By Michael S. Derby
Feb 9 (Reuters) – Americans were less worried about the direction of inflation and labor market prospects as of last month, although concerns about the state of their finances continued to mount, the Federal Reserve Bank of New York said in a report released on Monday.
As part of its latest Survey of Consumer Expectations, the bank said that inflation expectations one year from now stood at 3.1% in January compared with 3.4% in December, while at the three- and five-year-ahead horizons, expectations held steady at 3%.
On the hiring front, some of the gloominess over labor market prospects abated in January. The survey found respondents see a lower chance of losing their job and an improved outlook for finding one if they did. But they collectively said they expect the unemployment rate to be higher a year from now compared to what they saw in December.
Households in January also reported that they saw higher future earnings expectations relative to December, while the expected level of income a year from now ebbed last month compared with December. At the same time, survey respondents see credit as harder to get in the future, while on balance downgrading the state of their current and future financial situations in January relative to the month before.
HIGH ANXIETY
The cross-currents of retreating inflation fears coupled with anxieties over finances come as other data point to a sour mood for American households, which makes for a challenging environment for the Federal Reserve as it contemplates what it needs to do next with monetary policy.
In its most recent report, the University of Michigan Surveys of Consumers said consumer sentiment levels remained “very low from a historical perspective,” as households worry about how high inflation is eating away at their spending power in a softening job market. Meanwhile, research firm Gallup said in a survey released on Monday that Americans are balancing expectations of stronger growth and rising asset prices against worries about hiring and inflation.
The trick for policymakers is that sour moods often don’t translate to a retreat from spending. Speaking after the Fed’s late January monetary policy meeting, Chair Jerome Powell explained “the consumer is filling out surveys that sound really negative, and then spending.” He added, “there’s been a disconnect for some time between downbeat surveys and reasonably good spending data.”
The retreat in near-term expected inflation in the New York Fed data is likely to be viewed as good news by Fed policymakers. The Fed trimmed its interest rate target range by 75 basis points last year to between 3.5% and 3.75%, as it sought to support a weakening job market while still imposing enough restraint on the economy to help lower inflation pressures. It held rates steady in January although some officials favored a cut.
Fed officials have been describing the job market as a low-hire, low-fire environment, and some policymakers say the cost of short-term credit needs to be eased to help ensure the hiring sector doesn’t run into deeper trouble.
The officials expect inflation to wane over the course of the year due to projections that tariff pressures will abate. Part of their confidence that inflation will return to target rests on the relative stability of longer-run inflation expectations.
Data suggests “the American people believe that we are committed to bringing inflation down to our target,” Federal Reserve Vice Chair Philip Jefferson said on Friday. “My view is that we are still perceived of as being credible now with respect to the current situation with inflation being above target,” and that inflation pressures will ease over time, he said.
(Reporting by Michael S. Derby; Editing by Andrea Ricci)
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