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As it continues its effort to tame inflation, The Federal Reserve raised interest rates for the fourth straight meeting.
The Fed voted to raise its benchmark interest rates by 0.75% at its November meeting. Combine it with the similar actions taken at the last three meetings, and this marks the sharpest increase in rates since the 1980s, which was also the last time inflation was as high as it is now.
The Fed is seeking to use its monetary policy tools to bring down inflation, which has been elevated for months. Fed Chair Jerome Powell said at a press conference following the meeting that inflation remains well above the Fed’s goal of 2%, and the latest inflation data for September came back higher than expected. That's the wrong direction.
Why is this happening?
Interest rate hikes are designed to cool the economy, which can help to bring prices down. In this case, the goal is to bring down demand so it comes back into line with supply. After months of hikes, there are some signs that these rate increases are having an impact. Powell said the economy has “slowed significantly” from 2021.
“Real GDP rose at a pace of 2.6 percent last quarter but is unchanged so far this year,” he said. “Growth in consumer spending has slowed from last year’s rapid pace, in part reflecting lower real disposable income and tighter financial conditions.” Housing activity has also cooled.
But the job market still remains “extremely tight,” Powell said. Reinforcing this, the US Labor Department released data showing job openings rose in September. Typically, the Fed's action would cause this number to fall.
On its primary goal, the Fed believes it will take more time for the full effects of the Fed's action to be felt on inflation. So, rate hikes continue.
The Fed’s statements are being closely parsed for signs that rate hikes will start to back off, which would ease the blow they deliver to the economy. Powell made three important statements about the near future of interest rate hikes:
“We still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”
Inflation has come down some, but not anywhere near the level that the Fed wants to see. Meanwhile, the labor market remains out of balance. As a result, the ultimate destination of rate hikes will go further than what was predicted at the September meeting. So, more rate hikes are on the way. However, the Fed could reduce the level of rate hikes below 0.75%.
“That time is coming, and it may come as soon as the next meeting or the one after that. No decision has been made. It is likely we’ll have a discussion about this at the next meeting—a discussion.”
This statement addresses the question of whether there will be lower rate hikes at the December meeting. Powell left the door open to it with this statement. He made no firm commitment, but even the suggestion that it is possible is further than he has gone previously.
“It is very premature to be thinking about pausing.”
There was some language in the Fed’s initial statement about rate hikes that it was taking “lags” between the implementation of rate hikes and their effects on the economy into account. This was new language, and might suggest the potential to set the stage for rate hikes to curtail. But in the press conference, Powell said that while there may be a lower percentage attached to rate hikes, the Fed is not yet considering stopping them.
The takeaway: There may be smaller hikes to come, but they aren't stopping soon and will in fact cumulatively go higher.
So, does that mean there be a recession?
As the Fed implements interest rates, a key risk is that it throws the economy into recession. But there is also the prospect for a soft landing, in which rate hikes are executed without much damage. But as rate hikes have been implemented many months in a row, the window for that soft landing has “narrowed,” Powell said.
“We’ve always said it was going to be difficult, but I think to the extent rates have to go higher and stay higher for longer it becomes harder to see the path,” Powell said.
But Powell allowed that the data is unusual. Typically there are more job losses as economic activity slows, but that isn’t happening at this time. Easing of supply issues would typically be paired inflation falling further – which also hasn’t happened.
Powell said that “no one knows” if there is going to be a recession or not, or how bad it is going to be. What’s a surer bet is that the Fed will continue to take action to fight inflation.
As Powell has said repeatedly in recent months, “We will stay the course until the job is done.”
Trending in Economy
The retailer's marketplace is expanding quickly.
When it comes to ecommerce growth, was the pandemic a blip or a new trendsetter?
As we move further from the height of COVID-related closures, it’s a question that will start to be answered through the lens of history.
So far, the narrative of ecommerce growth in the U.S. from 2019-2022 has gone like this: Ecommerce’s share of overall retail saw a huge spike at the height of the pandemic in 2020-21, when goods in general were in demand and online shopping was necessary to preserve health and safety. Experts looked out and saw a permanent exponential change in the penetration of ecommerce as a share of retail that would last beyond the pandemic. Then, in 2022, everyone went back to stores and the trendline came back to 2019 levels. Growth was no longer exponential. There was still growth, but it was not happening as fast as during the pandemic period.
With this in mind, it’s worth pointing out that 2023 is the first year that there likely won’t be a pandemic-influenced swing to influence ecommerce growth. It is also a year where demand has suffered challenges amid inflation and interest rate hikes.
So as we seek to determine the importance of ecommerce to overall retail, it’s worth it to continue taking a close look at what growth trends retailers are seeing now, whether ecommerce is remaining resilient amid consumer pullback and how retailers are preparing for the future.
The latest example arrived this week from Macy’s. It’s a fitting one for the times. Overall, Macy’s is seeing a slowdown as consumers pull back on discretionary purchases, with sales declining 7% in the first quarter versus the same quarter of 2022. Digital sales were down 8%.
Macy’s is particularly susceptible to the macroeconomic headwinds that many brands and retailers are facing, as spending among the middle-income consumers it counts as a primary customer base is particularly softening, said GlobalData Managing Director Neil Saunders.
But while ecommerce is slowing overall, the importance it gained to Macy’s business during the pandemic is remaining in place.
In 2019, ecommerce made up 25% of Macy’s revenue, CEO Jeff Gennette told analysts on the company’s earnings call. That jumped to a high of 44% in 2020. By 2022, digital reached 33% of sales after the pandemic boom. In the first quarter of 2023, it remained at 33%. So, while the trend line dipped after shoppers returned to stores, ecommerce share still settled in at a higher post-lockdown point than it was before the pandemic.
This came in a quarter in which traffic was “relatively good” across both online and in-store, Gennette said. It was “flattish” online, and slightly up in stores.
“We do expect that this is the reset year with the penetration between them,” Gennette said. “But we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond. And that's going to be foisted by a lot of ideas and strategies.
Over the last year, the retailer has made investments in boosting ecommerce, even as shoppers returned to stores. In a bid to boost the assortment of goods available online, Macy’s launched a marketplace in September 2022 that welcomes goods from third-party sellers.
The marketplace had an “outstanding” first quarter, said Macy’s President Tony Spring, who is poised to succeed Gennette as CEO next year. Gross merchandise value increased over 50% when compared to the fourth quarter of 2022, while the average order value and units per order for marketplace customers was 50% above those not shopping at the marketplace.
Macy’s is continuing to build the marketplace even as it racks up sales. The retailer added 450 brands, ending the quarter with 950 brands.
This is helping to draw in new customers, as well as younger existing customers who are buying more items, resulting in increased basket size.
“We're very excited as to how marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past,” Gennette said.
In the end, Gennette said a strong digital and social presence is key to attracting younger consumers. That's a different type of shopper than other age groups.
“We know the younger customer starts first online,” Gennette said. That behavior will still be in place as the generation gets older, and gains more buying power in the process.
Going forward, Macy’s is seeking to expand the model to other retail banners in its portfolio. Bloomingdale’s will open a marketplace in the early fall.
The Macy’s ecommerce trajectory isn’t that different from the wider U.S. ecommerce narrative detailed above. With one quarter of 2023 data, there is evidence that ecommerce share settled out at a higher point after the pandemic than where it started before COVID arrived. There is flattening now, but the retailer is taking it not as a sign of a slowdown, or a signal to change course. Rather, it sees changing consumer behavior as a reason to build for the future.