28 July 2022
Fed hikes interest rates 0.75%, warns of 'tightening'
Plus, consumer confidence is down, and orders for durable goods are up.
Plus, consumer confidence is down, and orders for durable goods are up.
At a time of 40-year-high inflation and concerns about a recession, economic data is being watched closely. Here's a look at the latest updates from a busy week of reports, including an announcement from the Federal Reserve about the latest interest rate hike:
When the Federal Reserve announced its decision on whether to hike interest rates on Wednesday, the result was the same as June’s meeting: A 0.75% increase in the benchmark rate.
Prior to the last two months, the last time the Fed hiked interest rates at 0.75% was in 1994. Collectively, the increase over the last two months is the largest since the 1980s, Bloomberg noted.
The primary reason for the hike, according to Federal Reserve Chairman Jerome Powell: Data continues to show inflation is still high. The Fed’s preferred measure of inflation, called the Personal Consumption Expenditures index, rose 6.3% year-over-year in June. The Fed’s target for that rate is 2%. So, it once again made a move to raise rates, as expected.
Here’s how Powell described the current economic situation:
Notwithstanding the recent slowdown in overall economic activity, aggregate demand appears to remain strong, supply constraints have been larger and longer lasting than anticipated, and price pressures are evident across a broad range of goods and services. Although prices for some commodities have turned down recently, the earlier surge in prices of crude oil and other commodities that resulted from Russia’s war on Ukraine has boosted prices for gasoline and food, creating additional upward pressure on inflation.
This came with an acknowledgement by Powell that the Fed believes a slowdown in growth of economic activity is necessary to rebalance supply and demand. It has likely yet to arrive.
“These rate hikes have been large and they’ve come quickly,” Powell said. “It’s likely that their full effect has not been felt by the economy so there’s probably some significant additional tightening in the pipeline.”
However, Powell said he doesn’t believe the economy is in a recession. This is because the labor market is strong. Employment has been holding steady at 3.6% for a few months, and the economy added 372,000 jobs in June.
As for future rate hikes, Powell said the Fed is taking its decisionmaking on a “meeting by meeting” basis. The committee that makes decisions next meets in September. Powell said that “another unusually large increase could be appropriate” at the next meeting, but that will depend on economic data released between now and then. However, he said a slowdown in rate hikes will eventually be necessary.
“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said.
The guiding principle of monetary policy at the moment: The Fed is “strongly committed to returning inflation to its 2% objective.”
The latest news hits on two levels. For one, the hike in the interest rate will make borrowing money more expensive, affecting loans as well as personal credit that can affect consumer activity. In the bigger picture of the economy, the Fed said it is engineering a slowdown in order to cool demand. Powell said this is necessary to get prices down and create a healthy labor market over the long-term. In the short-term, however, it could mean more pain. Americans are already bracing for it, but keep in mind that consumers have already faced months on end of higher prices for gas, food and other essential goods. The cumulative effect is starting to show in spending with some of the largest brands.
The Conference Board's Consumer Confidence Index. (Courtesy photo)
When it comes to how consumers are feeling about the economy, the trend line is pointing down.
Consumer confidence fell to its lowest level since February 2021, dropping for the third consecutive month, according to the Conference Board. The organization's index surveys consumer attitudes, spending plans, and expectations about the economy.
Survey results showed mixed feelings about the current situation and the labor market. But consumers were more pessimistic about their short-term financial prospects.
“Concerns about inflation—rising gas and food prices, in particular—continued to weigh on consumers. As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes, and major appliances all pulled back further in July,” said Lynn Franco, senior director of economic indicators at The Conference Board. “Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months.”
Orders from manufacturers for durable goods increased 1.9% in June, according to US Commerce Department data released Wednesday.
Durable goods are items that are meant to last at least three years. Key categories that showed movement include:
The figures are not adjusted for inflation. Still, this indicator’s headline increase is a sign of activity continuing ahead. New orders rose 0.8% in May, and they’ve risen in eight of the last nine months.
Nonstore retailers grew 8% for the year, while overall retail rose 1.6%.
Growth of U.S. retail sales continued to slow on an annual basis in April, as more signs of a consumer slowdown reared their head. But there was a bright spot for digital businesses: The category that includes ecommerce markedly outpaced wider retail.
Data from the U.S. Commerce Department for April 2023 showed the following:
Total retail sales were $686.1 billion, up 0.4% from March 2023. This reversed a trend of declining monthly sales that was observed over the last two months.
On an annual basis, retail sales grew 1.6% from April 2022.
Core retail sales, as measured by the National Retail Federation, rose 2% year-over-year. This measure strips out auto and restaurants.
Nonstore retailers, which includes ecommerce sales, grew 8% year-over-year.
On a category level, a bifurcation is continuing to emerge between discretionary and essential categories.
There were annual declines in sales at furniture stores (-6.4%), electronics and appliance stores (-7.3%) sporting goods and hobby stores (-5.4%) and clothing stores (-2.3%).
Meanwhile, notable gains were made at health and personal care stores (+7.9%) and grocery stores (+3.7).
It’s the latest sign that consumers are tightening after months of rapidly rising prices, and increased interest rates that are starting to impact demand in key consumer spending drivers such as housing. Savings, which were robust during the pandemic, could also be in shorter supply. The retail sales data comes a day after the New York Fed reported that household debt surpassed $17 trillion for the first time in the first quarter.
NRF Chief Economist Jack Kleinhenz said that the slowing year-over-year growth came "partly because of upward revisions to last year’s data but also an early indication that credit conditions are tightening and excess savings are shrinking.” It was also driven in part by a massive 14.6% decline in gas station sales due to falling prices. As a result, April’s overall annual retail growth looks better when stripping away gas and motor vehicle-related retailers, for a growth rate of 4.3%. But that still remains more tepid than the high-single-digit range that was observed for much of 2022.
“While any growth is welcome, this was the shallowest increase in 31 months and marks a very significant deterioration compared to recent performance,” said GlobalData Managing Director Neil Saunders. “The earlier timing of Easter compared to last year may certainly have pushed a bit of spending from April into March, but the broader evidence suggests that a consumer slowdown is now firmly underway.”