Insight: Market Rout Could Blow Fed off Course If Consumers Blink

Federal Reserve officials are playing it cool for now, but roughly $2.5 trillion of stock market value wiped out in the past three weeks and a possible consumer pullback could throw the Fed off its course of gradual interest rate hikes.

Policymakers continue to argue that the threat will pass, but the risk that the selloff will hit the main engine of U.S. economic growth – household spending – gets bigger the longer markets remain depressed.

Fed research and other studies estimate that up to 6 percent of any drop in household net worth gets passed through and results in less spending. It means that unless the market recovers soon, upwards of $150 billion in consumption will be lost in coming months – a drag of close to 1 percent of gross domestic product.

Fed policymakers meet on Tuesday and Wednesday for the first time since raising interest rates in December. While no move is expected, investors will parse their statement to see how recent events have influenced the central bank’s outlook.

Since its last meeting, oil prices have plumbed new multi-year lows, worries about China’s growth have roiled stock markets, and Fed officials have voiced concerns that a recent drop in U.S. inflation expectations could mark a dent in household and business confidence.

Reuters

Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.