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Fed Chair Jerome Powell Just Told Retail There’s More Bad News to Come: Week Ahead

Stocks reacted by plunging over 1,000 points after Federal Reserve Chair Jerome Powell said the U.S. central bank is committed to its 2 percent inflation target, telling the world that interest rates would continue to rise despite signs last month that inflation appeared to be easing.

At the annual Jackson Hole Economic Symposium on Friday, Powell addressed economic policy and how “restoring price stability” would require a “restrictive policy stance for some time.” He shot down speculation that rate cuts could be on the way next year. “The historical record cautions strongly against prematurely loosening policy,” he said.

The Fed raised rates four times so far with two 0.75 percent hikes back-to-back in June and July, bringing rates to between 2.25 percent to 2.50 percent. There’s now speculation that September would see another increase between 0.50 to 0.75 percent, although experts such as Wharton’s Jeremy Siegel are calling for a 1.0 percent hike next month.

July’s CPI rose 8.5 percent annually, a slower pace than June’s 9.1 percent increase. But Powell said one month wasn’t necessarily indicative of a trend. The Fed will evaluate August data before deciding on September’s increase. The Fed is aiming for a 3.25 percent to 3.5 percent rate by year-end.

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According to Powell, the labor market continues to be strong. Higher interest rates plus slower growth and a softer labor market could bring down inflation, he added. But going too high could also trigger a recession and a recent Conference Board Measure of CEO Confidence survey indicates that 81 percent of respondents now expect a recession over the next 12 to 18 months.

Retailers recently reporting second quarter earnings said they noted store traffic slowed in June as consumers adjusted spending to afford the basics. They not only lowered second-half earnings guidance, but many retailers also have cut orders to keep inventory levels in check.

What’s more, new waves of layoffs could further dampen consumer spending. And efforts to curtail inflation could challenge businesses and retailers too. Businesses will find that an increase in rates means higher borrowing costs on new loans. Retailers could see consumers pull back on spending for apparel even further as they focus more on food for the table. And if Powell’s timetable for an extended period of high rates stretches well into 2023, then retailers need to start playing out various scenarios as they work on their planning—from supply chain and inventory management to sales planning and marketing efforts to keep existing market share and even earnings guidance.

The possible impact from rate increases on consumer spending for the upcoming holiday season is still to be determined. Retailers clearing out inventory could make for a hugely promotional holiday. Meanwhile, merchants are busy planning promotions on incoming receipts for gift-giving, but if they make the wrong bets, Holiday 2022 will see even more discounting. Ultimately, that’s bad news for retailers because the discounting and clearance sales will hurt their merchandise margins, indicating a world of pain could be ahead.