Federal Reserve’s meeting minutes reaffirmed a hawkish stance sending shivers of higher interest rates to come. The Federal Open Market Committee’s September meeting minutes revealed united support for the central bank’s tightening cycle, with officials highlighting upside risks to inflation and cementing market expectations for prolonged higher rates. However, market consensus suggests that there will likely be no hike later this month ahead of the mid term elections.
The Fed is on a path trying to tame inflation. Inflation currently sits at about 3.4%, far lower than its recent peak in 2022, when it topped 9% but much higher than their target of 2%. Despite the interest rate hike last month, prices are still rising, adding to the higher costs consumers have absorbed in previous years. All kinds of everyday goods are more expensive than they were a year ago. The prices of new cars, child care, beef and paper towels have all soared. Prices have, on average, risen faster than wages.
The economy is increasingly being supported by the wealthy. The top 10% of income groups have seen their wealth increase by 30% in the past few years as the stock market continues hit new highs while the bottom 40% have seen their wealth decrease reinforcing the K-shaped economy that is being kept afloat by wealthier economic groups.
For the week, the Dow rose 0.9%, the S&P gained 1.2%, and the Nasdaq increased 0.6%.
Future Wealth’s View
It is clear that consumers are spending and household spending has grown faster over the past 12 months than it did last year. Part of the reason is that the S&P 500 is up 14% this year and the unemployment rate is low. But the stubborn inflation is squeezing disposable incomes. The cost of borrowing has gone higher as interest rates have climbed. Prices of housing, food and travel have all grown faster than wages as inflation has impacted every aspect of our lives.
We are now finding ourselves at a point where consumer spending remains strong even as consumer confidence continues to drop. As long as the stock market continues to reach new highs, the economy will be resilient enough to withstand the shocks of higher interest rates and higher inflation. But, make no mistake, if and when Nvidia and its AI counterparts begin to voice caution, look out for a reversal that could shake up things in a hurry.
In the meantime, the market will be looking for clues from the US companies that begin to report their Q3 results starting this week, leading up to the midterm elections in early November.