The March retail sales report surprised to the upside, coming in at 0.7% from the month prior versus the anticipated 0.4% gain. Roth MKM's Chief Economist and Macro Strategist Michael Darda joins the Morning Brief to discuss the implications of this report for the Federal Reserve's rate cut plans, calling it a "body blow to expectations."

Darda notes that earlier this year, markets had priced in expectations for six to seven rate cuts. However, that outlook has now dwindled to less than two rate cuts. With "several months of hot inflation readings" combined with the better-than-expected retail sales data, in Darda's view, this leaves the Fed with little choice but "pushing back in terms of when they would likely start to entertain any kind of a notion of easing monetary policy."

Darda believes rate cuts could materialize later in 2024. However, he expects monetary policy to only begin easing once "it's much more obvious that the economy is losing steam." Darda warned of two potential "tail risks": the Fed waiting too long and causing "issues with earnings," or easing too soon and risking "a reacceleration, high inflation risk." He characterizes the Fed's rate cut timing as a "balancing act."

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This post was written by Angel Smith

Video Transcript

- Retail sales jumping 7/10 of a percent in March compared to the prior month. That was above expectations. And February's reading, that was also revised higher. So with this data, along with the backdrop of a strong labor market, what does this mean for the Fed's path towards cutting rates?

Let's bring in Michael Darda, ROTH MKM chief economist and macro strategist. Great to have you here with us this morning, Michael. I want to get first your response to what this means for the Fed.

MICHAEL DARDA: Thanks for having me on. Look, I think this is another body blow to expectations for near term Fed rate cuts, which have already really been backed out pretty materially. But if you remember, we came into the year and markets were expecting 6 to 7 Fed rate cuts. Now, it's less than two.

And so we have several months of pretty hot inflation readings. And now, this March report on retail sales, we had some upward revisions and the numbers came in much better than expected. So I think in this environment, the Fed is simply going to be pushing back in terms of when they would likely start to entertain any kind of a notion of easing monetary policy. The data, at this point, based on the criteria they laid out previously just does not support it.