An improved labor market, rise in household spending and desire to keep inflation at around 2% led the Federal Reserve’s Federal Open Market Committee (FOMC) on Wednesday (March 15) to raise the federal funds rate range 0.25%.
Some analysts have said the increase could be the first of three rate hikes in 2017. Wednesday’s rate hike was the third since the financial crisis of 2008.
Fed Chair Janet Yellen said early Wednesday afternoon that the rate range would move from 0.5%-0.75% to 0.75%-1%.
“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent,” noted a Federal Reserve statement about the rate rise. “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.”
The FOMC, which decided to not raise rates at its February meeting, said the economy has continued to improve.
“Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat.”
Inflation, sans energy and food prices, is rising to the FOMC’s target of 2%, which partially necessitated the need to increase the cost of money.
Indeed, the economy is doing better. The U.S. economy added a healthy 235,000 jobs in February as employers in the construction trade, manufacturing sector, health care field and private education services added nearly half of the new positions. The March 10 report from the U.S. Bureau of Labor Statistics showed that the U.S. jobless rate in February remained steady at 4.7%. Over the past year, the nation’s unemployment figure has held at a range between 4.6% on the low end in November and 5% in March and April of 2016.
As to household spending, a U.S. Census Bureau report also released Wednesday indicates that February retail sales are expected to be 5.7% above a year ago.
All indications from economic metrics have consumers spending about 5.7% more at retail and food establishments in February, compared to a year ago. The U.S. Census Bureau reported Wednesday its advance sales estimates of $474 billion, up fractionally from the prior month. Retail sales have trended higher year-over-year for the past few months with consumers doling out a combined $740.519 billion at retail establishments since Jan. 1.
Adjusted retail and food service sales, excluding automobiles, totaled $376.276 billion in February, up 5.5% from a year-ago. This was the government’s first estimate, which will be revised April 14. The biggest gains were in e-commerce sales increasing much faster than all of the other categories. Consumers spent $49.93 billion at online stores in February, up 12.97% from the same month last year.
However, rising rates could reduce money available to consumers. Bankrate estimates that the monthly payment will rise around $60 a month on a $200,000 mortgage. WalletHub estimates that rising rates on credit cards will result in $1.6 billion more in finance charges in 2017 – and that’s if the Fed does not raise rates again during the year.
Last year, consumers charged $89.2 billion on credit, according a recent WalletHub report. WalletHub said credit charges in 2016 were $3 billion – shy of the record set in 2007, ahead of the 2008 recession and financial meltdown that followed. The average credit card debt per household rose to $8,377 at the end of 2016, just below the $8,463 consumer households owed ahead of the 2008 recession.