Hopes of a new Fed hike in the near term are slowly fading as Federal Reserve officials maintain a cautious approach to the happenings in the markets and on the global scene. The stock market shedding about $2.5 trillion of market value in the past three weeks could as well have dashed hopes of a rate hike in March. Policy makers are especially concerned by the fact that the current turmoil could hit the engine of the US economic growth.
Consequences of Depressed Markets
Markets remaining depressed for long could significantly affect consumer’s purchasing power. Recent studies by the Fed already indicate that a 6% drop in household net worth could lead to less spending. The stock market thus needs to recover in the coming months to avert the risk of up to $150 billion in consumption being lost in the coming months.
Fed officials are set to have their monthly meeting this Tuesday and Wednesday, the first time since raising rates in December. Interest rates are set to remain the same, but investors will watch keenly the statements that come out of the meeting taking into consideration the recent events.
Since the Fed raised interest rates, oil prices have clocked 13-year lows with the situation in China getting worse by the day. Fed Official have already reiterated that a drop in inflation expectations could significantly dent household and business confidence. Personal savings rate rose to highs of 5.6% late last year as consumer spending habits continue to flatten.
Declining Consumer Spending
Consumers are becoming cautious of their spending patterns in line with concerns about the global economy. Retail sales in December were down contributing to losses posted by the likes of Macy’s and Wal-Mart.
Amidst the growing concerns about the global economy Macroeconomic Advisers consulting firm is projecting a 2.5% US growth above Fed’s 2.4%. Atlanta Fed Reserve president has already reiterated that the current market rout will not last for long to threaten US economy growth. Oil prices rebounded late test week to above the $30 a barrel raising hope that a bounce back may be on the horizon.
Investors’ confidence about a second rate hike later in the year are slowly dropping as the Fed continues to raise concerns about a further drop in inflation expectations. A string of bad news about the market compounded by global economic woes could force the US central bank to rewrite its plan for a new rate hike this year.
