Despite retail sales falling by the biggest amount in 16 months and a dip in consumer prices, the Federal Reserve raised interest rates on Wednesday for the third consecutive quarter as the central bank signaled its confidence in the U.S. economy.
The Federal Open Market Committee pushed its benchmark interest rate higher to a range of 1% to 1.25%, meaning both consumers and trucking companies will face higher costs when it comes to borrowing money from banks.
This latest hike, coupled with earlier ones starting in 2015, has moved the federal funds rate higher by a full percentage point. Even with this latest increase the rate is still extremely low by historical standards ever since it was dropped to near zero by the end of 2008 due to the Great Recession.
The FOMC said it is leaving the door open to more interest rate hikes in the near term, most likely one more time this year and three times each in 2018 and 2019.
TD Economics noted the FOMC “was somewhat sanguine on the economy, indicating that activity has been ‘rising moderately’ while the labor market ‘continued to strengthen’ as job gains 'moderated but have been solid' and unemployment declined."
“The statement highlighted consumer spending has accelerated recently, while business investment continued to expand. Inflation was viewed as having 'declined recently' while the core measure is running 'somewhat below 2%,' but expected to stabilize near the target over the medium-term," said Michael Dolega, senior economist at TD Economics, part of TD Bank Group. "At the same time, inflation expectations were viewed as little- changed and still low."
He said a Fed statement about this latest hike was largely as expected, with the Fed emphasizing the continued labor market improvement and accelerating economic growth as reasons to be optimistic for the economic and inflationary outlook. As such, the Fed appears unfazed by the recent inflationary slowdown, viewing it as temporary.
Retail Sales Fall The Most In More Than A Year
The move by the Fed followed the release Wednesday of less than encouraging economic reports, however, analysts seem rather unfazed by the lower than expected performances.
A 0.3% drop in retail sales in May compared to April, according to the Commerce Department, is the sharpest since January 2016. Also, this latest performance was well short of expectations from analysts who were expecting a small rise of 0.1%.
Despite the drop, retail sales compared to the same time a year ago are 3.8% higher while the April from month before level was revised upward to show a 0.4% gain.
Sales fell 2.8% at electronics stores, the biggest such drop since March 2016, while gasoline stations reported a 2.4% decline, due mainly to lower prices, and department stores had a 1% fall, the worst performance in nearly a year.
The decline in department store sales is hardly surprising with the recent sharp upturn in online shopping cutting into brick and mortar store sales.
The closely watched core retail sales, which exclude automobiles, gasoline, building materials and food services, were unchanged in May after climbing by 0.6% in April and up from the originally reported 0.2% increase.
Although core retail sales, which go directly into the calculation of nation’s gross domestic product were flat last month, the fact that the April figure was revised higher means the second quarter of the year started on a relatively strong footing for personal consumption expenditures, said Eugenio J. Alemán, senior economist at Wells Fargo Securities.
“The fact that the retail report is in nominal terms while inflation has been slowing down considerably will help real numbers remain strong during the second quarter of the year,” he said. “While this does not help retailers wanting more revenues, it will help real economic activity during the second quarter of the year.”
Retail Inflation Eases For Second Out Of Past Three Months
Meantime, a separate report from the Labor Department showed retail prices fell 0.1% in May from the month before despite analysts expecting a 0.2% hike.
The drop in the Consumer Price Index came amid lower prices for gasoline, apparel, airline fares, communication and medical care services, among others, and follows a 0.2% gain in April.
The latest decline marked the second drop in the CPI, the government’s main gauge of inflation, in the past three months. Over the past 12 months, the measure is up 1.9%, less than the April year ago rate of 2.2%.
In analyzing the report, Lindsey Piegaz, chief economist at Stifel said, “amid still-moderate labor market conditions and waning optimism of a resurgence in growth from fiscal stimulus, consumers are on increasingly fragile footing. Still-positive spending: consumers are still out in the marketplace buying big screen TVs and new spring dresses, but they're doing so at a remarkably slower pace, particularly given sustained low gasoline prices.
As she has noted for a long time, “temporary support from reduced energy prices or other policy adjustments, such as a larger tax refund check, will help provide a floor to consumer spending but longer-term sustainable gains will only come from organic job and income growth.”
This news follows a report from the day before showing wholesale prices in May were unchanged from the month before. The Producer Price Index rose 2.4% year over year, down from the PPI pace of 2.5% at the start of the second quarter.
“Headline producer inflation continues to cool, although the trend in core producer prices has not yet turned, continuing a modest upward trend,” Piegza said. “Consumer prices, meanwhile, continue to retreat below the Fed’s 2% target, further eroding the Fed’s justification for an additional rise in [interest] rates.”