In May, economists Hamza Abdelrahman and Luiz E. Oliveira of the Federal Reserve Bank of San Francisco published a blog post suggesting that, since the pandemic, American households at all income levels have been sitting on a substantial amount of excess savings (the difference between actual savings and the pre-recession trend). That was enough cash to support consumer spending at least through 2023. (How the 16 most important issues to Americans rank.)

That outlook has changed. Revised estimates based on new data indicate that rather than the $500 billion believed to have been available in May, the amount of excess savings had dropped to around $190 billion at the end of June. Abdelrahman and Oliveira admit that there is “considerable uncertainty in the outlook,” but the amount of excess savings is now expected to run out during the third quarter. That’s right now.

The Fed economists do not attempt to describe what that drop in excess savings will mean to different parts of the U.S. economy, but it could be pointing to lower spending on travel, cars and other consumer discretionary products.

In the minutes of the Fed’s open market committee (FOMC) meeting released Wednesday, the committee acknowledged that “the declining stock of excess savings” will contribute to expected slower growth in consumer spending in the months ahead:

Participants noted that consumer spending had recently exhibited considerable resilience, underpinned by, in aggregate, strong household balance sheets, robust job and income gains, a low unemployment rate, and rising consumer confidence. Nevertheless, tight financial conditions, primarily reflecting the cumulative effect of the Committee’s shift to a restrictive policy stance, were expected to contribute to slower growth in consumption in the period ahead. Participants cited other factors that were likely leading to, or appeared consistent with, a slowdown in consumption, including the declining stock of excess savings, softening labor market conditions, and increased price sensitivity on the part of customers. Some participants observed that recent increases in home prices suggested that the housing sector’s response to monetary policy restraint may have peaked.

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The FOMC views this as a good thing because as demand falls, prices fall with them, and the overall effect is to reduce inflation.

On Wednesday, the Atlanta Fed released its latest GDPNow forecast indicating that the U.S. economy is growing at an annualized rate of 5.8% in the third quarter. If history is any guide, that estimate is probably too high by at least half the eventual outcome.

Still, it will give the FOMC pause at its next meeting in September. Before the GDPNow forecast, Wall Street had the chance of another rate hike down to around 10%. And given the rather hawkish attitude of some FOMC members, the odds of another hike likely just increased.

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