Can a bag of groceries weigh down inventory? Wall Street weighs in as Fed tightens financial conditions

“Last year people paid higher prices thinking it wasn’t going to last,” says Katie Nixon, CIO of Northern Trust. “Now he’s sinking into the fact that prices are going to be higher for a while.”

It’s a major concern as Wall Street watches how U.S. households bear the heavier burden of higher prices at the grocery store, at the gas pump and on their credit cards, even as the Federal Reserve has launched a series interest rate hikes to fight inflation.

Read: Two senior Fed officials call for more aggressive interest rate hikes to stifle inflation

“The consumer bailed us out last year,” said Katie Nixon, chief investment officer of Northern Trust Wealth Management, referring to the combination of government financial stimulus and household spending that helped fuel profits. successful companies and the stock market SPX,
+1.17%
yields that exceeded 26% in 2021.

“Last year, people paid higher prices, thinking it wasn’t going to last,” Nixon said, by phone. “Now he’s sinking into the fact that prices are going to be higher for a while.”

That’s partly because consumers probably aren’t yet seeing the full impact on food prices from Russia’s invasion of Ukraine, she said, or from the rise in food prices. other raw materials.

To see: USDA says Russia’s actions increase agricultural supply uncertainty, lower global wheat export estimate

“Over the past few years, consumers have been able to meet their needs and wants,” Nixon said. “Balancing needs and wants is going to get more difficult as we progress through 2022.”

Buyer’s remorse?

Households in 2021 still had a flurry of pandemic fiscal stimulus payments hitting their bank accounts. They also received frequent assurances from the Fed that two years of easy money policies were not on a collision course with their wallets.

While the tone at the Fed has since changed and tangled supply chains appear to be easing, consumers from California to Florida have already spent much of the past year ready to pay near-record prices for expensive items, including used cars and houses, often on credit.

Households added about $1 trillion in debt in 2021, the largest annual increase since 2007, bringing their total debt to a record $15.6 trillion, according to the Federal Reserve Bank of New York.

On the positive side, most have tapped into credit at a low interest rate in a strong labor market. The concern is that it could lead to buyers’ remorse or cracks in consumer finances as the Fed steps up its efforts to curb inflation to 40-year highs by raising interest rates and tightening the credit.

“Consumer balance sheets are in good shape,” said Jake Remley, senior portfolio manager at Income Research + Management. “We probably have a long way to go before we see significant stress, without unexpected shocks.”

At the same time, however, it’s not hard to imagine higher interest rates returning for things like used vehicles, where prices in February were slightly lower, but still up 41 .2% over the year.

To verify: How the pandemic turned used cars into hot commodities

“Did we have a bubble in used cars? This is probably the No. 1 question as interest rates rise,” Remley said.

Remley also pointed to the more than 40 million borrowers with roughly $1.6 trillion in combined federal student loans who are expected to start making payments again in May, after a hiatus of more than two years with no debt bearing. interest.

“That could be a subtle drag on consumer spending,” he said. “It can be extended for a few months. However, it will end at some point.

Residential mortgage rates also climbed to around 4% this week for the first time since 2019, presenting another potential headwind to the consumer.

Higher rates, cheaper prices

The Fed raised its benchmark interest rate on Wednesday for the first time since 2018, while policy rates could be close to 2% by the end of the year and closer to 3% in 2023.

While the first near-zero rate hike won’t have too big an impact on household debt or consumer savings rates, a series of hikes could, particularly if higher costs remain entrenched and slow economic growth and inflation.

Investors reacted positively to this week’s quarter-percentage-point hike in the Fed’s benchmark rate, with the Dow DJIA,
+0.80%,
S&P 500 SPX,
+1.17%
and Nasdaq Composite COMP,
+2.05%
each sweeping their best week of percentage gains since November 2020. Although with a rough start to 2022, largely due to the war in Ukraine, indices were still lower on the year by 4.4% , 6.4% and 11.2%, respectively.

“The longer inflation potentially persists at these 40-year highs,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, “The longer it persists, the more damaging it is to consumers. And it’s more damaging to markets than the higher rates designed by the Fed.”

BNY Mellon puts the risk of a recession — a popular topic of debate lately — at just 20% over the next 12 to 18 months, Grohowski said, though some consumers who have piled into cars and homes opportunity with a “buy first, ask questions later” mentality is feeling the pinch of rising prices and borrowing rates.

“What the Fed is doing is appropriate, expected and frankly overdue,” Grohowski said. “Consumers will have to be prepared to incur higher borrowing rates and debt service charges if they want a lower cost of goods at the grocery store and at the gas station.”

Next week, other Fed officials will speak, including Fed Chairman Powell on Tuesday. New home sales data follows Wednesday, while Thursday brings weekly jobless claims and March manufacturing and services data. Friday is a reading of consumer sentiment and inflation expectations, but also pending home sales.

Relativestar: What happens to money when the Fed starts to reduce its balance sheet?

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