On the Money

Fed's rate hike should have 'erred on the side of caution' as growth remains tentative: Stifel Nicolaus' Piegza

Rising rates
Rising rates

After nearly years of crisis-era zero interest rates, this week the Federal Reserve raised its key interest rate for the second time in just three months.

After last week's quarter point rate hike, the Fed Funds Target Rate now stands at 1.25 percent, which is still very low by historical standards. In doing so, the Fed is signaling its confidence in the economy—which is growing, albeit modestly.

Still, the central bank's tentative exit from limitless cheap money and monetary stimulus carries real risks. As economists debate the fallout, the question being asked by a number of Fed watchers is: Did the Fed and chair Janet Yellen make the right move?

"I don't think they did," Lindsey Piegza, chief economist at Stifel, Nicolaus & Company told CNBC's "On the Money" recently.

"I think the Fed should have erred on the side of caution, waiting for further indication that we are on relatively firm footing," Piegza added, voicing concern that "the Fed may raise rates at a faster pace than the economy can withstand."

In the first quarter, the economy grew at a marginal 0.7 percent rate, its weakest in three years. That softness made Piegza concerned that "we've already seen signs of lingering weakness" from the first quarter into the second quarter, "particularly on the consumer side. Consumers have been paring back their activity, their spending behavior," Piegza said.

In May, retail sales were down 0.3 percent, a much steeper decline than the 0.1 percent economists predicted. Because consumer spending accounts for more than 2/3 of the economy, a downturn could be sign of trouble ahead for the economy.

"Remember we're a consumer-based economy, so first and foremost the sign of a healthy U.S. economy is if the consumer is out in the marketplace spending on goods and services," the economist said. "Retail sales are a key component of where we can expect the economy to be headed."

The warning signs extend to business as well, Piegza added. "Business investment is still relatively modest. We see domestic manufacturing still showing signs of weakness, and the latest inflation data figures are showing a soft trend."

As a result, Piegza suggested she "would have been much more comfortable" if the Fed had "sat this meeting out and said 'Let's wait for further evidence of which directional trend we see in the underlying marketplace.'"

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Meanwhile, what consumers pay for their credit is also likely to see some upward pressure. Piegza explained that "moderately higher interest rates" will be felt by credit card holders, and even some home owners.

The rate hike may result in "higher rates in home equity lines of credit or other lines of credit," she said. But there is a bright side, she added.

"Remember, as savers we may actually benefit seeing a higher return, a little extra cash on that cash that we've been storing at banks," she said. "So there's a little bit of a 'double-edge sword' for consumers here but generally, higher rates means that we're going to be paying more for that credit."

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