New Fed chair takes helm as inflation rises and consumer spending slows

On Wednesday, Kevin Warsh was officially confirmed by the Senate as the next Federal Reserve chair by a vote of 54 – 45. His confirmation includes:

• A 14-year term on the Fed’s Board of Governors
• A 4-year term as Fed chair

Jerome Powell’s term as Fed chair ended May 15, and Warsh officially began serving immediately following.

Two key inflation reports were released this week, the Consumer Price Index (CPI) and the Producer Price Index (PPI), and both told the same story of rising prices.

• CPI came in 0.6% higher in April and rose 3.8% year-over-year. This is the highest annual rate in 3 years, driven by rising energy prices.
• PPI rose 1.4% in April, up 6% year-over-year, the largest increase since 2022. Businesses continue to face higher input and transportation costs, again largely driven by higher energy prices.  

Rising inflation pressures have put the new Fed chairman in a difficult position and has all but removed the chance of a rate cut for the year.

Recently, a few food-focused companies reported some concerning trends around their Q1 earnings. Both Domino’s and McDonald’s reported recent downturns in consumer spending habits that had a significant impact on their bottom lines and could influence any future strategies put into play. We believe this pullback in consumer spending could trickle its way down to having an effect on the housing market as well.

On an April 27 earnings call, Domino’s CEO Russell Weiner said, “Looking back at Q1, pressure intensified throughout the quarter, in particular, in March because of growing consumer uncertainty. Consumer sentiment hit COVID-level lows, and ongoing inflation continued to impact purchase decisions.” Weiner also referenced the Iran conflict and the impact that rising gasoline prices is having on the spending habits of American households. McDonald’s CEO Chris Kempczinski echoed similar statements on a recent earnings call. He mentioned the current consumer environment, saying, “It’s certainly not improving, and it may be getting a little bit worse.” While he was pleased with McDonald’s performance overall, he was cognizant of the challenging landscape they’ll be operating in moving forward. The rise of both gasoline prices and inflation tends to have a disproportionate impact on lower-income consumers, a substantial part of each food giant’s consumer base.

With both Domino’s and McDonald’s being on the lower side of pricing when it comes to food options, their reports around a slowdown in consumer spending habits are even more concerning. In the past, a slowdown in consumer spending could be a leading indicator of a recession being on the horizon. That being said, extreme world events are providing us with a challenging and unpredictable environment to operate within. As we mentioned above, Kevin Warsh was recently approved by the Senate as the next Federal Reserve chair. He will be entering at a difficult moment as consumer spending weakens and inflation continues to rise. With so much noise being made about mortgage rates needing to decrease, it will be interesting to see how Warsh decides to hit the ground running. As these events play out in real time, we will continue to monitor the impact they will have on consumers, as well as any trickle-down effects that could be felt by the housing market.