We all know that for the Fed to keep with its higher rates for longer policy, it needs the US economy to keep as solid as it is now in the months or even year ahead. In that lieu, I would argue that the most confounding thing about the US economy in the last year has been the resilience of the US consumer. But is all that about to change?

This is pretty great chart (h/t @ Mayhem4Markets) and it speaks to how the pandemic savings is quickly depleting in the US and already has for the lower and middle income households i.e. bottom 80%.

For one, that could translate to weaker spending in the months ahead as consumers run out of excess savings to spend – especially for non-essential goods.

In the face of more subdued consumption and spending, that will in turn impact businesses and spill over to softer labour market conditions perhaps. So, don’t underestimate the chain effect this may have.

Essentially, the US consumer is the ribbon that ties everything together for the Fed right now. If that comes undone and the economy starts to weaken significantly, that will throw the Fed into a bit of a disarray in trying to manage its higher for longer narrative.

And the key question now is, as pandemic savings run out, how soon will this turn into material weakness in the US consumer?

So far, we’re not seeing much signs of that but it is worth keeping an eye out for just in case. It’s all about the data right now but it is important to recognise the potential drivers and forces that may come into play in the months ahead and this is one of that. And a rather critical one at that I might add.

This article was written by Justin Low at www.forexlive.com.