This week we have Fed hikes and retail sales on the menu.
The Fed Hikes by 0.25%
To nobody’s surprise, the Federal Reserve this week increased short-term interest rates by 25 basis points, also known as 0.25%. After the much better-than-expected August jobs report there was no reason for the Fed not to hike, as inflation has remained above its 2% target since March 2021.
The Fed also released its economic projections for the next few years, which told us:
- They expect to hike rates one more time this year, most likely in December.
- No changes in rates are anticipated in 2027, at least not yet.
- They raised their forecast for economic growth this year and in 2027.
As we mention often in the blog, while any Fed rate changes will impact short-term debt like credit cards, personal loans, and car loans, there isn’t a direct impact on 30-year mortgage rates. By hiking rates now, the Fed hopes to reduce future inflation, which could bring mortgage rates lower since they are based on future inflation expectations. Unfortunately, due to our $40 trillion national debt and large budget deficits, rates on long-term US treasuries have been rising.
The most effective way to get mortgage rates lower would be to reduce government spending, but that’s very difficult to do when you are fighting a war.
Retail Sales Better-Than-Expected in August
After a 0.5% decline in July, retail sales rose 1.2% last month, easily beating expectations. Spending gains were led by a 3.1% rise at gas stations and a 2.6% jump at nonstore retailers, better known as the Internet. The only major category tracked by the Census Bureau with a decline last month was building material and supply dealers.
Since retail sales are not adjusted for inflation, part of the increase in August sales can be attributed to rising prices. For example, while sales at gas stations were up 3.1% in August that was not because people were buying more gas. According to the August CPI report, the price of gas rose 3.9% last month, which means consumers were paying more for less gas.
Since consumer spending accounts for about 70% of GDP, we watch it very closely. So does the Atlanta Fed, famous for its GDPNow forecasts. After weak growth in the second quarter, the latest GDPNow forecast has third quarter GDP growing at a 5.1% rate. Before you get too excited, keep in mind that the Blue Chip consensus forecast for 3Q26 GDP is about half that.
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