NEW YORK — The Federal Reserve’s Open Market Committee followed through on expectations Wednesday and raised short-term interest rates a quarter point to 1.25 percent, its first rate hike in four years.
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The increase will impact business, and hopefully will cool inflationary price trends as the economy improves. But how will higher rates impact consumers and their spending?
Britt Beemer, chairman and founder of America’s Research Group, said it would take a much more radical and bold jump by the Fed to turn consumers’ heads. “Consumers would be more affected if companies laid off or stopped hiring employees, or if gas prices continue to increase,” Beemer said.
Cheryl Carner, director of retail finance at Capital Source, also said it will take more to deter shoppers. “Consumer confidence has been the highest in the past two years, and is being propelled by positive news on the job front, not by interest rates,” she said.
While the rise will affect mortgages, auto loans, and credit cards, rates have been so low for so long, with most people having a fixed rate mortgage, it is unlikely they will be directly impacted. Still, the Fed’s move is critical for macroeconomic health.
“It is more important, not that the Fed is increasing rates today, but what they are planning for the future,” Carner said.
The FOMC said in a statement that inflation is “still expected to be relatively low” and that the chances for “sustainable growth and price stability for the next few quarters are roughly equal.”
The FOMC added, “The committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.”
The implication is that the Fed will implement small, consistent increases as opposed to larger hikes. But even with small moves, Mark Bienstock, executive vice president at DCD Capital, said it would negatively affect consumer spending.
“The increase in gas and milk prices combined with an increase in interest rates, may hamper discretional spending, and apparel will be [among] the first ones hit,” he predicted. “Consumers will be more compelled to focus on what is necessary and really important, prioritizing between what they need and don’t need.”
The FOMC, which sets interest rates, had indicated since January the likelihood of gradually raising rates to head off the specter of higher prices creeping into a rebounding economy. Fed chairman Alan Greenspan also has made similar statements to Congress. Before Wednesday’s action, interest rates stood at 1 percent, a 46-year low.
— With contributions from Joanna Ramey, Washington