How Will the Interest Rate Hike Affect the Retail Sector?

Higher rates might give a short-term boost to home sales

Author: Andria Cheng

March 15, 2017

How worried should the retail sector be in the wake of the U.S. Federal Reserve’s interest rate hike on Wednesday?


The short answer, for now, according to economists, is this: Relax.

The impact of interest rates on the economy and on consumer spending has diminished, said Michael Niemira, chief economist at consulting firm The Retail Economist. “There’ll be a negative reaction when the Fed changes rates, but it’s not significant as long as the economy continues to grow.”

That’s partly because the the U.S. central bank, after keeping the so-called Fed Funds rate near zero for years to nurse the U.S. economy from the wounds of the Great Recession, only raised the rate by a quarter point to a range between 0.75% and 1%, its third rate hike in a decade. Even though the Fed is expected to raise the rate more before it reaches a longer-run median rate of 3% by the end of 2019, the rate is still at a historical low.

The Fed’s interest rate decision also came in wake of many positive economic signals, including the better-than-expected jobs report on Friday.

“Employment numbers are good and wages are starting to increase,” said Chris Christopher, an economist at business information provider IHS Markit. “The positive in the economy is outweighing the negative for the most part. The median consumer will benefit from the momentum in the economy. The Fed is raising rates because they can afford to do so. Retailers will care more about wages than interest rate.”

The Fed Funds rate, the overnight lending rate between banks, is a watchpoint because the rate eventually trickles down to rates consumers pay for mortgage, credit card and other loans. In fact, consumers could see a rate increase on their credit card debt as early as their next statement, according to Bankrate.com, which said mortgage rates had already gone up in anticipation of the Fed’s move. As the Fed is widely expected to raise rates two more times this year, mortgage rates are likely to keep rising gradually this year, Bankrate.com said.

Despite that, any negative impact on consumer spending is likely to be minimal for the time being. When asked about how concerned Home Depot is with the Fed’s expected rate hike moves recently, the largest U.S. home-improvement retailer’s Chief Financial Officer Carol Tome said that the company’s analysis showed that for every quarter point increase in mortgage rates, it would cost the homeowner who’s applied for a mortgage $40 more per month.

“That helps sort of dimensionalize the pressure associated with rising rates,” she said on the company's earnings call in February. “With the median home price in the country of $250,000, mortgage rates could go up to 7-ish percent before the Affordability Index would fall at 100 or below. So there's a long way to go before we'd be concerned.”

She pointed out that mortgage rates are currently around 4.2% to 4.3%, far below the historical mean of 5.8%.

If anything, the Fed’s signal to raise rates could actually provide short-term tailwind to the already improving housing market.

“It might encourage people to go out to buy a home” in anticipation that rates would go up, said National Retail Federation Chief Economist Jack Kleinhenz, adding that interest rates are still attractive. “Mortgage affordability is still at an advantage for a lot of people.”

Kleinhenz should know: He said his mortgage rate was 13.5% back in 1983.

“Typically a rate hike can even advance sales of homes, which then would have a secondary positive impact on housing related purchases,” The Retail Economist’s Niemira said. “You’ll see more interest among consumers that might be on the fence to buy a home.”

Economists also agreed that, for now, the bigger concern for consumer spending, 70% of the U.S. economy, and corresponding retail sales is what will happen to the healthcare, tax and other fiscal policy.

“Ultimately there’s a lot of uncertainty that’s associated not with the monetary policy but with the fiscal policy,” Niemira said. “What would Congress and the President do to affect the economic landscape on tax and healthcare policy? That’ll have a far bigger ripple impact on consumer spending.”

Photo credit: Flickr


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