Does September Sales Data Boost the Chances of a Fed Interest Rate Cut?

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Key Takeaways

• U.S. retail sales slowed in September and were worse than economists had expected, indicating that consumer momentum may be waning.

• Meanwhile, wholesale inflation rose as expected in the September data released on Tuesday, following a delay due to the government shutdown.

• Economists said the data could strengthen the case for the Federal Reserve to cut interest rates next month.

Consumers lost some of their heat as summertime faded, which could help pave the way for another interest rate cut.

Federal Reserve officials likely gained a clearer view of the economy in September after the release of data on Tuesday that had been delayed by the government shutdown. Retail sales came in slower than expected, and inflation at the wholesale level remained tame. Economists suggested the data put the Fed on track to cut interest rates again when it next meets in a few weeks.

Why This Matters for the Economy

Cooling consumer spending could signal a broader economic slowdown, influencing the Federal Reserve’s next interest rate decision and shaping growth prospects into year-end.

“Softer retail sales and producer price figures could nudge the Fed toward another rate cut in December,” wrote Sal Guatieri, senior economist at BMO Economics.

The data comes as Federal Reserve officials have indicated a divergence in opinions over whether the central bank should cut rates when it issues its next decision on Dec. 10. Persistently high inflation has some officials believing the Fed should hold rates where they are, while a softening job market has others thinking that more cuts are needed to boost the economy.

Slower Sales Could Indicate Sluggish Economic Growth

Healthcare spending, furniture store sales, and spending at restaurants and bars helped push retail sales higher over the month.  Sales fell at sporting goods stores, clothing retailers, electronic stores and online retailers when compared with August data. Auto sales declined despite September seeing the expiration of the government’s electric vehicle credit, which some economists expected would drive sales higher.

“Many consumers, especially middle- and lower-income households, face widespread financial pressures that force them to be more value-based shoppers,” wrote Nationwide Chief Economist Kathy Bostjancic.

The weaker sales report could indicate a drag on the economy. Retail sales categories that feed into the gross domestic product calculation moved lower, potentially setting up for weaker third-quarter results, economists said.

“The economy can’t afford to lose the consumer, particularly ahead of the all-important holiday season,” wrote  Bret Kenwell, U.S. investment and options analyst at eToro US. “Given that personal consumption accounts for roughly two-thirds of U.S. GDP, a weakening consumer would not read well for the overall economy.”

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