a Fed official warns of the inflationary risk of overconsumption

Fed Vice President Philip Jefferson confirmed Thursday that the US Federal Reserve plans to start lowering key rates “at some point this year”, however warning against potentially inflationary overconsumption.

“If the economy performs broadly as expected, it will probably be appropriate to begin to ease policy tightening at some point this year,” that is, to begin lowering rates, Philip Jefferson said in a speech before the Peterson Institute of International Economics (PIIE).

The number two of the American central bank clarified that the growth of spending and production in the United States should indeed slow down in 2024.

“Nevertheless, without a clear understanding of why consumer spending has been so resilient, I view continued spending strength as a significant upside risk to my forecast,” he noted.

American households in fact continued to consume in 2023, despite purchasing power reduced, on the one hand by inflation, and on the other by rate increases.

The manager thus notably mentioned consumption socially motivated by the desire to have the same thing, or even better than the neighbor.

He used a very well-known reference in the United States, “Keeping up with the Joneses”, named after a comic strip from the beginning of the 20th century, which tells of a family engaged in a shallot race to own the same thing. than its neighbors.

This “could lead individuals to consume more than predicted by models that only take into account household wealth and income.”

Too much consumption risks slowing down the progress made in terms of inflation.

One of the measures of price development, the CPI index, on which pensions are indexed, registered higher than expected in January, at 3.1% over one year.

“This disappointing CPI figure highlights that the disinflation process is likely to be bumpy,” Mr. Jefferson warned.

He also mentioned two other risks: a job market which would weaken too much and “geopolitical risks (which) could remain high”.

Thus “an extension of the conflict in the Middle East could have more significant effects on the prices of raw materials (…) and on global financial markets,” estimated the Fed official.

The monetary institution, after having raised its rates since March 2022 to 5.25%-5.50%, is now considering lowering them.

But its officials favor a cautious approach, and consider it unlikely to start at the next meeting, in March.

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