The Fed Raises Interest Rates: What It Means For Retail

Fed Chair Janet Yellen
Fed chair Janet Yellen.
Getty Images.

For the first time in nearly a decade, the Federal Reserve has made the highly anticipated move to raise the benchmark interest rate.

The new target range, 0.25-0.50 percent, was in line with what experts had forecast, and Fed Chair Janet Yellen said the rate will be raised “only gradually over time.”

“Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the committee decided to raise the target range for the federal funds rate. … The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation,” the Fed said in its post-FOMC statement.

Since the Fed slashed the federal funds rate to zero in 2008, rates on mortgages, savings accounts and other types of loans and financial products had been markedly lower, creating more access to capital for businesses and making big-ticket purchases more affordable for consumers.

While chatter about higher interest rates has sparked concern about a negative affect on home-buying and auto loans for consumers, as well as an even bumpier stock market, experts say the impact of the new benchmark won’t be felt immediately. Meanwhile, the hike, Yellen explained, is minimal.

“It is important not to overblow the implications,” Yellen cautioned during the Fed’s press conference. “It is only 25 basis points.”

Similarly, Matt Priest, president of the Footwear Distributors & Retailers of America (FDRA), said he anticipates larger effects on the shoe industry and its consumers from factors such as cheaper fuel costs and high shoe duties and tariffs.

“I think the impact of this rate hike [on footwear] will be minimal — I don’t think it impacts consumers directly that quickly,” Priest said. “Over time, though — if this is a broader, longer-term trend where the Fed raises the rates incrementally and substantively, then you’re going to see access to capital become more expensive, and that could stunt some investment and expansion. But we [don’t expect] it to affect footwear significantly until it really impacts mortgage rates on a consumer level.”

Jeff Van Sinderen, an analyst at B. Riley & Co. LLC, said if interest rates climb high enough, it could potentially drive up footwear sales if higher loan rates push consumers away from big-ticket items and toward shoe-and-apparel purchases.

“A rate increase may begin to gradually create some headwind for bigger-ticket purchases — such as houses, cars and boats — which have been pretty strong as consumers have taken advantage of low interest rates to finance them,” Van Sinderen explained. “I tend to think that the phenomenon of bigger-ticket purchases being pretty robust has taken away some of the disposable income that could otherwise go toward apparel/footwear purchases. … It could start a shift toward smaller-ticket purchases as interest rates rise and finance rates become less attractive.”

At press time, U.S. markets had shot up significantly since many investors view a rate hike as a sign of the Fed’s confidence in the economy. The S&P 500 gained 22.81 points, to 2,066.22; the Dow Jones Industrial Average climbed 174.30 points, to 17,699.21; and the Nasdaq Composite advanced 58.16 points, to 5,053.52.