uploads///Fed Fund Rate Vs Food and Drinking Place Retail Trade

What Will Happen to Restaurant Stocks when the Fed Hikes Rates?

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Oct. 6 2015, Updated 3:07 p.m. ET

Anticipation

The anticipation of an increase in target rates is old news and is already priced into the markets. The question is, when and what happens when the rates go up? The decision to not increase the rates this time around was generally viewed as positive.

In the FOMC press conference opening statement on September 17, Federal Reserve chair Janet Yellen noted that the “first increase in the federal funds rate will be appropriate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

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The above chart shows the target fed funds rate versus food and drinking place retail trade since January 2001 and through essentially two business cycles. When the Fed increased the funds rate around 2004, the retail trade was not affected much. This is because usually when the Fed increases the funds rate, it is viewed as a strength in the economy.

Usually the fed funds rate lags other indicators, meaning when there is an improvement in labor markets and inflation, the Fed is more likely to increase the funds rate.

When the Fed increases the target rate

When the Fed increases the target rate, it makes lending and borrowing between banks more expensive. This increase in rates is passed on to consumers. For example, anyone with a variable, or adjustable, rate loan will see increased monthly interest payments.

Naturally, newer loans will be more expensive. This may create ripple effects to the consumer discretionary sector and the Consumer Discretionary Select Sector SPDR ETF (XLY). If the Fed increases rates too early, restaurant companies such as Chipotle (CMG), Darden (DRI), Brinker (EAT), and Starbucks (SBUX) may be negatively impacted.

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