Can Strong Spending Change the Fed’s Rate Cut Plans?

Holiday Shopping Surge

Americans kept their wallets handy in December, driving up retail sales, and raising questions over the Federal Reserve’s policy path in 2024.

U.S. retail sales jumped 0.6% in December, primarily driven by an increase in motor vehicle purchases and a continued boom in online shopping. Consumer spending drives the U.S. economy, making this kind of data even more important as economists and investors are hoping the Federal Reserve can achieve a “soft landing” after raising interest rates to combat inflation.

Optimistic Outlook

Even though there are a lot of unknowns heading into 2024 — and election year no less — many are growing optimistic. The fact that U.S. consumers have remained so resilient through the worst of the post-pandemic inflation surge, has lifted spirits.

The Commerce Department’s report has led some economists to revise their estimates for Q4 economic growth. Core retail sales — which exclude automobiles, gasoline, building materials, and food services — jumped 0.8% in December. This subindex closely aligns with the consumer spending component of the GDP, which accounts for about two-thirds of U.S. economic growth. As a result, Q4 GDP estimates have now pushed above 2.2%. The Bureau of Economic Analysis will report the first estimate of Q4 GDP growth next week .

At the same time, the median increase in monthly household spending fell to just over 5% in December, according to the Federal Reserve Bank of New York’s quarterly SCE Household Spending Survey. While that’s still double pre-pandemic levels, it’s also the lowest level since April 2021, and a steep decline from 7.1% in 2022.

Shaping the Fed’s Path

Meanwhile, the Fed’s December projections showed as many as three cuts in 2024, with the market expecting the first one in March, per the CME FedWatch Tool .

But whether market expectations will be met at the Fed’s March meeting, remains to be seen. The persistent strength of the consumer has made the case for rate cuts less urgent, even as the labor market is cooling. At the same time, Fed governor Christopher Waller this week suggested that there was no rush to cut interest rates though cuts were likely this year.

If next week’s GDP data outperforms, it will be key to watch Fed expectations to understand where the market stands.

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