Americans saved $815 billion in April, which is more than any other month. This is good news for consumers, but it could delay the Federal Reserve's efforts to slow inflation.
According to Torsten Slok, the chief economist of Apollo Global Management, the amount of cash on corporate and household balance sheets is so high that it will take more interest rate increases to slow the economy down.
"The problem is there is so much cash on household sector balance sheets and corporate sector balance sheets that it's going to take more rate hikes to slow the economy down, simply because the starting point is a level of cash that is much higher than we've ever seen before," said Slok.
According to Slok, the total amount of cash households and corporations have in their checking accounts is around $3 trillion higher than pre-crisis levels.
Rising interest rates to slow down demand growth
Since the Fed started raising interest rates, it has been trying to slow down the demand growth by implementing a policy of slowing down the economy's growth.
The Fed's efforts to slow down the economy's growth will likely take longer if interest rates continue to rise. Because of the massive amount of cash on the corporate and household balance sheets will take the central bank time to get the job done.
"The risk is that interest rates have to go up more…because it will take time for the Federal Reserve to succeed in cooling things down when there is so much cash among investors," Slok said.
People still spend money
Despite the various factors affecting the consumer side, people are still spending their cash in their checking accounts. They're shifting their spending on travel and entertainment.
Since the pandemic outbreak, the number of people flying in the U.S. has increased significantly. On Sunday, over 2.5 million individuals passed through security checkpoints. Slok also noted that restaurant reservation data and hotel occupancy rates have been strong.
Since consumer inflation is currently at 8.6%, the Fed has no choice but to act now to prevent it from rising further. The central bank targets 2% annual inflation.
"So there is absolutely no other option for the Fed than to step on the brakes to try to cool inflation," said Slok.
This is one of the reasons why many economists are sounding the alarm about the Fed tipping the economy into a recession.
Recession risks
Although some economists believe the U.S. is at risk of experiencing a recession, they don't think it's a long-term issue. For instance, Bruce Kasman, the chief economist of JPMorgan Chase & Co., said that the country could experience a short-term recession in the next six to nine months. However, he noted that it's still very high in terms of risk.
Despite the various factors that have affected the consumer side, Kasman believes that the U.S. economy is still in good shape. He noted that the country is still experiencing strong job growth and that consumer spending is still growing despite the rising cost of living.
However, Kasman said that the country is at risk of experiencing a recession due to the rising cost of living and tight financial conditions.
"There's a combination of higher inflation with commodity price pressures intense, tightening financial conditions, and more recently, of course, and importantly, what the Fed told us last week, which is that they're definitely moving policy into a restrictive stance, and that they ultimately do want the unemployment rate to rise," Kasman said.