarters, with US President Donald Trump inheriting solid growth and a central bank trying to normalise monetary policy a decade after the first stirrings of the financial crisis.

The Federal Reserve’s monetary policymakers announce their next monetary policy decision on 26 July, although some economists believe any move to start unwinding the $4.5 trillion (£3.4 trillion) balance sheet will not come until the September meeting, when Federal open market committee (FOMC) chair Janet Yellen is set to face questions from the press.

The Fed is likely to let the assets “roll off” the balance sheet as the bonds mature. Up to now it has been reinvesting the proceeds to maintain the stimulus on asset prices in an effort to force money out into the rest of the market, but recently Fed officials, including Yellen, have signalled that asset prices will be able to survive the tapering.

The Fed has shown itself in recent months to be keen to continue on the path of monetary policy normalisation. It has hiked interest the key federal funds rate twice in 2017, with a third hike this year still expected by economists.

Read more: Fed chair Yellen expects no more financial crises 'in our lifetime'

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