Happy Wednesday! Is it possible for the Fed to get ahead of monetary policy?

IN ACTION

“Of course, economic policy uncertainty among businesses is very elevated, and this has affected measures of sentiment and confidence for consumers and businesses, which fell to historically low levels in April.” - Speech by Governor Waller, The Effects of Tariffs on the Three I’s: Inflation, Inflation Persistence, and Inflation Expectations (June 1, 2025)

THE BASICS

Consumer confidence is a measure of how consumers perceive the overall economy and their personal financial situation. While assessing confidence can be challenging, it serves as a useful gauge of potential future spending behavior. An important economic indicator, consumer confidence reflects how optimistic or pessimistic buyers are about the economy and their personal finances, signaling their willingness to spend.

WHY IT MATTERS

The Federal Reserve closely monitors consumer confidence because of its forward-looking nature. Unlike many key economic indicators (inflation, unemployment, GDP as examples) which reflect past or current conditions, consumer confidence measures how people feel about the economy and their personal finances. These perceptions provide insight into future consumer behavior, particularly spending patterns, which can drive economic growth and inflation. By tracking changes in sentiment, the Fed can better anticipate changes in demand and adjust monetary policy accordingly - though Chair Powell’s Fed has generally adopted a “wait and see” approach in the post-COVID era.

Worth noting is that the Fed does not have its own consumer confidence index, and instead primarily relies on the University of Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Index. While these surveys differ in methodology, both are widely used by economists, policymakers and Fed officials to assess potential shifts in consumer-driven demand. In a rapidly changing economic landscape, sentiment data provides a timely and complementary perspective to traditional, lagging indicators.

2025 AND BEYOND

The Conference Board released its latest Consumer Confidence report on May 27th, showing a meaningful rise in consumer optimism compared to April. This improvement was largely driven by hopes for trade deals, following a sharp decline in April amid heightened uncertainty around tariffs. When confidence plunged last month, Chair Powell urged the Fed to wait for confirmation of inflation in the hard data - rather than react to a meaningful drop in confidence. This rebound in the confidence report, alongside a moderately favorable April inflation report, provides early validation of this approach. Nevertheless, the Fed will continue to use consumer confidence as a key reference point amid ongoing economic uncertainties and volatility.

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