If the Federal Reserve is looking for an excuse not to raise interest rates at the June 28/29 FOMC meeting, it didn’t find one in yesterday’s release of consumer borrowing for April. Yes, April’s numbers are old, bordering on ancient, coming at a time of increasing anxiety as Wall Street and the Fed are desperately looking for clues about what comes next in the economy. But something is better than nothing (maybe), and two-month old data will have to do.
As such, the unexpectedly sharp rise in consumer borrowing in April extends one more reason, however flimsy, to think that Bernanke and company will vote to elevate Fed funds by another 25 basis points come the end of this month. Indeed, consumer credit (defined here as excluding mortgage loans) jumped by an annual rate of 5.9% in April, the Federal Reserve reported. That’s the fastest annual pace in about a year, a sharply above March’s meager 0.8% rise. If there’s an economic slowdown coming, as more than a few dismal scientists predicts, Joe Sixpack didn’t receive word of that future in time to curtail borrowing in April. Perhaps a more reserved Joe will emerge in May’s data.
Meantime, the consumer credit news had little impact on the bond market, although the yield on the 10-year Treasury did edge up a bit yesterday to close at about 5.03%. No matter, as the Fed funds futures market continues to hold fast to its recently revised prediction that another 25-basis-point rate hike is coming later this month.
But between now and the FOMC meeting on June 28/29 holds the potential for more than a little volatility as new data is released. Among the probable sources of revised thinking one way or another: next Wednesday’s consumer price report for May; industrial production’s update the day after; the latest on housing starts on June 20; durable goods on June 23; and existing home sales on June 27. And, of course, Mr. Bernanke may be inclined to talk publicly at some time between now and the end of June; given his recent history on chatting, we wouldn’t underestimate his capacity to reformulate Wall Street’s thinking yet again about the next step in monetary policy.
Yes, a 25-basis-point hike now seems likely. But tomorrow never knows. As the Beatle song recommends, “Turn off your mind, relax and float down stream…Lay down all thought, Surrender to the void.” Sounds like a plan.