Tighter credit, slower spending by better-off households may further cloud Fed outlook

Howard Schneider

Tue, Mar 18, 2025, 3:03 AM 4 min read

By Howard Schneider

WASHINGTON (Reuters) - Tumbling stock markets and signs of tightening credit may make the Federal Reserve's job even more difficult this week as U.S. central bank policymakers try to weigh whether consumer spending will suffer as households take stock of the potential blow to their net worth and greater difficulty in obtaining loans.

U.S. retail sales for February, reported on Monday in the last set of hard economic data Fed officials will see before kicking off their two-day policy meeting on Tuesday, were weaker than expected. Some economists saw the slowdown in spending on optional categories like restaurant meals as a signal that consumers across the board - not just lower-income households - were beginning to dial back their purchases.

"Restaurant sales ... have been moving sideways to down on a three-month average level in the last couple of months," analysts from Citi wrote. "This ... could suggest some softness more broadly with services consumption. Other discretionary categories like furniture, sporting goods, and apparel were weaker" as consumers spent more on non-discretionary items.

The Fed will release a new policy statement at 2 p.m. EDT (1800 GMT) on Wednesday. Though the central bank is expected to leave its benchmark overnight interest rate unchanged in the 4.25%-4.50% range, it will also issue new economic projections from policymakers that will give an idea of how they feel President Donald Trump's policies will affect economic growth, inflation and unemployment, and how interest rates may need to change as a result.

A slowdown in consumer spending might raise the Fed's concerns about growth and make it more inclined to cut rates. But the volatility around Trump's trade policies, which risk raising prices, has left Fed officials facing the potential quandary of a weaker economy and an acceleration in inflation.

The Atlanta Fed's GDPNow tracker, updated after the retail sales data, estimates consumer spending in the first quarter may grow by only 0.4% versus a prior estimate of 1.1%.

Adding to an already complex situation is a recent tumble in stock prices that has erased nearly $6 trillion in market value, with the hit spanning individual and institutional investors as well as household retirement accounts.

TIGHTENING CONDITIONS

In moments of market volatility, Fed officials will often point out that their job is to maintain stable inflation and maximum employment, not to keep stock prices high.

But stock prices and financial markets in general influence how the broader economy behaves, and in recent weeks the signs have been pointing to tightening credit conditions.