The US retail sales data for February reported an increase of only 0.2%, falling short of the 0.6% forecast. Analysts from the Bank of Montreal suggest that consumer spending is set for a notable decline in the first quarter, with no immediate return to the more robust growth rates seen in the latter half of 2024.
This decrease in consumer demand poses challenges for the Federal Reserve, which must balance a slowing economy with the risk of inflation. Anticipated large tariffs could further complicate the situation by potentially increasing price pressures, even as consumer activity diminishes.
Federal Reserve’s Response
Currently, the Federal Reserve is expected to adopt a wait-and-see stance on policy changes as it awaits further data. Although retail sales indicate heightened consumer strain, they do not confirm a clear movement towards recessionary conditions. The decision from the Federal Open Market Committee (FOMC) is scheduled for Wednesday.
With retail figures falling below expectations, concerns about consumer resilience have gained traction. The modest 0.2% rise—coming in well under the anticipated 0.6%—suggests demand is cooling, reinforcing the Bank of Montreal’s view that spending will drop notably in the first quarter. If that holds, it would reverse the strong momentum seen towards the end of last year. This slowdown could create hurdles for policymakers, particularly as they attempt to balance economic risks.
The Federal Reserve now finds itself navigating a more complicated position. The economy is showing signs of losing steam, yet inflationary risks remain on the table. Higher tariffs, if implemented, could push prices up again, even with demand softening. That would leave central bankers weighing the trade-off between curbing inflation and preventing a downturn. The immediate response, at least for now, appears to be patience—waiting for clearer signals before making any adjustments.
Market Expectations
Retail sales alone are not enough to signal recession, but they do hint at growing strain on consumers. Whether that strain deepens will depend on upcoming data, particularly from the labour market and broader spending trends. Until then, it remains unlikely that policymakers will deviate from their current stance. Market participants will be paying close attention to the Federal Open Market Committee’s decision on Wednesday, looking for any shift in tone.
