Key Findings

  • A University of Michigan survey shows consumer confidence fell to one of its lowest levels this month, impacted by persistent inflation and pressure on personal income.
  • "After the federal government shutdown ended, consumer confidence rebounded slightly from mid-month readings," said Joanne Hsu, director of the university's consumer survey, in a statement. "However, consumers remain frustrated by persistently high prices and weakening income." she added.
  • On the bright side, one-year inflation expectations fell to 4.5% from 4.6% in October, while long-term inflation expectations dropped to 3.4% from 3.9%, Hsu said.

Deeper Insights

Federal Reserve policymakers closely monitor inflation expectations, concerned that a sustained rise would indicate price pressures are becoming self-perpetuating.

Stable inflation expectations over recent months have helped ease concerns among Fed officials that progress toward curbing inflation to the 2% target has stalled. According to data from the U.S. Bureau of Labor Statistics, the consumer price index rose 3% year-over-year in September, 0.1 percentage point higher than in August.

Stable expectations also provide the central bank with room to maneuver in lowering borrowing costs.

"Inflation expectations are very firmly anchored," New York Fed President John Williams said in a speech last Friday.

"I still believe there is room for further adjustments to the federal funds rate target range in the near term to bring policy stance closer to a neutral level, thereby balancing our two goals," Williams said, referring to the Fed's dual mandate of ensuring maximum employment and price stability.

In recent months, Fed officials have split into two camps: one advocating for lowering the federal funds rate to shore up the softening labor market, and the other warning that further easing could reignite inflation.

Williams' remarks—showing openness to a third 25-basis-point rate cut this year—intensified market speculation that the central bank will ease policy again at its meeting scheduled for December 9-10.

After the speech, interest rate futures traders raised the probability of the Fed easing policy next month to 69.7%, up from 39.1% on Thursday, according to CME Group's FedWatch tool.

The University of Michigan survey shows consumers generally feel a decline in purchasing power given current borrowing costs.

"This month, current personal financial conditions and conditions for buying durable goods both plunged by more than 10%, while future expectations improved slightly," Hsu said.

"By the end of the month, the group of consumers holding the largest stock portfolios had given back the gains recorded in the preliminary reading," she said. "Their confidence index fell about 2 points from October, likely due to the stock market decline over the past two weeks."