Yesterday, I noted that Walmart’s new outlook was less gloomy than only a few weeks ago. That was the good news. The bad news was that the company was benefiting, in part, from the way it was attracting more affluent customers (who are — presumably thanks to inflation — not feeling quite so affluent as before), another sign of the way in which spending patterns are shifting in the wake of inflation.
Meanwhile, the news from Kohl’s today is not so great.
Kohl’s Corp cut its full-year sales and profit forecasts on Thursday, squeezed by steeper discounts and higher costs amid dwindling demand for clothing and shoes in the face of high inflation, sending its shares down 5%.
The U.S. department store chain joined top retailers including Target Corp and Best Buy Co to warn of a profit squeeze, as decades-high inflation has made Americans wary of opening their wallets for apparel and other discretionary goods.
The demand slump has left several retailers with bloated inventories, forcing them to offload excess stocks through steep discounts and clearance sales heading into the back-to-school season. Kohl’s is offering up to 80% discount on its website.
Kohl’s is taking a bigger hit as it caters to middle to low-income customers and leans toward more casual styles, which means it is unable to take advantage of resilient high-income consumers who have lifted sales of dressy clothing and high-end fashion.
Kohl’s has made its own missteps, but the broader message is interesting and may, of course, be a sign of a slowing economy.
The Fed, however, does not appear inclined to declare victory over inflation any time soon, nor should it.
Federal Reserve officials discussed the need to keep interest rates at levels that will restrict the US economy “for some time” in a bid to contain the highest inflation in roughly 40 years, according to an account of their most recent meeting.
Minutes from the meeting in July, when the US central bank raised its benchmark policy rate 0.75 percentage points for the second month in a row, signalled that policymakers were intent on pressing ahead with tightening monetary policy but aware of the risks of overdoing it.
Given the enormity of the inflation problem and “upside risks” to the outlook for price growth, officials supported raising interest rates to the point where they act as a drag on economic growth.
Raising rates to such a level would allow the Fed to increase them even “further, to appropriately restrictive levels, if inflation were to run higher than expected”, the minutes noted.
Some officials indicated that once rates had been raised to the point where they were cooling down the economy “sufficiently”, it would probably “be appropriate to maintain that level to ensure that inflation was firmly on a path back” to the Fed’s target of 2 per cent.
If I had to guess, that probably means that the central bank will opt another 75bp hike (rather than 50bp) as its next move, even, as was also noted (you can see more in the full piece), that the “bulk” of the effect of the current round of rate increases has yet to be felt. Thus the changes in demand being seen by some retailers owes more or less everything to the effect of higher prices, very little (IMO) to interest rates.
For a more interest-rate sensitive area, look to housing.
Sales of previously owned homes fell nearly 6% in July compared with June, according to a monthly report from the National Association of Realtors.
The sales count declined to a seasonally adjusted annualized rate of 4.81 million units, the group added. It is the slowest sales pace since November 2015, with the exception of a brief plunge at the beginning of the Covid pandemic.
Sales dropped about 20% from the same month a year ago.
I’ve written more on what appears to be a darkening housing market here, here, and here.
However, even if the full effect of current rate hikes has yet to be felt, there is something to be said for choosing a 75bp message simply to send a message. Expectations matter when fighting inflation.
And, right on cue, here’s Henry K — Henry Kaufman, that is, or “Doctor Doom,” for those of us with long-enough memories, chatting to the FT:
[Kaufman] fears that today’s Fed under Jay Powell is failing to combat inflation with the resolve displayed by Paul Volcker, who aggressively raised interest rates while leading the central bank in the 1970s and 1980s.
“I am still waiting for him to act boldly — ‘boldly’ means he has to shock the market,” Kaufman said of Powell. “If you want to change someone’s view, if you want to change someone’s action, you can’t slap them on the hand, you have to hit them in the face.”
You can take the man out of Salomon Brothers, but you can’t take Salomon Brothers out of the man.
The FT:
Kaufman said the Fed chair erred after he made his pivot on inflation last November. Months passed between the time Powell warned of “persistently higher inflation” and the start of Fed interest rate increases in March.
“His forecast was right, his inaction was wrong,” Kaufman said.
Kaufman has, uh, noticed that real interest rates are still negative.
“Today, the inflation rate is higher than interest rates. Back then [August 1982], interest rates were higher than inflation rates. It’s quite a juxtaposition,” he said. “We have a long way to go. Inflation has to come down or interest rates will go higher.”
For more on how a “tightening,” when rates remain negative in real terms, may struggle to deliver low inflation, check out John Cochrane here.