Stay informed with free updates
Simply sign up to the US inflation myFT Digest — delivered directly to your inbox.
A top US Federal Reserve official has said price cuts at big retailers and weaker sales suggest that a slowdown in consumer spending has “finally” begun, increasing the chances that the central bank will lower interest rates this year.
Adriana Kugler, a Fed governor, said retailers were being forced to lower prices to hang on to cost-conscious consumers, a trend that made her more optimistic that inflation was on course to hit the Fed’s 2 per cent goal.
A report released on Tuesday showing retail sales in May rose by just 0.1 per cent “may be another signal that the long-expected deceleration in consumer spending may finally be upon us”, Kugler said at an event at the Peterson Institute think-tank in Washington on Tuesday.
“If the economy evolves as I am expecting, it will likely become appropriate to ease [monetary] policy at some point later this year,” she added.
Kugler’s comments strike a dovish tone on US interest rates less than a week after Fed officials raised their forecasts for inflation this year, reflecting concern over lingering price pressures.
But Kugler, a voting member of the Fed’s rate-setting committee, said her discussions with retailers pointed to new weakness in consumer spending, which has powered the US economy in recent months even after two years of interest rates at 5.25-5.5 per cent, a 23-year high.
“What I have heard in my own conversations with business contacts is that consumers are ‘trading down’ to lower-cost products and that firms are responding with more discounting,” Kugler said.
Target and Walmart said last month they would cut the cost of thousands of items.
At Sam’s Club, Walmart’s members-only warehouse store chain, prices for items including private-label shredded mozzarella cheese, Thai jasmine rice and certain nut mixes have dropped to levels from before the Covid-19 pandemic, the company said.
In some negotiations with consumer packaged goods companies, “we have refused cost price increases because they were completely unjustifiable; in fact they should have been decreases. And we have removed those items from our clubs,” Chris Nicholas, Sam’s Club chief executive, said in an interview.
The discounting by retailers, combined with other signs of cooling across the economy, suggested “economic conditions are moving in the right direction” for rate cuts, Kugler said.
Her comments were echoed by Alberto Musalem, the president of the St Louis Federal Reserve but a non-voter at the central bank, who said on Tuesday that retailers were discounting items “because consumers are becoming more price-sensitive”.
The comments follow the Fed’s publication of its latest “dot-plot” projections showing officials were now backing just one rate cut this year, down from three in their previous forecast in March.
John Williams, president of the New York Fed and a voter at the US central bank, told Fox News on Tuesday that rate-setters would remain watchful of data, but that conditions were moving “in the right direction”.
Since the Fed vote, the University of Michigan’s closely watched poll of consumer sentiment unexpectedly fell in June. The jobless rate has also edged up, from 3.9 per cent in April to 4 per cent in May.
“We’re watching closely to make sure we’re not surprised by a sudden increase in unemployment,” Kugler said on Tuesday. “From previous experience, what we have seen is that when these phenomena take root, unemployment [can go] up very, very quickly.”
