U.S. consumer sentiment ebbs in March; inflation expectations ease By Reuters

WASHINGTON (Reuters) – U.S. consumer sentiment fell for the first time in four months in March, but households expected inflation to subside over the next year and beyond, which could offer some relief to the Federal Reserve as it confronts financial market instability.

The ebb in sentiment reported by the University of Michigan on Friday was before the recent collapse of two regional banks, which sparked fears of contagion in the banking sector. Worries about a banking crisis against the backdrop of data this month showing a still-tight labor market and consumer prices remaining stubbornly high in February have created a dilemma for the Fed.

“Inflation expectations are falling, giving the Fed some flexibility in the future path of rate hikes,” said Jeffrey Roach, chief economist at LPL Financial (NASDAQ:) in Charlotte, North Carolina. “The Fed now has two serious concerns over financial stability and persistent inflation.”

The University of Michigan’s preliminary March reading on the overall index of consumer sentiment came in at 63.4, down from 67 in the prior month. Economists polled by Reuters had forecast a preliminary reading of 67.0.

“This month’s decrease was already fully realized prior to the failure of Silicon Valley Bank, at which time about 85% of our interviews for this preliminary release had been completed,” said Surveys of Consumers Director Joanne Hsu.

The decline in sentiment was concentrated among lower-income, less-educated and younger consumers, as well as consumers with the top tercile of stock holdings, Hsu added.

The survey’s reading of one-year inflation expectations fell to 3.8%, the lowest since April 2021, from 4.1% in February. Its five-year inflation outlook dropped to 2.8%, falling below the narrow 2.9-3.1% range for only the second time in the last 20 months.

(Graphic: UMich inflation expectations – https://www.reuters.com/graphics/USA-STOCKS/movakwjyrva/umichinflation.png)

Financial markets expect the Fed to raise interest rates by another quarter of a percentage point next Wednesday, according to CME Group’s (NASDAQ:) FedWatch tool.

But banking sector instability following the failure of Silicon Valley Bank in California and Signature Bank (NASDAQ:) in New York as well as problems at Credit Suisse has prompted some speculation that the central bank could pause its most aggressive monetary policy tightening campaign since the 1980s.

The Fed has raised its benchmark overnight interest rate by 450…