The first chart below shows that households during the pandemic saved an additional $2.6trn, and so far, consumers have only spent $100bn of these savings.
The second and third charts show that the amount of money in checking accounts at commercial banks is about $3trn higher than the pre-pandemic trend.
With US annual consumer spending at around $16trn, these amounts of cash on the sidelines are a significant tailwind for the US economy over the coming quarters. And because these savings are readily available for consumers to spend, increasing the Fed funds rate will have a less negative impact on the economy than normally because consumers don’t need to borrow when they have extra cash in their bank accounts.
Put differently, when there is a lot of cash in the economy, the transmission mechanism of monetary policy is weaker. As a result, the Fed has to increase interest rates even more than during previous hiking cycles.
The bottom line is that interest rates will continue to rise, and it could take several quarters before the US consumer starts slowing down meaningfully.
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