The Fed Held Rates at 3.5%-3.75%. Here's What That Means for Walmart, Costco, and Target.

The Fed chose to hold benchmark interest rates steady on Wednesday at 3.5%-3.75%.

The stock market initially cheered the decision as the S&P 500 popped when it was announced, and climbed through the first half of Fed Chair Kevin Warsh’s comments. However, it then shifted around 3:00 p.m. as 30-year treasury yields spiked, a sign that investors seemed unsatisfied with Warsh’s plans to fight inflation.

Investors still see a greater than 50% chance that the Fed will hike rates by 25 basis points in September, according to the CME FedWatch tool, and Warsh reiterated his commitment to price stability and bringing inflation down to its target of 2%.

Investors were certainly disappointed to see indexes plunge at the end of Wednesday’s session, with the S&P 500 losing 1.5% and other major indexes down even further. Still, no change in rates may be the best thing for major retailers like Walmart (NASDAQ:WMT), Costco Wholesale (NASDAQ:COST), and Target (NYSE:TGT). Let’s take a closer look.

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Walmart, Costco, Target, and the Fed

The Fed’s rate decisions affect a wide range of businesses and industries, but no other companies have their fingers on the pulse of the American consumer like Walmart, Costco, and Target.

These companies are sensitive to the Fed’s actions in a number of ways. First, the Fed funds rate directly influences credit card rates, which are based on the prime rate, which is determined by the Fed funds rate. As credit card APRs move higher, consumers may be more reluctant to spend money.

Similarly, higher interest rates also act as a brake on the broader economy, disincentivizing borrowing by both businesses and consumers. For investors, that partly explains why stocks tend to fall as rates go up.

Higher rates then, if they come, are likely to be a challenge for these retailers, though a 25-basis-point hike may not be meaningful. The three companies have different degrees of exposure to interest rates.

Target is the most exposed. The company sells primarily discretionary goods and only has stores in the U.S., meaning it lacks the international exposure of Walmart or Costco. Discretionary products are also more sensitive to interest rates, inflation, and the macroeconomy, and consumers are more likely to cut back on spending on products like clothing, home goods, and electronics than on staples like food.

Walmart has the next-most exposure, as it generates most of its revenue from staples like groceries but has historically catered to price-sensitive customers, meaning economic pressure could impact its discretionary categories.

Finally, Costco seems to be the most resilient to outside factors like interest rates due to its membership model, which helps incentivize customer loyalty and accounts for most of its profits as it sells its goods near cost to attract members.

Notably, all three of these stocks rose on Wednesday, a sign that investors aren’t worried about the risk of modestly higher interest rates.

One other metric to watch

Investors in these companies are better off focusing on inflation rather than interest rates. Consumers are more sensitive to inflation, and that has a much more direct effect on consumer spending than interest rates.

If inflation rises, that’s likely to both take a bite out of spending at Walmart, Costco, and Target, and encourage the Fed to raise rates, which would also pressure these stocks. Over the long run, the best thing for these retailers is for both inflation and interest rates to fall while the broader economy remains stable.

Jeremy Bowman has positions in Target. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.