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Stock market retreat could spook consumers and alter Fed strategy

The Federal Reserve’s policy-making committee meets this week, but Fed watchers aren’t expecting the central bank to tinker with interest rates again this month.

The Federal Reserve’s policy-making committee meets this week, but Fed watchers aren’t expecting the central bank to tinker with interest rates again this month.

Instead investors and analysts will check Wednesday afternoon to see what the Fed might have to say about consumer spending and the possible effects on the public mood of the stock-market slump that began at the start of the year.

Reuters reported Monday that if bad news about the markets and the economy continues, the Fed could be forced to change its plan for as many as four small interest-rate increases this year. The central bank lifted its benchmark overnight interest rate in December for the first time in nearly 10 years, and analysts have been expecting another boost in March.

The markets have had a rough start to the year, although on Friday the Dow Jones industrial average rose 1.3 percent, to 16,093.51, the S&P 500 index rose 2 percent, to 1,906.90, and the Nasdaq composite index rose 2.7 percent, to 4,591.18. All three indexes finished higher for the week for the first time this year.

Reuters said Fed research and other studies estimate that as much as 6 percent of any drop in household net worth results in lower consumer spending. Unless stocks recover soon, upwards of $150 billion in consumption will be lost in the coming months.

On Monday the markets resumed their retreat as oil prices fell further. The Dow lost 1.29 percent, closing at 15,886.18, the S&P 500 fell 1.55 percent, to 1,877.31, and the Nasdaq declined 1.58 percent, to 4,518.49.

If the economy grows slower, the Fed will be less likely to see evidence of the level of inflation that would prompt further rate increases.

"A strong consumer should be enough to keep U.S. growth in positive territory, but with numerous headwinds, the risks to this view seem skewed to the downside," analysts at Credit Suisse said in a recent report that Reuters quoted. "Events of the past few weeks suggest a darkening situation."

Among this week’s economic reports are two important monthly readings on the American consumer’s mood, one that will be released before the Fed completes its two-day meeting and the other afterward.

The Conference Board will release its Consumer Confidence Index for January today, and on Friday the University of Michigan will release its final Consumer Sentiment Index for the month. Forecasts are that both will be unchanged, or nearly so, from their solid, steady readings in December.

Hard news about the performance of the economy will come Friday in the Commerce Department’s report on fourth-quarter gross domestic product. The median forecast of economists is that growth was only 0.7 percent, a slowdown from 2 percent in the previous quarter.

Last week the department said housing starts fell by an unexpected 2.5 percent, to a seasonally adjusted annual pace of 1.15 million units, in December. Building permits fell 3.9 percent, to a 1.23 million-unit rate. The drop came after two months of hefty gains.

“Builders are extremely cautious to increase spending for fear of over-extending themselves in case there’s an economic downturn,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, told Bloomberg. “We’ll see continued demand for new housing and prices will move higher, but builders aren’t accelerating new construction.”

However, home resales rebounded in December, rising 14.7 percent from the previous month to a seasonally adjusted annual rate of 5.46 million, the National Association of Realtors reported. For the full year, sales were 5.26 million, the highest annual level since 2006.

"Although some growth is expected, the housing market will struggle in 2016 to replicate last year's 7 percent increase in sales," Lawrence Yun, chief economist for the NAR, predicted.

"In addition to insufficient supply levels, the overall pace of sales this year will be constricted by tepid economic expansion, rising mortgage rates and decreasing demand for buying in oil-producing metro areas."


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