U.S. Consumer Spending Rises, Brexit Casts Shadow on Outlook

U.S. consumer spending rose for a second straight month in May on increased demand for automobiles and other goods, but there are fears Britain’s vote to leave the European Union could hurt confidence and prompt households to cut back on consumption.

Despite the healthy consumer spending, Brexit made it unlikely that the Federal Reserve would raise interest rate soon. The U.S. central bank needed to be sure there was no shock from the outcome of the British referendum before tightening monetary policy further. The dollar fell against a basket of currencies, while prices for longer-dated U.S. government debt rose.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 percent last month after surging 1.1 percent in April.  The economy is doing well.  However, there are many uncertainties in the market.  Therefore, consumers and business should watch out for their spending or expansion in the next quarter.

The Fed Is Now More Likely to Cut Interest Rates Than Raise Them

Wall Street is betting Brexit will change the minds of raising interest rates in the next meeting.

The probability of a federal funds rate hike at the Fed’s next three monthly meetings has collapsed to 0%, and traders are assigning a less than 8% chance of a rate increase at all this year. Earlier in June, Fed policymakers had indicated that they expected to raise rates twice this year, following their last increase in late 2015.  That’s because the risks surrounding Brexit are greater than what they were during the financial crisis because of the high level of uncertainty surrounding Britain’s future.