How a Potential Federal Reserve Interest Rate Hike Would Impact Retailers and Consumers

Following a brutal season for the stock market, all eyes are on the Federal Reserve in the run-up to tomorrow’s meeting, at which policymakers are expected to approve another interest rate hike.

The possible increase would mark the Fed’s fourth raise in 2018 and the ninth since December 2015, and could take the rate to a range of 2.25 to 2.5 percent.

It comes on the heels of a grim month for benchmark indexes, with both the Dow Jones Industrial Average and the S&P 500 on pace for their worst December since the Great Depression in 1931. (They are down 7.8 percent and 7.6, respectively, during what’s widely considered a positive month for markets.)

For American companies and their customers, the rate hike would trigger a ripple effect putting greater pressure on not only loans but also debt — including credit cards, which could then impact confidence in consumer spending.

“Borrowing money will be more expensive, and we are an economy based on borrowing money,” advised Matt Priest, president and CEO of the Footwear Distributors & Retailers of America. “As interest rates rise and consumers are incentivized to save, you might see a slowdown in spending that inevitably impacts retail growth.”

In an unprecedented move, President Donald Trump once again challenged the U.S. central bank, urging it today to reconsider its next move. (The Fed operates independent of the White House to stave off political influence.)

“I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake,” Trump warned this morning on Twitter. “Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”

(The “50 B’s” appears to be a reference to the Fed’s policy of shedding its bond holdings by $50 billion each month.)

The aforementioned Wall Street Journal op-ed, published Monday evening and titled “Time for a Fed Pause,” implored the Federal Open Market Committee to halt a rise in interest rates amid a lack of inflation and fears of a potential slowdown in the U.S. economy.

However, it’s doubtful that the Fed would shelve its decision. “The expectation is that they will raise interest rates. If the Fed does nothing, that might always be worse,” said Steve Lamar, EVP at the American Apparel & Footwear Association. “What companies crave is stability and an end to uncertainty.”

Additionally, the Commerce Department announced in late November that the U.S. gross domestic product climbed at a robust 3.5 percent annualized rate in the third quarter, with unemployment remaining at its lowest level in 49 years and wages hitting their highest point in a decade.

“Unemployment has been going down, and with that comes the onset of a recession,” Priest explained. “I think the Federal Reserve is concerned about that and wants to ensure that interest rates, which are still historically low, are tracking the way in which the economy is going.”

The Fed is currently forecasting 2.5 percent GDP growth for 2019, with Chairman Jerome Powell expected to address a fresh economic outlook for the new year during the two-day session.

In recent months, investors have erred on the side of caution due to global economic worries such as the Brexit debate in the U.K., France’s “yellow vest” protests and trade tensions between the U.S. and China.

“The Fed is taking steps to slow the economy while we’re still in the midst of this trade war that can have a lot of unintended consequences,” Lamar added. “If those trade issues persist and are allowed to deepen, that will start to have a deleterious effect on the economy, and it’ll show up everywhere, from manufacturing to consumer confidence — you name it.”

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