MNI INTERVIEW: Fed Cuts Expected To Bolster Jobs - UMich

MNI (WASHINGTON) - The share of Americans expecting the Fed to lower interest rates over the next year is at a record high and they generally expect those lower interest rates to help stave off any further significant weakening in the labor market, the head of the University of Michigan's Survey of Consumers told MNI.

"About 55% of consumers expect rates to fall in the year ahead. We saw those numbers before and after the FOMC rate cut [last week], and that's the highest share to report those declining interest rates expectations in the entire history of the survey, since we started collecting this on a monthly basis in 1978," said survey director Joanne Hsu in an interview Friday.

Hsu, a former principal economist at the Federal Reserve Board's division of research and statistics, said "consumers are overwhelmingly expecting continued rate cuts, which are expected to provide some protection against a further unraveling of labor markets."

Consumer sentiment rose more than 3% in September, an increase seen across all education groups and political affiliations and the highest level since April, mostly driven by the fall in inflation. "Consumer sentiment is starting to build momentum. It's been on an upswing all month long. Their views are starting to brighten a little bit, particularly in the wake of slowing inflation," she said. The expectations index is now 13% above a year ago. 

SOFT LANDING 

Overall, survey respondents are positive about the economic outlook. "The median consumer's expectations are consistent with a soft landing," Hsu said.

Year-ahead inflation expectations have come down, hitting 2.7% in September, the lowest since December 2020. Consumers see costs rising 3.1% over the next five to 10 years, the University of Michigan survey shows. There is not a "meaningful" share of respondents expecting a surge in inflation over the next year, Hsu said.

American consumers remain extremely focused on prices, and they've noticed inflation has slowed down, Hsu said. "Last month 47% of people spontaneously mentioned prices as a bad factor and that was down to 40% in September, a pretty substantial decrease in a single month but still very high." The historical average since 1978 was about 17% and peaked at 49% in July 2022.

When it comes time to buying a car, a house, or large durable goods, consumers are taking note of easing prices and falling interest rates, Hsu said. "They've noticed interest rates falling. They see it as less of a barrier now for buying these big ticket purchases than they did last month."

Americans see the labor market softening from a pretty strong base and have been consistently expecting wage increases in the year ahead, Hsu said, but they also expect the Fed to lower interest rates even after the 50 basis point decrease last week. (See: MNI INTERVIEW: Fed Can Cut Gradually If Jobs Stay Strong-Kohn) 

"We were seeing earlier in the month some concerns about labor markets, but those concerns did not really pass through to expectations for business conditions, and the main reason for that is that consumers do really expect the Fed to step in," Hsu said.