Fed chair Powell has kept markets calm, but now he has to reassure American shoppers

Posted September 18, 2019 6:28 a.m. EDT

— Federal Reserve chairman Jerome Powell has spent a year messaging confidence to investors in the heavily coded language of central bankers, and last month finally gave President Donald Trump the rate cut he'd been demanding for months. Now Powell has a much tougher audience: American shoppers.

The thing keeping the US economy afloat despite Trump's ongoing trade wars and contractions overseas is consumer spending, which has stayed strong despite a slew of negative headlines -- a federal budget deficit topping $1 trillion, bond markets sending signals of a looming recession and now an oil shock in Saudi Arabia. But any slip, especially heading into the holiday season, could mean the difference between a gentle slowdown and a full-blown recession.

"The one aspect of the US economy that's really holding up well is the consumer, and if the consumer gets freaked out and clutches the pocketbook tighter then a downturn becomes a self-fulfilling prophecy," Greg McBride, chief financial analyst for told CNN.

Powell waved off imminent recession fears in a speech earlier this month, and will surely try to assuage those concerns Wednesday at his scheduled press briefing following the Fed's decision on rates. The central bank is expected to lower rates by a quarter-percentage point to a range between 1.75% and 2% following its routine two-day interest-rate policy-setting meeting in Washington.

Consumer spending has stayed solid thanks to strong jobs numbers and continued growth. Retail sales in August beat economists' expectations as household spending continues to be robust, driven by higher auto sales.

"Consumer confidence is high," Robert Frick, corporate economist for the Navy Federal Credit Union told CNN. "Powell can legitimately say that the economy is doing well because the consumer economy is doing well. There's a reason why people feel secure. Powell won't be lying when he says, 'We have good income, good spending, good jobs, good confidence.' All that's true."

But confidence in the economy, which is typically viewed through the lens of how workers feel about their job prospects and wages, tells only one part of the story. Consumer sentiment -- that is, how an individual feels about their current financial standing -- is showing signs of weakening.

US consumer sentiment fell markedly in August, with the University of Michigan's Consumer Sentiment Index posting its largest monthly decline since December 2012.

"The August data indicate that the erosion of consumer confidence due to tariff policies is now well under way," said Richard Curtain, director of the survey, in a statement at the time. He said consumers, who had spontaneously made "negative references to tariffs" also expect higher inflation next year, rising unemployment and smaller gains in household paychecks.

The mixed data and conflicting indicators, analysts say, help explain why Fed officials are divided over what to do next. Two members of the Fed's policy-setting committee -- Boston Fed president Eric Rosengren and Kansas City president Esther George -- voted against the decision to cut rates in July and are likely to object again at this week's meeting, according to Fed watchers.

The unclear outlook on the economy is one of the reasons why central bankers at their last meeting in July signaled they were eager "to maintain optionality" -- or flexibility--when it comes to charting the path of interest rates for the remainder of the year.

Analysts said consumers typically take a while to change their habits, even if they aren't sure what's coming next.

"It takes a big change in interest rates or oil prices for people to actually become fearful and anxious, or even to change their spending patterns," said Frick.

That's why Powell's comments Wednesday will be critical, says Chris Rupkey, chief financial economist at MUFG Union Bank

"If the Fed statement warns of downside economic risks and more rate cuts to follow, that would be likely to hurt consumer confidence," said Rupkey. "But if it's one more and done for the Fed then I don't think consumers will become more fearful about a possible recession and the job losses that come with that."