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Fed Rate Hike Adds Some Concern to Uneasy Business Climate

Economists and investor reaction to the expected Federal Reserve’s raising of the federal funds rate by 25 basis points to a range of 1 percent to 1.25% was tepid, as potential higher costs for credit card debt and loans were balanced out by increases in interest savings and other investments.

Importers concerned about currency fluctuation might be keeping an eye on the bouncing dollar.

The dollar inched higher on Thursday, with expectations of another Federal Reserve rate hike this year kept alive by a policy meeting that also pointed the way to a trimming of the huge emergency funds pumped into the economy since 2009.

The dollar was trading at 1.11 euros on Thursday, after rising to nearly 1.13 euros after the Fed announcement. The dollar was getting 110.7 yen on Thursday, after falling to below 109 yen in reaction to the rate hike. The Chinese yuan was trading at 6.8 to the dollar on Thursday, after dipping to 6.79 the day before.

Following the midday announcement on Wednesday, stocks dipped as investors were also concerned about weak retail sales and dipping oil prices. The Dow Jones Industrial Average rose 0.2% to a record 21,374.56, but the Nasdaq composite index fell 0.4% to close at 6,194.89.

On Thursday midday, the Dow had fallen close to 100 points, or 0.43%, and the Nasdaq about 70 points, or about 1.1%, although analysts pointed to political volatility as the more likely culprit than the Fed rates.

Retail sales in May were essentially unchanged on a seasonally adjusted basis after an upwardly revised gain of 0.6%, according to the National Retail Federation.

Sales at clothing and accessories stores increased 0.3% seasonally adjusted from April and increased 2.1% unadjusted year-over-year. Sales at general merchandise stores decreased 0.3% seasonally adjusted over April but increased 1.3% year-over-year.

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“Consumers continued to show solid purchasing power in May, but they are buying more without spending more,” NRF chief economist Jack Kleinhenz said. “The lack of retail pricing power continues to be a benefit to consumers but an ongoing challenge for retailers.”

“While the month-to-month comparisons may be unimpressive, current trends in retail sales growth are healthy,” Kleinhenz said. “It is important to note that retail sales over the past three months are four percent higher than they were during the same three-month period last year. The industry is off to a good start in the second quarter and prospects remain in line with our annual forecast for spending.”

In announcing the rate hike, the Federal Open Market Committee noted that the labor market has been strengthening and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months and business fixed investment has continued to expand, the Fed said.

“The committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further,” the FOMC said. “Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term, but to stabilize around the committee’s 2 percent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely.”

Sara Johnson and Ozlem Yaylaci, economists at IHS Markit, said despite Wednesday’s report showing core Consumer Price Index inflation had slowed to 1.7% year on year in May, the committee still believes that inflation will stabilize around 2 percent over the medium term.

They said the FOMC’s median forecast for inflation, as measured by the personal consumption expenditures deflator, declined to 1.6% from 1.9% for 2017.

“Since a rate hike at today’s meeting was already expected, the focus was on the new projections and, more importantly, on the changes to the balance sheet policy,” Johnson and Yaylaci said. “The economic projections were little changed from those of March, except for unemployment rate projections, which were lower for each year for the forecast period.”

IHS Markit expects the next rate hike to come at the FOMC’s December meeting.

“At that time, we expect the Fed will start the process of shrinking its balance sheet,” they said, referring to the comprehensive plan also announced Wednesday. “Some Fed officials think the rate hikes should pause once the balance sheet starts winding down since the process will put further upward pressure on long-term interest rates.”