Income growth for Americans jumped in January, according to a new report from the U.S. Department of Commerce. Specifically, personal income rose by 0.6 percent last month, the largest gain since 2018 and double the increase analysts expected. Consumer spending also rose in January, but at a slower rate than in December. Some giveback in consumption is not surprising following the holiday shopping season, and this was accompanied by a healthy increase in Americans’ personal saving rate. Elsewhere in the report the headline and core readings on the PCE deflator, the Federal Reserve’s preferred inflation gauges, both came in below forecasts and remained nowhere near officials’ 2 percent “target.”
The good thing about muted inflation pressures is that this environment provides the Fed with room to cut rates early in an attempt to stave off a more severe economic downturn. Recent Fed commentary suggests the committee is reluctant to signal that more easing is on the horizon. There is good reason for this since the majority of economic reports released in February have been encouraging. This week’s coronavirus-driven turbulence in the stock market, though, if sustained has the potential to ding consumer confidence and tighten financial conditions. As a result the Fed funds futures market currently implies a 100 percent chance of a quarter-point cut at the upcoming March 18th FOMC meeting. That is up from 11 percent just one few week ago, and there is now even a 45 percent chance of an additional 50 basis points in Fed easing occurring by June. However, this remains a very fluid situation, so both the stock market and rate cut odds could change considerably with the tone of the incoming virus headlines in the weeks ahead.
Sources: Econoday, U.S. DoC, ZH, FRBSL