Will Tuesday’s Retail Sales Data Affect the Fed’s Decision?

Consumers delivered another positive retail sales report for August despite weakening in some sales categories.

Census Bureau data showed that U.S. retail and food sales in August were 0.1% higher than the prior month. Economists surveyed by the Wall Street Journal and Dow Jones Newswires had projected a 0.2% decline. However, the surprise August increase was slower than the prior month’s results, which was also upwardly revised.

“Consumers are still worn down from inflation, but they’re continuing to spend, particularly at value-oriented retailers,” wrote Claire Tassin, retail and e-commerce analyst at Morning Consult. 

Will Retail Sales Data Influence Interest Rates?

The retail sales data come on the same day as the Federal Open Market Committee (FOMC) begins its two-day meeting, which could further complicate the central bankers’ already difficult decision.

Economists widely expect the central bank to cut interest rates. However, there have been some questions about whether the Fed will make a standard cut of a quarter percentage point or a more aggressive half-percent cut. 

While the retail report doesn’t change the chances of a cut, it could be a factor in deciding how much to cut. Economists and traders just don’t agree on which way it could influence central bankers.

“Retail sales won’t sway Fed officials as they start their September policy meeting today,” wrote Oren Klachkin, financial markets economist at Nationwide, who projected the Fed would stick to a quarter-point cut. 

On the other hand, Wells Fargo economists pointed out that the data showed a slowdown in sales across several categories, demonstrating that consumers are more selective about their spending. 

“The consumer may technically be unstoppable, but in recent months, spending has undeniably slowed sharply,” wrote Wells Fargo economists Tim Quinlan and Shannon Seery Grein. “For policymakers already aware of the need to make the policy environment less restrictive, this weakening may encourage the Fed to deliver a larger cut to initiate its easing cycle.”

Traders slightly muted their expectations for a more aggressive cut Tuesday morning, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. They are now pricing in a 61% chance of a half-point cut, down from 67% before the data was released.

BMO Senior Economist Sal Guatieri wrote that the retail sales data alone may not clearly indicate a direction for central bankers, but it could be another piece of evidence that accumulates.

“Policymakers have become increasingly worried about the rising jobless rate, and higher credit card and auto loan delinquency rates suggest that not all households are in a spending mood,” he wrote.