At the same time, personal savings rates have dropped as consumers dip into their reserves to keep up with higher prices. The savings rate was 6.9% in September, down from a pandemic peak of 33.8% in April 2020.
Businesses, too, have been feeling the pinch. The Producer Price Index, a measure of wholesale inflation, increased 8.6% in September from a year ago. Manufacturers have been passing those costs along to consumers, with the profit margins of S&P 500 companies falling to their lowest level in nearly a decade, according to FactSet.
So, while inflation may be closer to the Fed’s target, the economic pain continues for many Americans.
And while the central bank may be celebrating its progress toward its inflation goal, the battle is far from over.
As Daly said in her speech, the Fed must remain vigilant and intentional in its efforts to keep inflation in check and ensure the stability of the U.S. economy.
The recent survey conducted by the New York Fed revealed that the perceived likelihood of missing a minimum debt payment in the next three months has increased to 14.2% of respondents, the highest level since April 2020.
Small business credit card usage has also been on the rise, increasing by more than 20% compared to pre-pandemic levels and nearing the highest in a decade, as reported by Bank of America. The bank’s economists anticipate that the pressure could alleviate as the Fed reduces interest rates, although the extent of the cuts may be called into question if inflation remains high.
Despite this, the one positive aspect of the small business credit balances is that they have not kept pace with the 23% inflation increase since 2019, according to BofA. However, sentiment among small firms remains pessimistic, with the September survey from the National Federation of Independent Business showing that 23% of respondents still view inflation as their main concern.
Amidst the mixed signals regarding inflation, the Federal Reserve faces a crucial decision at its upcoming policy meeting on November 6-7. Despite the Fed’s decision to lower the baseline interest rate by 50 basis points in September, market expectations have shifted to suggest a potential increase in rates.
SMBC Nikko Securities has advocated for the Fed to pause on further rate cuts until there is greater clarity on the current economic situation. The firm believes that softening financial conditions could lead to a resurgence in inflation, a view shared by Atlanta Fed President Raphael Bostic.
Lower interest rates are expected to improve financial conditions and boost the wealth effect through higher equity prices, according to SMBC’s chief economist Joseph LaVorgna. However, concerns about inflation persist, leaving individuals like the young man encountered by San Francisco Fed President Daly uneasy about the future and questioning whether the Fed may be making a policy mistake.
Daly expressed her hope for a future where individuals have the opportunity to catch up and get ahead financially, indicating that this would be her version of success in her role at the Fed.