As was widely expected, the Fed Open Market Committee (FOMC) increased the Fed Funds rate by a quarter-point to 0.50%-0.75% yesterday. This was only the second rate hike since the financial crisis of late 2007-early 2009. The Fed Funds rate is the interest rate that banks and other financial institutions charge each other to borrow reserves overnight.
It is notable that when the FOMC raised the Fed Funds rate on December 16 of last year, the outlook was for 3-4 rate hikes in 2016. There was widespread expectation of a hike at the June FOMC meeting and again at the September meeting. Yet the Janet Yellen Fed chose to hold off, awaiting further confirmation that the economy was on the mend.
Apparently the Commerce Department’s latest GDP estimate of 3.2% growth in the 3Q and the Labor Department’s latest unemployment estimate of 4.6% in November were finally enough confirmation for the FOMC to raise rates for the first time in almost a year.
The Fed also pays a great deal of attention to the inflation rate. Its stated target for inflation is around 2%. While the Consumer Price Index is up only 1.7% over the last 12 months, the Fed also closely monitors “inflation expectations” – what people think inflation will do going forward.
The five-year figure for inflation expectations has now risen to 2.07%, which might seem low, but that is up significantly from the 1.41% reading in July. This suggests that the Fed might be more aggressive with rate hikes going forward.
In fact, yesterday’s policy statement suggested as much. The FOMC statement and projections suggest three rate hikes in 2017 as opposed to the two expected in the last statement. The FOMC target for the Fed Funds rate in 2017 increased from 1.1% to 1.4% in yesterday’s report. Of course, that depends on the economy and other factors.
In addition to the rate hike announcement, the FOMC released its latest economic projections. The Fed increased its 2016 GDP estimate slightly from 1.8% to 1.9% and 2017 from 2.0% to 2.1%. The projections included a small inflation bump from 1.3% to 1.5% for 2016 but left unchanged its previous inflation estimates of 2.0% for 2017 and 2018.
Market reactions to the Fed’s decision were mixed yesterday: stocks moved moderately lower following the report; bond yields spiked higher initially; and the US dollar moved higher as well. Equities continued to decline during the Fed’s press conference. So far today, stocks have rebounded strongly.
Fed Chair Janet Yellen’s post-meeting press conference yesterday was pretty much a non-event. She stuck with the tone of the policy statement and offered no surprises in either her prepared remarks or her answers to reporters’ questions.
Retail Sales Were Weaker Than Expected in November
In other economic news, the Commerce Department reported yesterday that retail sales for November came in weaker than expected with growth of only 0.1% last month, versus the pre-report consensus of 0.3%-0.4%. Sales were up 0.6% in October. Despite the disappointing number for November, retail sales rose 3.8% from a year ago.
Nine of 13 major retail categories showed gains in November, led by restaurants and furniture stores. Retail sales excluding automobiles and service stations increased 0.2%, less than the projected gain of 0.4%. Automobile dealers’ sales dropped 0.5%, the biggest decrease since March and erased the prior month’s increase.
The weaker than expected retail sales in November led some analysts to voice concerns about the level of holiday spending by consumers. Surveys back in October suggested that consumers were planning to spend around 10% more this year during the holidays than last year.
Other spending data suggest that consumers got a late start on holiday shopping this year. Time Magazine suggests that all the hype over this year’s presidential election caused many shoppers to delay their holiday buying. This, we are told, will lead to heavy discounting by retailers between now and the end of next week. We’ll see.
Thank goodness, I’m all but done with my Christmas shopping!
Sorry, comments are closed for this post.