Jerome Powell Sends Wall Street a Wake-up Call
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Federal Reserve chairman Jerome Powell splashed some cold water on the outlook for this year, signaling that the U.S. economic roller coaster would continue.
The Fed pushed interest rates higher eight times in the last year, trying to keep inflation from becoming entrenched in the economy by making it more expensive to borrow money, clamping down on consumers and employers.
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While the market was hoping that the heavy lifting was over when the pace of interest rate hikes slowed to 25 basis points at the Fed’s February meeting, Powell clearly felt he needed to flex a little muscle to make Wall Street listen.
“We will continue to make our decisions meeting by meeting,” Powell told the Senate Committee on Banking, Housing and Urban Affairs on Tuesday.
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” he said. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
Investors did take a step back, pushing the Dow Jones Industrial Average down 1.7 percent, or 574.98 points, to 32,856.46. Among the fashion industry decliners were Mytheresa, down 4.2 percent to $7.26; Simon Property Group Inc., 2.6 percent to $120.61; Macy’s Inc., 2.5 percent to $21.12; Estée Lauder Cos. Inc., 2.5 percent to $245.46; Farfetch, 2.5 percent to $5.14, and VF Corp., 2.4 percent to $24.26.
Stephen Stanley, chief U.S. economist at the corporate and investment banking firm Santander, described Powell’s speech as “short and to the point” and “significantly more hawkish than I anticipated.”
“There is no question that Powell opened the door to a 50 basis point hike in March,” Stanley said.
There’s little good news in all of this for retailers, who are coping with higher costs and selling to consumers who have to pay more for food and rent while the Fed tries to cool the economy for the greater good.
As Powell was speaking in the Senate, John David Rainey, Walmart Inc.’s chief financial officer, spoke at the Raymond James Institutional Investors Conference, putting a retail face on the broader economic trends.
“Clearly, the consumer is being discerning,” Rainey said. “Given some of the inflationary pressure, we see a shift from general merchandise to grocery.”
That’s caused problems in some categories, including apparel, where consumers have had to make tough choices and are restocking their pantries before their closets.
Rainey expects prices overall in the economy to remain high this year, but said Walmart was positioned to gain regardless.
“If the consumer is going to continue to be pressured with less disposable income, we think our value proposition resonates,” the CFO said. “On the other hand, if we get into a better economy that has more growth behind it, a lot of what we’re doing really plays to that importantly around convenience and some of the things that we’re doing in that area.”
But not all retailers are big enough to win in both good times and bad.
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