Market Week: June 19, 2023

The week in review

  • The Fed held rates at a range of 5.00-5.25%
  • May headline CPI rose 0.1% and core CPI rose 0.4%
  • Retail sales rose 0.3% and 0.1% ex-autos

The week ahead

  • Housing starts and permits
  • Prelim. PMI for June
  • Existing home sales

Thought of the week

Last week, the Federal Reserve opted to keep the federal funds rate unchanged but hawkish messaging left the door open for further tightening in the coming months. In the Fed’s defense, economic growth has so far been resilient, suggesting the economy may be able to weather tighter conditions for longer. However, cracks are emerging, and one notable risk on the horizon is the resumption of student loan payments. The debt ceiling resolution bill mandated that the pandemic student loan debt relief program end on June 30 as scheduled, with payments resuming in late August, regardless of an expected Supreme Court ruling on President Biden’s partial debt forgiveness program.

In 1Q23, nearly 44 million Americans owed more than $1.6 trillion in federal student loan debt and, according to Moody’s, these borrowers will be faced with an average $250 monthly payment once payments resume. While this may not be a significant amount for many Americans, the majority of student loan debt is held by younger Americans. This is notable because these consumers tend to have a higher marginal propensity to spend, greater credit card debt and smaller accumulated savings than their older counterparts, suggesting that the payment resumption is likely to detract from spending in discretionary areas such as clothing and entertainment. Overall, we think that the impact of forbearance ending should only be a moderate hit to the economy.

However, it is coming at an inopportune time and even a modest consumer pullback will add to the economy’s vulnerability under the weight of monetary and credit tightening. With inflation falling and economic storm clouds gathering, the Fed may be too optimistic in believing that further tightening won’t put the economy into a significant recession, giving investors good reason for caution.

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