U.S. Consumer Spending Drops: Impact on Interest Rates and Economy

In January, U.S. consumer spending took an unexpected dip, which might make it harder for the Federal Reserve to cut interest rates just yet. Consumer spending, a big part of the U.S. economy, fell by 0.2% last month after a big rise of 0.8% in December, according to the U.S. government’s report. Economists had thought spending would increase by 0.1%, but the actual results were different.

The drop in spending could be due to a few reasons. People may have already bought what they needed in December, when many were worried about higher prices from tariffs. Additionally, cold weather and snowstorms across the country, as well as wildfires in places like Los Angeles, probably hurt shopping. The unusual weather also slowed down construction jobs.

Experts think that this news suggests the economy may grow slower at the beginning of the year, with predictions mostly below a 2% growth rate. Last quarter, the economy grew by 2.3%.

Problems have also arisen from policies from President Trump, like tariffs and big budget cuts, leading to job losses for many federal workers. In his first month, Trump put tariffs on goods from China and said new tariffs on goods from Mexico and Canada would begin soon. Other tariffs on steel, aluminum, and cars are also coming soon.

Confidence among businesses and consumers is falling due to worries about these tariffs, which could increase costs for everyone. People believe prices will rise over the next year, and recent data shows that the costs of living (the PCE price index) increased by 0.3% in January. Over the past year, prices rose by 2.5%. If you take out food and energy prices, the core inflation rate was 2.6%.

The Federal Reserve is keeping an eye on these price measures for their target of 2% inflation. Financial markets think the Fed might start to cut interest rates in June. Right now, their interest rate is between 4.25% and 4.50%, having decreased by a total of 1% since last September. Recent discussions have shown concerns about rising inflation due to Trump’s policies. Earlier, the Fed raised rates sharply in 2022 and 2023 to keep inflation in check.