Walmart’s Inflation Warning Could Impact Fed Meeting Outcome

The U.S. Federal Reserve will announce its rate hike decision on July 27. In June, the Fed spooked markets with a 75-basis point rate hike. The economic data has been soft ahead of the Fed’s July meeting. Walmart warned about inflation taking a toll on its sales. Will Walmart’s inflation warning impact the outcome of the Fed's meeting?

Walmart said that high inflation is limiting consumers’ ability to spend on general merchandise. There were always concerns about slowing sales of discretionary products and Walmart has confirmed what the markets were fearing.

The economic data has also been soft. The weekly jobless claims have risen to multi-month highs while consumer confidence has skidded to multi-month lows.

While announcing the consumer confidence for July, the Conference Board said, “As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes, and major appliances all pulled back further in July. Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months.”

There has been a flurry of layoffs over the last two months and even Shopify has announced that it's laying off 10 percent of its workforce. All of these factors, especially the warning from Walmart, which is the largest U.S. retailer, will likely impact the outcome of the Fed’s meeting on July 27. However, the U.S. Central Bank will also watch the multi-decade high inflation, which hit a fresh pandemic high of 9.1 percent in June.

A 75-basis point rate hike is the most likely outcome at the Fed’s July meeting. While a quarter of traders expect a 100-basis point rate hike, the probability looks low. First, we’ve already started to see prices of several commodities, especially gas, come off their 2022 highs.

Also, amid the slowing growth, we could see companies cut down their prices even more in the back half of the year. Along with slowing growth, rising inventories will cajole several companies to lower prices in the back half of the year. Overall, given the rapidly slowing growth, the Fed might not go for a 100-basis point rate hike.

It's always tough to predict how different asset classes will react to the Fed's meeting. The relationship between Fed’s rate hikes and interest rates isn't straightforward. U.S. 10-year Treasury yields fell after the Fed’s June meeting when Fed Chair Jerome Powell announced a 75-basis point rate hike, which was the steepest since 1994.

Markets are now worried about inflation and a recession. The second-quarter GDP report is expected on July 28. Even though the White House said in a blog post that two successive quarters of negative GDP growth doesn't define recession, many other economic indicators do point to an impending recession.

Powell and other FOMC members have a tough task at hand as they try to tame U.S. inflation without pushing the economy towards a recession. Along with the rate hike decision, markets will also watch Powell’s comments on the U.S. economy. Slowing growth is gradually replacing inflation as the biggest risk for markets.