Stocks of most leading American retailers leaped Wednesday after the Federal Reserve finally pulled the trigger on its long-speculated interest rate hike.
Apart from a handful of department stores, retail shares outperformed those of other sectors. The S&P 500 Retailing Industry Group leaped 1.7 percent at the bell to close at 1,304. Retail, fashion apparel, beauty and related sector stocks experienced gains of between 2 and 4 percent.
The Dow Jones Industrial Average jumped 224 points, or 1.3 percent, to close at 17,749 while the broader S&P 500 gained 1.5 percent to finish at 2,073.
But some retail stocks suffered declines amid concerns over a weak holiday selling season — especially for companies deep in apparel, outerwear and cold-weather accessories such as scarves, boots and gloves. The decliners included J.C. Penney Co. Inc. with a 1.9 percent drop to $7.02 and Kohl’s Corp. with a 0.5 percent decline to $45.97. Macy’s Inc. fell 0.2 percent to $35.87 while Sears Holding Corp. declined 1.5 percent to $20.51. Columbia Sportswear Co. shed 0.1 percent to close at $44.43.
The gainers included Wal-Mart Stores Inc. with a 1.1 percent increase to $60.30 and Target Corp. with a 1.1 percent gain to $73.80. Gap Inc. was up 2.1 percent to $26.30 while Ascena Retail Group rose 4.4 percent to $10.15. Hudson’s Bay Co. gained 1.1 percent to $17.75 while Urban Outfitters Inc. rose 4.2 percent to $23.76 and Lands End Inc. climbed 2.8 percent to $23.85.
The Fed, citing a stable economic outlook, voted to raise a key interest rate for the first time in more than nine years, lifting it up 25 basis points from nearly zero to a target range of 0.25 percent to 0.50 percent. The Federal Open Market Committee issued a unanimous decision, pointing to modest economic growth buoyed by improvements in the job market, a falling unemployment rate and upticks in household spending and fixed business investment.
But the committee also indicated that it will make further rate hikes slowly as the economy strengthens and inflation rises.
“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” it said. “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
For retailers, the hike could translate into higher borrowing costs or a tightening of the capital markets, which could squeeze start-ups. Meanwhile, consumers could see higher rates on their credit cards, mortgages and auto loans — trouble for households living paycheck to paycheck. And some analysts have warned previously that a rate hike could chill consumer spending due to the “headline effect.”
It didn’t take long for major banks to react. Five minutes after the market closed, Bank of America issued a one-sentence statement: “Bank of America Corporation announced today that it is increasing its prime lending rate to 3.50 percent from 3.25 percent, effective immediately.”
For the Fed, the historical importance of the increase was not lost.
“This action marks the end of an extraordinary seven-year period during which the federal fund rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” said Federal Reserve chairman Janet Yellen at a press conference after the FOMC decision was released.
Yellen said consumer price inflation has been held in check by sharp declines in energy prices since the middle of last year, which the committee expects to dissipate over time. The appreciation of the U.S. dollar has also “weighed” on inflation by “holding down import prices.” She noted that risks from the global economy persist, but the strength of the U.S. economy propelled the Fed’s action.
Earlier in the day, major indices in Europe were varied. The FTSE 100 in London closed up 0.7 percent to 6,061 while the DAX in Frankfurt rose 0.2 percent to finish at 10,469. The FTSE MIB in Milan closed the day down 0.3 percent to 21,210. In Asia, stocks rallied with greater momentum ahead of the rate hike with the Asia Dow jumping 2.2 percent to 2,679. The Nikkei 225 in Japan closed up 2.6 percent to finish at 19,050 while the Hang Seng in Hong Kong increased 2 percent to 21,701. The Shanghai Index in China gained 0.2 percent to close at 3,516.
IHS chief economist Nariman Behravesh said “on the basis of economic fundamentals, the rationale for the Fed hike was debatable. On the one hand, the U.S. economy is on a solid footing. On the other hand, inflation is still a distant threat.”
Behravesh noted that the Fed’s preferred “measure of inflation — the deflator for core personal consumption expenditures, which excludes energy and food — has been relatively stable at around 1.3 percent for the past few months. This is well below the Fed’s target of 2 percent.”
But Yellen stressed that the Fed is raising the key interest rate while inflation remains below its 2 percent target, because the committee has “reasonable confidence’ the rate of inflation will move back to 2 percent over the medium term.