Key Takeaways:

  • Consumer confidence hit a six-month high this month, driven by falling borrowing costs and stable inflation expectations, according to a survey released Friday by the University of Michigan.
  • Consumers expect an inflation rate of 2.7% over the next 12 months, unchanged from September and within the 2.3% to 3% range seen in the two years before the pandemic. Joanne Hsu, director of the university's consumer survey, said in a statement that long-run inflation expectations fell to 3% from 3.1% in September.
  • Hsu noted that political factors are shaping U.S. households' economic outlook, with the November 5 election "taking center stage in consumers' expectations." She said confidence among Democrats fell 1%, while Republicans rose 8%, reflecting confidence that their candidate will win.

Deeper Dive:

After several months of easing price pressures, the Federal Reserve cut its key interest rate by 50 basis points in mid-September to a target range of 4.75% to 5%.

Since then, consumer spending, the labor market, and the broader economy have shown greater resilience than expected.

The Atlanta Fed said Friday that the economy got off to a solid start in the fourth quarter, with its estimate showing gross domestic product (GDP) may have grown at a 3.3% annualized rate in the previous quarter. According to the Bureau of Economic Analysis, GDP grew at a 1.4% annualized rate in the first quarter and 3% in the second.

Data from the Labor Department on Thursday showed initial jobless claims fell by 15,000 to 227,000 for the week ended October 19, better than expected.

Commerce Department data released last week showed retail sales rose 0.4% month-over-month in September, beating expectations, after a 0.1% gain in August. This underscores the strength of consumers and supports recent upward revisions to 2024 economic growth forecasts.

Additionally, unexpectedly strong hiring by U.S. employers last month dashed market expectations for a second consecutive 50-basis-point rate cut when the Fed concludes its two-day policy meeting on November 7.

According to the CME FedWatch tool, rate futures traders have lowered the probability of a 50-basis-point cut to zero from 57% a month earlier. They now see a 96% chance of a 25-basis-point cut, a slower easing pace than Fed officials projected on September 18.

In recent weeks, central bank officials have confirmed the Fed may continue lowering borrowing costs, but have warned against expecting oversized cuts.

"Although we have begun the process of policy recalibration, we are not declaring mission accomplished on inflation," Cleveland Fed President Beth Hammack said Thursday at a regional Fed inflation conference.

"The pandemic and its aftermath remind us that different movements in inflation components can have important implications for the overall inflation path," she said in a Bloomberg News webcast. "Recent declines in energy prices have held down overall inflation, but geopolitical events could cause those prices to reverse quickly."