Unfazed by Fed, Americans lap up luxury goods

"Everybody has money," said New York real estate doyenne Barbara Corcoran, whose firm recently sold an 1,100 square-foot one-bedroom apartment in Manhattan for $2.85 million.

Consumer spending, particularly on expensive stuff, does not appear to be bending much under the pressure of rising interest rates. But the Federal Reserve, which hiked rates by a hefty half percentage point on Tuesday, hopes it will soon.

Over the past few years, Americans have enjoyed steady incomes, rising wages, and enormous wealth appreciation from booming equity and real estate markets.

For many, that wealth has accumulated substantially overtime and they are spending it freely now, even in the face of higher borrowing costs.

The Fed wants to see that pace of consumer demand slow and signalled on Tuesday it will continue to raise rates until it does. Leading Wall Street firms now expect one or two more rate hikes before summer ends.

"Right now, the Fed is still pumping in a little too much" money, said Mickey Levy, chief financial economist at Bank of America Securities in New York.

"Wealth has been rising over 10 years rapidly. Is there cumulative impact? Nobody knows. We and the Fed would admit to this. We are dealing in uncharted territory," said Levy, who expects one more rate hike in coming months.

Wealth of a nation

The Fed, explaining its decision to raise the key federal funds rate on overnight bank lending to 6.5 per cent Tuesday, said demand is running in excess of supply and it fears this imbalance will push up inflation.

It has not gone unnoticed by the Fed that consumer spending accelerated in the first quarter to an 8.3 per cent annual pace, the fastest growth in 17 years.

Economists see employment as the key factor in spending, and jobs are plentiful while wages are rising. The 3.9 per cent national unemployment rate is the lowest in three decades and some businesses are facing worker shortages.

But Fed officials say spending and growth have been revved up even more by wealth creation, particularly from rising home and stock values.

More Americans now own stocks and despite the market’s recent dip, they have seen huge gains in the past few years.

Tom Stevens, chief investment officer at Wilshire Asset Management, said $10.5 trillion in value has been created in the stock market over the past five years.

The Wilshire 5000 — an index of 7,200 US stocks and the most accurate measure of the market — saw a rise from 1995-1999 more than twice that of the previous 20 years combined.

Stevens said stock ownership is spread out across a much wider audience and more people can tap investment portfolios for extra cash rather than borrow from banks at market rates.

"It’s not the same as we’ve seen historically. The sensitivity to interest rates doesn’t seem to be as much of a driver as it was in past periods." Unfazed by the Fed

Kathy MacCausland, marketing director at Viking Yacht, said customers are unfazed by rising interest rates.

About seven out of 10 Viking customers are entrepreneurs, some in their mid-40s, and many buy boats with all cash.

"People are out spending their wealth," MacCausland said.

In the red-hot New York real estate market, Corcoran also sees few signs of cooling in response to rising rates.

One in three apartments still sells for more than an already "aggressive" asking price and it is not so unusual for a hot property to sell in one hour.

She has noticed some changes — for one the age of her buyers. A few years ago, the average age was 48, now it’s 37.

About a quarter of her clients work on Wall Street and 13 per cent now work for technology companies, a group she didn’t even count a few years ago. About a third of buyers pay all cash. And the market for second homes is booming.

"Over the last two years, there is virtually no old money left in New York, it’s all new money," she said.