Here's What the Fed's Interest Rate Hike Means for Costco, Walmart, and Target (and My Top Pick to Buy Now)

Key Points

The Federal Reserve recently did something it hasn’t done for three years: It raised interest rates. In his first big policy shift as Fed chair, Kevin Warsh, who took the post in May, said, “inflation is too high and has been for too long.” The move, a quarter-point increase to the range of 3.75% to 4%, followed Warsh’s decision to maintain rates at the current level during June and July policy meetings.

Though President Donald Trump has pushed for lower interest rates, in recent months, economists’ expectations for a rate hike gradually increased amid higher inflation — this could be seen from prices at the pump to food costs at the supermarket. Lifting rates is meant to put the brakes on rising inflation and the broadening of price increases across the economy. Rate increases do this by prompting individuals to save rather than spend.

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With this in mind, let’s check out what the Fed’s interest rate hike means for certain top consumer-related stocks such as Costco Wholesale (NASDAQ: COST), Walmart (NASDAQ: WMT), and Target (NYSE: TGT), as well as my top pick to buy now…

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Interest rate hikes affect the consumer’s wallet

So, first, let’s take a closer look at how the move on interest rates impacts the consumer. The central bank’s recent decision concerns the Federal Funds rate — this is the rate banks use when they borrow from or lend to each other overnight. And this rate impacts the rates that affect the consumer’s wallet.

For example, credit cards generally have variable rates, so consumers may see their Annual Percentage Rate (APR) increase in the coming months. This may mean a payment of only a few extra dollars a month, but even that could be difficult for some households. The rate hike will also push up the borrowing rate on new loans for cars as well as new student loans. And adjustable-rate mortgages may see an increase due to the Fed’s recent move. Meanwhile, interest rates on your savings accounts at the bank may climb. Against this backdrop, consumers may focus on savings and rein in spending.

My top stock to buy

This may not seem like particularly good news for the retailers I mentioned above, and my top stock to buy now — another player involved in that space. I’m talking about Amazon (NASDAQ: AMZN). Though Amazon has a booming cloud computing business, the company is known worldwide for its e-commerce unit, which sells everything from groceries to mass merchandise. (It’s my top buy because the cloud unit is proving to be a winner in the artificial intelligence (AI) boom, but the business as a whole offers investors stability too, with a long track record of growth.)

Now, if consumers find themselves with less buying power due to rate hikes, is this bad news for these top retail players? Not necessarily. First, it’s important to note that this rate increase isn’t enormous, so for many individuals and families, it might be very manageable and even imperceptible. That said, even for those who feel the impact more heavily, this higher borrowing cost may not push them away from these particular retailers.

Costco, Target, and others focus on low prices

Here’s why: Costco, Walmart, Target, and Amazon each have a strong commitment to value for customers. For example, Costco’s business model of buying in bulk and selling to the consumer in large quantities means it has the ability to offer rock-bottom prices. Target’s vast selection of owned brands helps the retailer to keep costs low and offer great prices on these items. And, overall, each of these companies’ well-structured supply chains and sourcing methods favors low prices.

All of this means that, during a period of higher interest rates, the consumer may actually turn even more frequently to these retailers. Of course, one thing could weigh on these players to a certain degree: Consumers might be more likely to shop for essentials and postpone spending on discretionary items. So, while groceries, gas, and other must-buy items may see strength, other products may not.

What does that mean for you as an investor? It’s important to keep in mind that periods of rising interest rates are temporary and designed to eventually improve the economic backdrop. So any weakness in quality consumer-related stocks, such as the players I mention here, actually may represent a valuable buying opportunity for investors. With this in mind, Costco, Walmart, Target, and Amazon are great stocks to own today and well into the future.

Should you buy stock in Costco Wholesale right now?

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Adria Cimino has positions in Amazon and Target. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.