Retail Sales Are the Last Big Economic News Before Fed Rate Decision

Tuesday’s retail sales report could be the scrap of evidence that tips the balance as Federal Reserve officials decide how much to cut interest rates on Wednesday.

It is practically a given that the central bank will reduce rates. Inflation has fallen to its lowest point since February 2021, giving the Fed more flexibility to focus on the second component of its dual mandate—achieving maximum employment. Although the labor market remains resilient, the most recent two jobs reports have been weaker than expected, putting some pressure on the Fed to loosen monetary policy.

The question now is by how much rates will fall—0.5 percentage point, or 0.25 point? The indications from interest-rate futures are split , recently favoring the more aggressive half-percentage-point decrease.

Andrew Hollenhorst, an economist at Citi , leans toward the likelihood the Fed is more cautious on Wednesday, cutting rates by 0.25 percentage points. But he notes that it it is a close call that depends on the dynamics of the bank’s rate-setting committee and the strength or weakness of Tuesday’s retail sales report.

A positive surprise would suggest that both consumers and the labor market remain resilient, paving the way for a more modest cut. If the report comes in well below expectations, however, Fed officials may grow concerned that a weaker labor market is weighing on consumer spending, which could lead to a bigger cut, Hollenhorst added.

Louis Navellier, founder and chief investment officer of the money-management firm Navellier agrees. “In theory, if the August retail sales report is horrible, then a 0.5% Fed key interest rate cut may be forthcoming on Wednesday,” he said.

Economists are expecting retail sales will decline by 0.2% in August from July, according to FactSet. They jumped by a surprising 1% in July .

Lower gasoline prices and car sales will likely drag the headline number lower. Indeed, stripping out car and gas sales, retail sales are projected to increase by about 0.3% month over month.

Yet there is growing concern that even excluding autos and gas sales, the sales figure will be soft. While spending was remarkably strong in July, the Fed’s latest Beige Book flagged that consumer spending ticked down in August, points out Bill Adams, chief economist for Comerica Bank . Many retailers, particularly those catering to lower-income shoppers, have warned that Americans are being cautious and exceedingly choosy about what they are buying and where.

The impact of the retail sales report will likely extend beyond the immediate rate cut. The insights it contains about U.S. consumers will also factor into the Fed’s quarterly update to its Summary of Economic Projections, containing officials’ latest forecasts for the U.S. economy, inflation, and near-term interest rates.

The so-called dot plot , which charts the individual interest-rate projections of the seven members of the Fed’s board of governors and the 12 regional Fed presidents, is always closely watched as investors try to chart the Fed’s future actions.

Hollenhorst believes the median dot showing where rates will be at the end of 2024 should show “at least” 0.75 percentage-point of cuts, factoring in 0.25 point at each meeting through the end of the year. But it is likely that officials will leave the door open for more cuts in case data on the job market or consumer spending sour faster than expected.

It seems that just about all San Francisco political leaders have lately acknowledged the need to rein in progressive policies—except perhaps the one running for President of the United States.

Compared to past elections, the mayor’s race in San Francisco this year has been striking for its focus on the need for law and order. Even many leftist politicos are sounding more moderate these days and offering fewer progressive virtue signals—perhaps because such signals don’t yield progress and lack virtue.

The San Francisco Standard’s David Sjostedt reports on the incumbent running for re-election:

How very Texan of Ms. Breed. Earlier this year she led a successful referendum campaign to cut off cash assistance to drug addicts who refuse to enter treatment programs. While she’s at it, perhaps she’ll consider turning off the subsidy spigot entirely for able-bodied adults.

Meanwhile across the Bay, there is a similar political hunger for a new approach to social problems. Rigel Robinson, a former member of the Berkeley City Council, opines in the Standard:

Back in San Francisco, another Breed departure from the kooky dogma of the extreme left is suddenly relevant to our national political discourse. Last December this column noted a Jose Martinez report for CBS News in San Francisco:

The office would have been a precursor to attempting to redistribute money from people who never owned slaves to people who were never enslaved. It isn’t just the principle of reparations plans that’s offensive , or the difficulty and destructiveness of government officials trying to precisely define the level of ancestral guilt or victimhood within the great American melting pot. It’s also the money.

In early 2023, after studying the work of San Francisco’s reparations committee, Lee Ohanian at Stanford’s Hoover Institution provided a ballpark estimate:

Pretty much everyone in San Francisco, even those who favor expansive social spending, recognized that this leap into the depths of progressive insanity wasn’t going to happen.

In February of this year, Aldo Toledo reported in the San Francisco Chronicle:

Opposing reparations plans—un-American efforts to punish or reward people based on their ancestry—is now a perfectly safe space for politicians on the left to show how reasonable they have become. If a massive reparations plan failed in San Francisco for goodness sake, politicians campaigning nationwide can be comfortable rejecting it, too.

But the Democratic presidential candidate from San Francisco still won’t do it. Curtis Bunn reports for NBC News:

Any gathering of journalists is likely to be deflated when a candidate refuses to stake out the leftwardmost position on an issue of public policy. But for the rest of America, it’s bound to be disturbing that Ms. Harris won’t repudiate an extreme position she held as a presidential candidate in the last election.

The logical conclusion is that she’s still just as radical as her record.

Retail Sales Are the Last Big Economic News Before Fed Rate Decision

Kamala Harris and the evolution of San Francisco progressives.