The conundrum facing the Federal Reserve may be best illustrated by this: U.S. workers are growing more optimistic about income growth in the next year, but they aren't nearly as confident about how much they'll spend.
That indicates the central bank is making progress toward achieving maximum employment, half of its mandate, but that the benefits of that success -- which typically would buoy economic growth, the second half of the Fed's mission -- are less than ideal.
How the bank's monetary policy committee evaluates the two seemingly disparate trends will be a pivotal part of its decision about whether to raise interest rates next month for the second time since the 2008 financial crisis. Committee members were open to the possibility of a hike in June, according to minutes from their April meeting released Wednesday, but not unanimous about whether enough positive data would exist to support such a move.
"If I get convinced that my own forecast is sort of own track, then I think tightening in the summer, with a June or July frame, is really a reasonable expectation," New York Fed President Bill Dudley, who holds a permanent vote on the monetary policy committee, said in a news conference on Thursday. "It's really a question of whether the economy cooperates in terms of my personal expectations."
Trading in Federal Funds Rate futures now indicates a 26% change the central bank will double interest rates in June, to a range of 0.5% to 0.75%. That's roughly twice the likelihood a day before the minutes were released, when trades still indicated a more than 30% chance there would be no increase at all this year.
Since banks typically benefit from passing rate increases on to borrowers more quickly than lenders, the Fed's decision to raise rates by 25 basis points in December, coupled with a projection of four more hikes this year, was a boost to their stocks. It fizzled quickly, however, as the Fed cut that projection by half amid market turmoil at the start of the year.
One of the drivers of that turmoil, falling crude oil prices, has weakened as prices rallied from a February low around $26 a barrel, and Dudley noted Wednesday that markets seem to be growing more comfortable with how China is adjusting its currency-exchange rate to protect growth. Slower expansion in that economy, the world's second-largest, has been a drag on markets as traders speculated that the country was in worse shape than government data indicated.
Another international issue that may weigh on the Fed is the United Kingdom's vote on whether to leave the European Union, scheduled for June 23, a little more than a week after the monetary policy committee's June meeting. A decision to leave could rattle markets, weakening Britain's economic clout and curbing the benefits to the U.S. of its typically strong relationship with the country.
"We'd have to think about that, in terms of whether it makes sense to go in June or wait a little bit later," Dudley said Thursday. "I wouldn't want to say that Brexit is determinative; it depends a bit on the probability of an adverse vote -- a leave vote -- what's our assessment of the likelihood of that, and what's our assessment of the likelihood of the impact on financial conditions if there was such a vote."
Such questions make the disparate economic data inside the U.S. appear less daunting in comparison. And closer scrutiny of the data on earnings growth shows at least part of the reason that it's not having a greater effect on spending plans.
While the median projection for income growth in the next year has rebounded to 2.4%, the gain was concentrated among lower- and middle-income workers, according to the New York Fed's Survey of Consumer Expectations.
Not only do raises given to lower-earning employees generate less of an increase in spending power, survey participants indicated a greater likelihood of losing their jobs than last fall, and a smaller probability of finding another one.
"The devil is really in the details," Robert Rosener, an economist with Morgan Stanley, said in a video presentation."The industries that are seeing above-trend wage growth have largely been concentrated at the lower end of the pay scale, which doesn't move the needle as much."