Federal Reserve Gov. Christopher Waller said he is watching
During a Wednesday afternoon speech at the European Economics and Financial Center in London, Waller said he will factor both
He said both options will be on the table heading into the meeting two weeks from now, but recent data readings have been "overwhelmingly positive" for the Fed's goals of stabilizing prices and maintaining high employment. To that end, he noted that he will be monitoring the performance of bank-issued credit to better understand consumer spending patterns.
"Though hard to measure, it seems that households are drawing down their liquid assets," Waller said. "Some other data supporting a slowing include more use of credit cards this year and a return of delinquency rates for consumer loans, which plunged over the course of the pandemic, to essentially their pre-pandemic levels."
The total balance on credit cards and other revolving credit products plummeted from $858 billion in March 2020 to $736 billion in April 2021, according to data tracked by the Federal Reserve Board and analyzed by the Federal Reserve Bank of St Louis. Since then it has climbed steadily,
Similarly, the delinquency rate on consumer loans dropped from 2.47% in the first quarter of 2020 to roughly 1.5% for much of 2021, according to the St Louis Fed. Through the second quarter of this year, the rate had ticked back up to 2.36%. Though still well below the 4.85% peak from 2009, the rebound demonstrates a return to the typical range of between 2% and 2.5% seen since the subprime mortgage crisis.
Waller also addressed soaring Treasury yields, including the 10-year and two-year notes, which are trading at 16- and 17-year highs, respectively, demonstrating weakening investor sentiment. He said stronger-than-expected data on economic activity, an increased focus on the U.S. deficit, recent Treasury issuances and geopolitical unrest all could have contributed to this development.
"Whatever the causes, I will be watching how these interest rates evolve in coming months to evaluate their impact on financial conditions and economic activity," he said.
Waller added that he anticipated some deterioration in financial conditions would accompany the Fed's efforts to tighten monetary policy. What he did not expect is the continued strength of consumers.
"I have been waiting a while for tightening financial conditions to cause a significant slowing of spending, and I have been consistently surprised at the resilience of consumer spending," he said. "So I will be patient in waiting for the data to document how spending evolves."
Waller also highlighted other conditions, including a leveling off of manufacturing volumes and construction activity. He also cited a normalization of the ratio of job openings to job seekers, which remained at 2:1 for several months but has since fallen to 1.5:1. Still, he noted that the labor market was "unusually tight" and would need to be monitored closely by Fed officials as they weigh their next policy move.
Overall, Waller said that he has been impressed with the economy's ability to absorb higher interest rates, grow at a strong pace and maintain 50-year-high employment while still inching toward the Fed's goal of 2% inflation. But he is not betting on things staying that way.
"This is great news, and while I tend to be an optimist, things are looking a little too good to be true," Waller said. "So, it makes me think that something's got to give."
