US Insights

Fed rate hike shakes up retail outlook for 2016

Doug Hermanson

Principal Economist

Economy 01.04.2016 / 12:45

egg money

Uncertainty around future Fed decisions biggest threat to shoppers’ spending plans

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 economy:

  • 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 sharply.

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 rates increase.


Source: Kantar Retail

Editor's Notes

This article first appeared on the Kantar Retail blog on December 18, 2015.

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