Americans May Finally Give the Federal Reserve What It Wants

The constant hum of the American consumer machine is displaying a degree of resilience that is puzzling economists.

High borrowing costs, a product of the Federal Reserve's interest rate hikes, haven't deterred consumers from robust spending.

Yet as the seasons transition, there's an underlying concern about the sustainability of America's spending momentum, and the possibility of reduced consumption could well give the Federal Reserve what it wants as it fights persistent high inflation.

United States Census Bureau data released earlier this month showed a promising trend—retail sales in September grew by an encouraging 0.7 percent, representing the sixth consecutive month of gains. That trajectory defines the resilience of American consumers, even in the face of rising inflation and steep interest rates.

However, the Census Bureau data isn't inflation-adjusted, which increased by 0.4 percent in September. More to that, while the data paints a picture of overall retail growth, individual spending sentiments highlighted by a Morning Consult survey produced for CNBC illustrate a different tale.

The poll revealed that 92 percent of respondents noted reduced spending over the past six months, despite a growing economy. Middle-income households are feeling economic pressures the most, while discomfort in high-earning households has been less pronounced.

With the holiday season on the horizon, more than 75 percent of consumers intend to curtail non-essential expenditures, a potential red flag for industries banking on festive shopping.

But this will be a boon for the Fed, which has been on an inflation-busting crusade for nearly 20 months.

A slowdown in consumer spending is an alarm bell that economists like Jeffrey Roach, Chief Investment Officer at LPL Financial, have been sounding for months. Households are tapping into their savings, with the safety net provided by pandemic-era stimulus checks now diminishing for many.

Even with the economy surging forward at a 4.9 percent annual rate in the July-September quarter, largely fueled by consumer spending, there's a consensus among some economists that intense spending in the face of high rates may not be sustainable.

"Consumers have downshifted their plans to buy big-ticket items such as autos, homes, and major appliances as they are a bit more nervous about the future," Roach told Newsweek.

The primary drivers of consumer spending have been robust hiring, record-low unemployment rates, wealth accumulation via rising home values and stock portfolios, and wage growth that's outpacing inflation. The unemployment rate, at a near 50-year low of 3.8 percent, means more Americans have jobs, translating to increased income and spending.

That's the problem that the central bank has been dealing with. While the economy seems to be buzzing away, the Fed's objective is clear: regulate spending to control inflation. Since March 2022, the Fed has increased rates by 5.25 percentage points in an attempt to do so.

That approach has been a double-edged sword. While the Fed aims to stabilize prices, targeting a 2 percent inflation rate, consumer spending has simultaneously shielded the economy from a downturn.