A senior Federal Reserve official suggests that the slowdown in US retail sales strengthens the case for potential rate cuts.

 

A leading US Federal Reserve official has underlined that price reductions by major retailers along with softer sales numbers have been an indication of a slowdown in consumer spending that has "finally" begun, which might actually clear the way for interest rate cuts later in this year.

Adriana Kugler, a Fed governor, observed that slashing prices is a retailer's way to retain budget-focused consumers—a trend that strikes her as consistent with her view that inflation is getting closer to the Fed's 2% target. In remarks at the Peterson Institute in Washington, she said Tuesday's report of a slight 0.1% rise in retail sales for May was more evidence of the expected slowdown in consumer spending.

"If the economy evolves as expected, it could be appropriate to start removing policy accommodation later this year," Kugler added.

Kugler's comments are underscoring a dovish tone on US interest rates just after Fed officials upwardly revised their inflation forecasts, indicating that sticky price pressures remained of relevance.

In a speech, Kugler, a voting member of the Fed's rate-setting committee, drew on conversations with retailers that showed signs consumer spending is weakening, which has been the driving force behind the US economy in recent times, even with interest rates holding briskly between 5.25 percent and 5.5 percent for two years now—the highest in 23 years.

"In discussions with business contacts, I've learned that consumers are increasingly opting for lower-cost products, prompting firms to respond with increased discounting," Kugler noticed.

Only recently did Target and Walmart announce aggressive price cuts on thousands of items. For instance, Sam's Club lowered prices for items such as its private-label shredded mozzarella cheese, Thai jasmine rice, and some mixes of nuts to pre-pandemic levels.

Chris Nicholas, CEO of Sam's Club, said his company has held its position against unfair cost increases by consumer goods companies, rejecting price hikes and pulling items off shelves when the pricing was too steep.

The discounting trend among retailers, along with other broader economic cooling indicators, is an environment ripe for potential rate cuts, according to Kugler.

Alberto: For that matter, even Alberto Musalem, president of the St. Louis Fed—a non-voting member—has seconded Kugler's observations, attributing the discounting strategies by retailers to heightened consumer price sensitivity.

These comments come just a week after the Fed released its latest "dot-plot" projections, which now call for only one rate cut this year, down from three forecasted in March.