Howard Schneider, Lindsay (NYSE) Dunsmuir

(Reuters] – While the impact of the coronavirus outbreak was minimized, the U.S. household’s financial stability may have exacerbated and prolonged the Federal Reserve’s fight against inflation. The central bank is waiting for Americans to exhaust their spending capacity.

Although the recent plunge in stock market price – which is a source for household wealth and has increased its influence across income levels over recent years – may soften consumption, reports on inflation, household debt, and financial conditions this week gave no indication that consumers are near breaking point.

The Labor Department published April inflation data Wednesday, which put the Fed’s dilemma in stark relief. Overall consumer price growth slowed significantly from March’s high-since 2005 pace, but it was not as fast as predicted. There were also new signs that inflation pressures held steady in key areas, such as travel and rent.

Seema Shah is the chief strategist of Principal Global Investors. “This is an additional upward inflation surprise, and suggests that there will be painstakingly slow deceleration,” she said.

On Tuesday, data from the New York Fed showed that household debt increased to an all-time high in the second quarter. However, the evidence was not yet clear that households are overstretched.

Although there was a slight increase in delinquent households during the first stages, the New York Fed stated that the rate is “very low” by historical standards. The New York Fed also stated that the levels of greater debt stress, such as bankruptcies and debt collection proceedings are at their lowest level since 1999 when it started collecting data.

Fed policymakers are noted to be keenly monitoring household balances as they assess how long Americans will remain cash-rich.

Neel Kashkari, Minneapolis Fed president, said Monday that he expected to see more evidence of households’ balances being dwindled. There is a chance that the economy may have been forced to an even higher pressure equilibrium. He said that if this is the case then there will be more to do to lower inflation.

The U.S. economy contracted during the first quarter due to technical issues in inventory management. There are not many signs of activity at the consumer level that suggests an increase.

Bank of America (NYSE) has released the latest snapshot of financial well-being and spending by consumers. It was gleaned from their database of more than 67,000,000 small businesses and consumer customers. The data shows that credit card and debit card usage is increasing faster than inflation. On a year-overyear basis, credit and debit card spending rose 13% in April. However overall household card spending was 23.7% more than it was before the pandemic.

Visitors are traveling more frequently with Americans. On Tuesday, the number of visitors who were processed at Transportation Security Administration checkpoints was down 15% compared to 40% one year earlier. Visitors are returning to tourist spots such as Las Vegas and the spending is also on the rise.

Fed officials have been increasing interest rates to try and curb excessive demand. This will slow inflation but not force the economy into contraction, which is what it often does in response to tightening credit.

The Fed will be watching “how our policies flow through.” Raphael Bostic, Atlanta Fed President, said Tuesday night that he does not see any demand pulling back in key areas. So far “we don’t see that. “Demand is extremely strong.”

Bostic warned that demand will also slow down as people adjust to rising prices. He also said families could see their wealth shaken by “incredibly rapid and incredibly robust shifts” in the financial markets over recent weeks, as bond and stock indices dropped.

The Fed may have a harder time influencing spending behaviour due to the strong balance sheets of corporate and household finances. However, increasing exposure to the investment market may increase the “wealth effect,” as less asset value leads to lower consumption and more prudent decisionmaking.

Roger Aliaga Diaz, Vanguard’s chief economist for Americas, stated that there is a growing belief that asset prices directly influence consumer behavior. He estimated that the billions of dollars in wealth that have been wiped away over the past weeks could account for one percent of the decline in U.S. growth.

“I am certain they are counting that impact,” he stated.