Despite stable economic data, Americans increasingly view the economy negatively, so the Federal Reserve will need to track their views less closely in its policymaking, the president of the Federal Reserve Bank of Chicago indicated Wednesday.
“We’re experiencing record divergence between the vibes and the hard data,” said Austan Goolsbee, speaking at an event at Chicago Fed headquarters on the growing mismatch between economic performance and consumer sentiment. Goolsbee also is an alternate member of the Federal Open Market Committee, which sets interest rates.
Americans’ views of the economy have continued to weaken. A leading measure of consumer confidence in the economy fell in September to its lowest level since 2014, according to survey results released by the Conference Board on Tuesday.
Goolsbee’s comments came two weeks after the Fed raised its benchmark rate for the first time since 2023. The quarter-point hike, to a range of 3.75% to 4%, arrived amid fears of stubborn inflation as the U.S.-Iran war wears on.
Still, newly released data about the economy’s fundamentals tempered expectations this week that the Fed will raise interest rates further. And indeed, Americans’ views of the economy may weigh less heavily on the Fed’s policy decisions as their sentiment becomes more distant from the data, said Goolsbee.
“To the extent that the sentiment predicts the hard numbers, the Fed has to care,” he said. “To the extent that that relationship is getting vaguer, the Fed phases back its narrow interest in the consumer sentiment measures.”
The pronounced divergence between consumer sentiment and consumer spending began in the pandemic and has persisted since.
Inflation has remained elevated. Prices were 3.4% higher in August compared with a year ago, per the Fed’s preferred metric, the federal government announced Wednesday. The index increased 0.3% compared with July, and by 0.2% excluding energy and food.
Crucially, however, consumer spending grew across the board by 0.9% compared with July.
Investors now give a 38% chance that the Fed will increase the interest rate at its next meeting in late October, according to CME Group, parent company of the Chicago Mercantile Exchange. Only a day earlier, on Tuesday, that probability was 51%, and a week earlier, 71%.
The Fed has a “dual mandate” to maximize employment and restrain inflation to 2%. That means, effectively, the Fed’s main function is to manage demand in the economy, Goolsbee said.
“If anything is going to be correlated with demand fluctuations, of course we’re going to care in the Fed,” Goolsbee said. “The law tells us we have to care. And that is why there has always been a little special function for consumer sentiment at the Fed.”
But something has gone out of whack since 2020.
Americans’ spending powered upward even as their views on the economy soured. It’s a phenomenon that economic commentator Kyla Scanlon, who moderated Wednesday’s event, has previously termed a “vibecession.”
Central to the “vibecession” is the power of inflation, which peaked in 2022 after pandemic-triggered supply issues and government stimulus spending. Year-over-year inflation has since cooled, meaning prices have stayed high but are increasing at a slower rate.
Recent price shocks like the Iran war have made Americans more pessimistic about the economy and frustrated with high, still-rising prices.
More Top Picks Cold Frames
“Every time they see a gas station, they know what the price level is,” said Brian Fabes, a senior fellow at NORC at the University of Chicago.
So when people hear that the economy is strong, “there’s cognitive dissonance,” said Ric Estrada, the president and CEO of Metropolitan Family Services.
Goolsbee gave little indication of how exactly the Fed will treat that dissonance as the “vibecession” hangs over the economy. Still, he did not count out consumer sentiment entirely, at least as a measure of how Americans think the economy will perform.
“You don’t get that many real-time indicators about people’s expectations,” Goolsbee said.