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Near-Term Fed Hikes Resilient But 2023 Rates Slide

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(MNI) Washington

U.S. households will likely draw on savings built up during the Covid pandemic for years to come rather than spend them in a short-term burst as the economy re-opens, current Fed officials and outside advisors told MNI.

Households will receive USD700 billion over the next six months from President Joe Biden's coronavirus relief, sending "excess" personal savings currently at USD1.8 trillion even higher after earlier rounds of handouts last March and December. In March alone, the Biden administration sent out USD276 billion in USD1,400 direct checks, according to Treasury data.

But economic uncertainty and a skew of the excess cash holdings toward higher-income households suggest that while the marginal propensity to consume could increase in the next six months, it might only rise to about 35%, sources said. This should reduce the risk that an inflationary spike could pressure the Fed to scale back stimulus before it reaches its recently-redefined dual mandate goal of inclusive full employment.


"It's not obvious at all that people will just start sending like crazy as soon as the pandemic is over," said Giorgio Primiceri, a Northwestern University professor and consultant to the Chicago Fed. "These accumulated savings will not be spent in very large amounts as soon as the situation improves with the coronavirus."

One reason people will keep much of the government money in their pockets is concern over jobs, said Michael Weber, a University of Chicago professor and outside advisor to the Cleveland Fed.

"At least in the short-run, I would expect a lower marginal propensity to consume, compared to previous episodes from March and December," he said, "We have to distinguish between the short-run, and the intermediate marginal propensity to consume."

Previous New York Fed estimates put consumers' marginal propensity to consume at 29% for the cash sent out in March 2020, and that dipped to 24% as confidence fell in the Winter.

"I have limited optimism that pent-up demand will just simply power us through, rather than having it be a more sustained, solid drip to keep us rolling," said Kartik Athreya, Richmond Fed research director, at an MNI webcast Tuesday. "There is good news there for sure, but I don't think it's one and done."

Other officials have told MNI that the Fed is likely to become more bullish about the economy when it releases its June projections, and that it is even possible that the Fed's dots might begin to show a median forecast for a rate hike in 2023.

John Leer, an economist for Morning Consult, which conducts daily polls, told MNI gains in consumer confidence this year have been strong relative to past fiscal relief packages and despite upticks in coronavirus cases, and accelerated after Biden's USD1.9 trillion relief package became law. Leer added there are signs consumers are making plans to eat out, travel abroad and go on vacation.

But most confidence gains have been concentrated in low- and middle-income consumers, he said. "Confidence is increasing for upper-income consumers but not at a higher rate and the rate change over time is what is important because it tends to be a great predictor of consumer spending."


The savings pile may not provide immediate rocket fuel to consumer spending, but government transfers have provided a base from which households can boost the rebound.

Household balance sheets appear strong in aggregate and, in contrast to aftermath of the 2008 financial crisis households will not need to keep saving rates high to pay off debts. Consumer credit data from the Fed shows Americans shed USD120 billion in revolving debt last year and credit scores improved throughout the pandemic.

Some have suggested that the post-Covid period could include a slow normalization of saving rates. That would run against the historical norm where savings rates stay elevated after recessions.

"I'm a little more optimistic that savings rates will settle back to its pre-Covid levels," said Andrew Lee Smith, a research and policy advisor at the Kansas City Fed, who nonetheless shared the other sources' caution about the likely pace at which excess savings will be spent. "That's kind of driven by what we see across household balance sheets, because some don't have to go through that period of deleveraging and balance sheet repair that they went through after the last recession."

MNI Washington Bureau | +1 202-371-2121 |
MNI Washington Bureau | +1 202-371-2121 |

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