Late last year, the Fed announced it will raise the target
federal funds rate a quarter of a percentage point from a
historical low of close to zero. Raising rates for the first time
in more than eight years likely won't be the Fed's last key
decision point over the next 12 months as it assesses the timing
and size of future increases. The uncertainty around future Fed
decisions will be among the bigger threats to shoppers'
spending plans in the coming year, though is very unlikely to
derail consumer spending.
The ability of the Fed to remain on a predictable course will
likely be challenged by the mixed signals being sent by the
- The job market has posted strong job gains in the past year,
but there is likely more slack in the job market than the
unemployment rate is indicating.
- Inflation is still modest according to most measures.
- Threatening the Fed's plans most are potential pockets of
disruption in financial and asset markets, such as commercial real
estate or corporate debt, which may have been pumped up too much by
the Fed's easy money policy.
- A post-recession boom-bust cycle in some emerging markets is
among the unintended consequences already being felt globally.
To all these points, the Fed is likely to move cautiously-all
the while keeping US and global investors on edge.
A sharp decline in asset markets, including the stock market, is
the least likely scenario for the coming year given interest rates
are unlikely to rise sharply. Moderate inflation, financial
uncertainty in emerging markets, and loose monetary policy in the
Eurozone and Japan will keep the appeal of US assets relatively
solid at least through 2016. But if these factors shift, the Fed
will have to move deftly to keep rates from increasingly
If the stock market becomes volatile or declines, spending plans
among older households in particular will likely contract.
This was the case in the third quarter of 2013 when
expectations that the Fed would taper its bond-buying program
likely contributed to a dip in spending plans among older
upper-income (i.e., "Have") households as tracked by Kantar Retail
ShopperScape®. Increased home values and a higher share of
interest-earning savings will cushion some older "Have Not"
households from these concerns.
The spending plans of younger households should remain solid
given how sensitive the Fed will be to any downshift in the job
market. Additionally, younger households are in a better position
to manage their finances in the face of a rate increase than they
were ten years ago. Household debt service relative to incomes is
close to its lowest since the early 1980s and households have
mostly stayed away from loans, such as adjustable-rate mortgages,
that will become riskier as interest rates increase.
If a sharp increase in long-term interest rates is avoided, this
is especially good news for the housing market, which is sensitive
to rate changes. But even a modest increase in rates will make the
math a bit tougher for first-time home buyers whose share of home
buying is already at its lowest in several decades. Improved job
and income gains and looser credit standards will be needed to
stimulate more home-buying among younger households, especially as
Source: Kantar Retail