Fed’s Kugler Optimistic of Interest Rate Cut This Year After Poor Retail Sales Data

The Federal Reserve building is seen in Washington, D.C., on Jan. 26, 2022. Joshua Roberts/Reuters

After a disappointing May retail sales report on June 18 and renewed progress on inflation, Federal Reserve Governor Adriana Kugler is optimistic that an interest rate cut later this year would be appropriate.

Although inflation continues to run above the central bank’s 2 percent target, Ms. Kugler noted that recent data and broader economic conditions “are moving in the right direction” for the institution to pivot on monetary policy.

“If the economy evolves as I am expecting, it will likely become appropriate to begin easing policy sometime later this year,” Ms. Kugler said in a speech at the Peterson Institute for International Economics on June 18, adding that the current policy stance “is sufficiently restrictive to help cool the economy” and restore 2 percent inflation without a recession or significant deterioration of the labor market.

The May retail sales report was one of the latest data points supporting a rate cut, she said.

According to the U.S. Census Bureau, retail sales rose by 0.1 percent monthly. This fell short of the consensus estimate of a 0.2 percent gain. Additionally, the April retail sales reading was revised downward from 0 percent to negative 0.2 percent.

“Output growth appears to have slowed in the first half of this year, and while consumer spending still grew in the first quarter, the May retail sales report we received this morning may be another signal that the long-expected deceleration in consumer spending may finally be upon us,” Ms. Kugler said.

Ted Rossman, the senior industry analyst at Bankrate, said the latest numbers are exactly what the Fed wants.

“The ho-hum retail sales figures are probably in line with what the Federal Reserve expects and wants,” Mr. Rossman said. “If these numbers were too hot, that would fuel inflation fears. Too cold could foreshadow a recession. The softness that we’re seeing indicates that high interest rates are dampening demand, but not excessively so.”

Meanwhile, in a question-and-answer session following her prepared remarks, the Fed official conceded she would not “discount the risk to the upside on inflation.”

Because of the consternation surrounding the inflation threat, she supports the Fed’s consensus that policymakers need to gather more evidence to ensure inflation is progressing sustainably toward 2 percent.

In the updated June Summary of Economic Projections, Fed officials trimmed their rate cut forecasts from three to one, with the median policy rate seen at 5.1 percent by the year’s end. This is up from the March dot-plot of 4.6 percent.

Monetary authorities and financial markets debate when the first rate reduction could take place.

‘Air Soaked With Uncertainty’

In recent days, many Fed officials have delivered speeches and given media interviews.

This past weekend, Minneapolis Fed President Neel Kashkari said a December rate cut was “a reasonable prediction.”

“It’s really going to depend on the data,” Mr. Kashkari told CBS’s “Face the Nation” on June 16. “And we’re in a very good position right now to take our time, get more inflation data, get more data on the economy, on the labor market, before we have to make any decisions.”

Speaking at the Global Interdependence Center 42nd Annual Monetary and Trade Conference on June 17, Philadelphia Fed chief Patrick Harker said that the United States is “still surrounded by an air soaked with uncertainty.”

“There are a host of risks and known unknowns, but what I would like to emphasize is that the data haven’t, so far, resolved those. Indeed, data have been what I would describe as ‘choppy,’” Mr. Harker stated.

Despite the first-quarter inflation bump, the regional central bank head was pleased that inflation has not reignited so far in the second quarter. While the latest inflation suggests progress on disinflation has resumed, he wants confidence that “inflation is on a sustainable path back to target.”

“I believe that the current policy interest rate, which has been held steady for nearly 11 months, will continue to serve us well for a bit longer, holding us in restrictive territory to bring inflation back to target and mitigate upside risks,” Mr. Harker said.

The annual inflation rate ran hotter than expected in the first three months of 2024 and climbed to 3.5 percent in March. The May consumer price index (CPI) slipped below economists’ expectations at 3.3 percent.

Cleveland Fed’s Inflation Nowcasting model anticipates that next month’s CPI report will show the annual inflation rate easing to 3.1 percent.

Torsten Slok, chief economist at Apollo Management, does not expect a rate cut this year, bucking the wider market trend.

“With inflation still a problem and continued strong tailwinds to the US economy from easy financial conditions and expansive fiscal policy, we continue to expect zero Fed cuts this year,” he wrote in a May 27 note.

The next two-day Federal Open Market Committee policy meeting will take place on July 30 and July 31. The futures market expects no change to the benchmark federal funds rate.

Investors are penciling in a quarter-point rate cut at the September meeting, according to the CME FedWatch Tool.