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The final trades of the week. With CNBC's Melissa Lee and the Fast Money traders, Tim Seymour, Dan Nathan, Guy Adami and Bonawyn Eison.
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Tag: Banks
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Why the Chartmaster Carter Worth sees more pain for the hard hit financials
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Carter Worth of Worth Charting looks at what’s next for regional banks. With CNBC’s Melissa Lee and the Fast Money traders, Tim Seymour, Dan Nathan, Guy Adami and Bonawyn Eison.
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Blackstone drops as the SEC looks into real estate fund redemptions
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BX was down another 4% this week as BREIT draws SEC interest. With CNBC's Melissa Lee and the Fast Money traders, Tim Seymour, Dan Nathan, Guy Adami and Bonawyn Eison.
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Goldman’s job cuts likely won’t be the last as Wall Street prepares for winter
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CNBC's Hugh Son joins Power Lunch to discuss more layoffs coming to Wall Street as big banks continue to downsize.
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Financials will be choppy over next few quarters, says JMP’s Devin Ryan
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Devin Ryan, JMP Securities senior research analyst, joins ‘Closing Bell’ to discuss Goldman Sachs laying off up to eight percent of the bank’s workers in January.
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Basel Committee Finalizes Policy Suggesting 2% Bitcoin Exposure Cap For Banks
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The Bank for International Settlements’ (BIS) Basel Committee on Banking Supervision has finalized a proposed policy that would place a 2% limit on banks’ Tier 1 capital held in bitcoin. This comes with an endorsement from the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee, which is the “primary global standard setter for the prudential regulation of banks.”
Investopedia defines Tier 1 capital as “the core capital held in a bank’s reserves [that] is used to fund business activities for the bank’s clients. It includes common stock, as well as disclosed reserves and certain other assets.”
The policy includes bitcoin in its definition of Group 2 crypto assets, saying that “In addition to any tokenised traditional assets and stablecoins that fail the classification conditions, Group 2 includes all unbacked cryptoassets.” It later describes that “a bank’s total exposure to Group 2 cryptoassets should not generally be higher than 1% of the bank’s Tier 1 capital and must not exceed 2% of the bank’s Tier 1 capital.”
The BIS had previously considered a policy of 1% for global banks. In turn, the banks requested a 5% reserve limit. This 2% appears to be a compromise between the two. According to data from 2020, if applied to all banks in the world, who collectively custody approximately $180 trillion, this would amount to a limit of $3.6 trillion in bitcoin held by such entities.
Tiff Macklem, Chair of the GHOS, stated that “Today’s endorsement by the GHOS marks an important milestone in developing a global regulatory baseline for mitigating risks to banks from cryptoassets. It is important to continue to monitor bank-related developments in cryptoasset markets. We remain ready to act further if necessary.”
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Goldman Sachs is planning to cut up to 8% of its employees in January
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David Solomon, chief executive officer of Goldman Sachs Group Inc., during a Bloomberg Television at the Goldman Sachs Financial Services Conference in New York, US, on Tuesday, Dec. 6, 2022.
Michael Nagle | Bloomberg | Getty Images
Goldman Sachs, the storied investment bank, plans on cutting up to 8% of its employees as it girds for a tougher environment next year, according to a person with knowledge of the situation.
The layoffs will impact every division of the bank and will likely happen in January, according to the person, who declined to be identified speaking about personnel decisions.
That’s ahead of an upcoming conference for Goldman shareholders in which management is expected to present performance targets. The New York-based investment bank typically pays bonuses in January, and its possible the layoffs could be a way to preserve bonus dollars for remaining employees.
The bank’s planning is ongoing, and the round could be smaller than that, the person added. But that means as many as about 4,000 employees could be impacted, as reported by Semafor earlier Friday. Goldman had been in hiring mode previously: the firm had 49,100 workers as of September 30, which is 14% more than a year earlier.
Goldman CEO David Solomon indicated that he was looking to rein in expenses at a conference for financial firms last week.
“We continue to see headwinds on our expense lines, particularly in the near term,” Solomon said. “We’ve set in motion certain expense mitigation plans, but it will take some time to realize the benefits. Ultimately, we will remain nimble and we will size the firm to reflect the opportunity set.”
This story is developing. Please check back for updates.
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Student loan forgiveness is headed to the Supreme Court. What that means for the payment pause
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West | Istock | Getty Images
The Biden administration’s most recent announcement that the pause on federal student loan bills would be extended left borrowers with more uncertainty: It didn’t provide a date for when the payments would resume.
The pandemic-era relief policy suspending federal student loan bills and the accrual of interest has been in effect since March 2020. Turning the $1.7 trillion lending system back on for some 40 million Americans is a massive task that the U.S. Department of Education has been reluctant to undertake.
The administration had hoped to ease the transition for borrowers by first forgiving a large share of student debt, but its plan to do so, unveiled in August, soon faced a barrage of legal challenges and remains tied up in the courts. That development is why borrowers have gotten even more time without a student loan bill.
Here’s what you need to know about the latest payment pause extension.
Student loan bills could resume as soon as May 1
The Education Department has left things a little open-ended when it comes to the timing of federal student loan payments resuming.
It has said the bills will be due again only 60 days after the litigation over its student loan forgiveness plan resolves and it’s able to start wiping out the debt.
If the Biden administration is still defending its policy in the courts by the end of June, or if it’s unable to move forward with forgiving student debt by then, the payments will pick up at the end of August, it said.
Most recently, the Supreme Court has said it will hear oral arguments around the president’s plan in February.
That means the earliest that payments could restart would likely be May 1, if the justices reach a quick decision, said higher education expert Mark Kantrowitz.
Borrowers who are behind may get a ‘fresh start’
The U.S. government has extraordinary collection powers on federal debts and it can seize borrowers’ tax refunds, wages and Social Security checks if they fall behind on their student loans.
During the extended payment pause, however, the Education Department is also ceasing all collection activity, it said.
Borrowers in default on their student loans should also look into the recently announced “Fresh Start” initiative, in which they’ll have the opportunity to return to a current status.
Refinancing may be worth considering
Kantrowitz had previously recommended that, despite the chance of picking up a lower interest rate, federal student loan borrowers refrain from refinancing their debt with a private lender while the Biden administration deliberated on how to move forward with forgiveness. Refinanced student loans wouldn’t qualify for the federal relief.
Now that borrowers know how much in loan cancellation is coming — if the president’s policy survives in the courts — borrowers may want to consider the option, Kantrowitz said. With the Federal Reserve expected to continue raising interest rates, he added, you’re more likely to pick up a lower rate with a lender today than down the road.
Still, Kantrowitz added, it’s probably a small pool of borrowers for whom refinancing is wise.
It would be deeply unfair to ask borrowers to pay a debt that they wouldn’t have to pay, were it not for the baseless lawsuits brought by Republican officials and special interests.
Miguel Cardona
Secretary of the U.S. Department of Education
He said those include borrowers who don’t qualify for the Biden administration’s forgiveness — the plan excludes anyone who earns more than $125,000 as an individual or $250,000 as a family — and those who owe more on their student loans than the administration plans to cancel. Those borrowers may want to look at refinancing the portion of their debt over the relief amounts, Kantrowitz said.
Borrowers need to first understand the federal protections they’re giving up before they refinance, warns Betsy Mayotte, president of The Institute of Student Loan Advisors.
For example, the Education Department allows you to postpone your bills without interest accruing if you can prove economic hardship. The government also offers loan forgiveness programs for teachers and public servants.
“Your rate doesn’t matter if you lose your job, have sudden medical expenses, can’t afford your payments and find that defaulting is your only option,” Mayotte said, in a previous interview about refinancing.
Make the most of extra cash during the payment pause
Boy_anupong | Moment | Getty Images
With headlines warning of a possible recession and layoffs picking up, experts recommend that you try to salt away the money you’d usually put toward your student debt each month.
Certain banks and online savings accounts have been upping their interest rates, and it’s worth looking around for the best deal available. You’ll just want to make sure any account you put your savings in is FDIC-insured, meaning up to $250,000 of your deposit is protected from loss.
And while interest rates on federal student loans are at zero, it’s also a good time to make progress paying down more expensive debt, experts say. The average interest rate on credit cards is currently more than 19%.
Some may want to keep paying during the pause
If you have a healthy rainy-day fund and no credit card debt, it may make sense to continue paying down your student loans even during the break, experts say.
There’s a big caveat here, however. If you’re enrolled in an income-driven repayment plan or pursuing public service loan forgiveness, you don’t want to continue paying your loans.
That’s because months during the government’s payment pause still count as qualifying payments for those programs, and since they both result in forgiveness after a certain amount of time, any cash you throw at your loans during this period just reduces the amount you’ll eventually get excused.
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Watch live: ECB President Christine Lagarde speaks after rate decision
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European Central Bank President Christine Lagarde is due to give a press conference following the bank’s latest monetary policy decision.
The ECB, the central bank of the 19 nations that share the euro currency, opted for a smaller rate hike this time around, taking its key rate from 1.5% to 2%.
It also said that from the beginning of March 2023 it would begin to reduce its balance sheet by 15 billion euros ($16 billion) per month on average until the end of the second quarter of 2023.
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Swiss central bank lifts interest rates by 50 basis points to counter ‘further spread of inflation’
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The Swiss National Bank hikes interest rates again.
FABRICE COFFRINI / Contributor / Getty Images
The Swiss National Bank increased its benchmark interest rate Thursday for the third time this year, taking it to 1%.
The central bank said it was looking to counter “increased inflationary pressure and a further spread of inflation” with the move.
Speaking to CNBC Thursday, bank Chairman Thomas Jordan said: “All in all the inflationary pressure is higher than in September so further tightening was necessary.”
“We are using a risk management approach and we are looking at what policy is appropriate in order to achieve our [inflation] goal,” he added.
Inflation in the country remains well above the Swiss National Bank’s target of 0-2%, but is noticeably below the soaring rates of neighboring European countries. Switzerland’s inflation rate remained steady at 3% last month, having dropped from a three-decade high of 3.5% in August.
The central bank’s 50 basis point hike Thursday came after it unexpectedly raised its policy interest rate for the first time in 15 years in June, taking it from -0.75% to -0.25%. It then entered positive territory with a 75 basis point increase on Sep. 22.
“We have to take the decisions now in order not to take more rate increases later on,” Jordan told CNBC, adding that further inflationary pressure would prompt more hikes.
“It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term,” a press release from the central bank said.
“To provide appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary,” it added.
Global slowdown
In announcing its latest rate hike, the Swiss National Bank noted the global slowdown in growth and that inflation is “markedly above” central banks’ targets in many countries — and it doesn’t expect this to change any time soon.
“The SNB expects this challenging situation to persist for now. Global economic growth is likely to be weak in the coming quarters, and inflation will remain elevated for the time being,” the press release said.
In the medium term, however, the bank expects inflation to settle at more moderate levels as countries continue to tighten monetary policy.
Charlotte de Montpellier, senior economist at ING, noted that the Swiss National Bank’s total increase of 175 basis points in 2022 compares to an expected 250 basis-point increase in the eurozone and a 425 basis-point hike in the U.S.
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Fed interest rate hike sends business loans to steepest cost since 2007, breaking 10% sticker shock level
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With the Federal Reserve’s latest rate hike adding half a percentage point to the cost of debt capital and reaching its highest level in 15 years, the majority of small business loans will hit the double-digit interest level for the first time since 2007.
The cost of taking out loans, and making monthly interest payments on business debt already has been rising swiftly after successive mega 75 percentage point rate hikes from the Fed, but the 10% level is a psychological threshold that small business loan experts say will weigh on many entrepreneurs who have never experienced a loan market this elevated.
Small Business Administration lenders are limited to a 3% maximum spread over the Prime Rate. With Wednesday’s rate hike raising Prime to 7.5%, the most common SBA loans will now surpass the 10% interest level. It’s the highest level for the Prime Rate since September 2007.
To veteran small business lenders, it’s not a new experience.
“Prime was 8.25% in May 1998 when I started in the SBA lending industry, 24 years ago,” said Chris Hurn, founder and CEO of small business lender Fountainhead.
Loans he made at that time were at the very common Prime+2.75% (then the maximum over Prime that any lender could charge on an SBA loan), or 11%. But that was the norm rather than a sea change in rates in a short period of time.
“In less than a year, we will have gone from the 5-6% range to a doubling and it will have a tremendous psychological effect,” Hurn said.
The monthly interest payment owners will be making isn’t very different from what’s already become one of the primary costs of Fed rate hikes on Main Street. Servicing debt at a time of input inflation and labor inflation is forcing business owners to make much tougher decisions and sacrifice margin. But there will be an added psychological effect among potential new applicants. “I think it’s started already,” Hurn said. “Business owners will be very careful taking out new debt next year,” he added.
“Every 50 basis points costs more and there’s no denying it, psychologically, it is a big deal. Many business owners have never seen double-digits,” said Rohit Arora, co-founder and CEO of small business lending platform Biz2Credit. “Psychology matters as much as facts and it could be a tipping point. A few people over the past few weeks have said to me, ‘Wow, it will be double digits.’”
A monthly NFIB survey of business owners released earlier this week found that the percentage of entrepreneurs who reported financing as their top business problem reached its highest reading since December 2018 — the last time the Fed was raising rates. Almost a quarter of small business owners said they are paying a higher rate on their most recent loan, and the highest since 2008. A majority (62%) of owners told NFIB they are not interested in applying for a loan.
“The pain is already in, and there will be more,” Arora said.
That’s because beyond the psychological threshold of the 10% interest level being breached, the expectation is that the Fed will keep rates elevated for an extended period of time. Even in slowing rate hikes and potentially stopping rate hikes as soon as early next year, there is no indication the Fed will move to cut rates, even if the economy enters a recession. The latest CNBC Fed Survey shows the market forecasting a peak Fed rate around 5% in March 2023 and the rate being held there for nine months. Survey respondents said a recession, which 61% of them expect next year, would not alter that “higher for longer” view.
The latest Fed projection for the terminal rate released on Wednesday rose to 5.1%.
This problem will be exacerbated by the fact that as the economy slows the need to borrow will increase for business owners facing declining sales, and unlikely to see additional support from the Fed or federal government.
Getting inflation down from 9% to 7% was likely to be the quicker change than getting inflation from 7% to 4% or 3%, Arora said. “It will take a lot of time and create more pain for everyone,” he said. And if rates don’t come down until late 2023 or 2024, that means “a full year of high payments and low growth, and even if inflation is coming down, not coming down at a pace to offset other costs,” he added.
As economist and former Treasury Secretary Larry Summers recently noted, the economy may be moving into the first recession in the past four decades to feature higher interest rates and inflation.
“We are in for a long haul problem,” Arora said. “This recession won’t be as deep as 2008 but we also won’t see a V-shaped recovery. Coming out will be slow. The problem isn’t the rate increase anymore, the biggest challenge will be staying at these levels for quite some time.”
Margins already have been hit as a result of the rising costs of monthly payments, and that means more business owners will cut back on investments back into the business and expansion plans.
“Talking to small business owners looking for financing, it’s starting to slow things down,” Hurn said.
There is now more focus on cutting costs amid changing expectations for revenue and profit growth.
“It’s having the effect the Fed wants but at the expense of the economy and expenses of these smaller companies that are not as well capitalized,” he said. “This is how we have to tame inflation and if it hasn’t already been painful, it will be more painful.”
Margins have been hit as a result of the costs of monthly payments — even at a low interest rate, the yearlong SBA EIDL loan repayment waiver period has now ended for the majority of business owners eligible for that debt during the pandemic, adding to the monthly business debt costs — and investments back into business are slowing down, while expansion plans are being put on hold.
Economic uncertainty will result in more business owners borrowing only for immediate working capital needs. Ultimately, even core capital expenditures will get hit — if they have not been already — from equipment to marketing and hiring. “Everyone is expecting 2023 will be a painful year,” Arora said.
Even in bad economic times, there is always a need for debt capital, but it will curtail the interest in growth-oriented capital, whether it’s a new marketing plan, the new piece of equipment making things more efficient or designed to increase scale, or buying the company down the street. “There will continue to be demand for regular business loans,” Hurn said.
While debt coverage ratios — the cash flow level needed to make monthly interest payments — are flashing warning signs, the credit profile of business owners hasn’t weakened across the board, but banks will continue to tighten lending standards into next year. Small business loan approval percentages at big banks dropped in November to the second lowest total in 2022 (14.6%), according to the latest Biz2Credit Small Business Lending Index released this week; and also dropped at small banks (21.1%).
One factor yet to fully play out in the commercial lending market is the slowdown already in the economy but not yet in the interim financial statements that bank lenders use to review loan applications. Business conditions were stronger in the first half of the year and as full year financial statements and tax returns from businesses reflect second half economic deterioration, and likely no year-over-year growth for many businesses, lenders will be denying more loans.
This implies demand for SBA loans will remain strong relative to traditional bank loans. But by the time the Fed stops raising rates, business loans could be at 11.5% or 12%, based on current expectations for Q2 2023. “When I made my first SBA loan it was 12% and Prime was 9.75%, but not everyone has the history I have,” Hurn said.
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Here’s what the Federal Reserve’s half-point rate hike means for you
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The Federal Reserve raised its target federal funds rate by 0.5 percentage points at the end of its two-day meeting Wednesday in a continued effort to cool inflation.
Although this marks a more typical hike compared to the super-size 0.75 percentage point moves at each of the last four meetings, the central bank is far from finished, according to Greg McBride, chief financial analyst at Bankrate.com.
“The months ahead will see the Fed raising interest rates at a more customary pace,” McBride said.
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Inflation boosts U.S. household spending by $433 a monthThe latest move is only one part of a rate-hiking cycle, which aims to bring down inflation without tipping the economy into a recession, as some feared would have happened already.
“I thought we would be in the midst of a recession at this point, and we’re not,” said Laura Veldkamp, a professor of finance and economics at Columbia University Business School.
“Every single time since World War II the Federal Reserve has acted to reduce inflation, unemployment has shot up, and we are not seeing that this time, and that’s what stands out,” she said. “I couldn’t really imagine a better scenario.”
Still, the combination of higher rates and inflation has hit household budgets particularly hard.
What the federal funds rate means for you
The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Whether directly or indirectly, higher Fed rates influence borrowing costs for consumers and, to a lesser extent, the rates they earn on savings accounts.
For now, this leaves many Americans in a bind as inflation and higher prices cause more people to lean on credit just when interest rates rise at the fastest pace in decades.
With more economic uncertainty ahead, consumers should be taking specific steps to stabilize their finances — including paying down debt, especially costly credit card and other variable rate debt, and increasing savings, McBride advised.
Pay down high-rate debt
Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark, so short-term borrowing rates are already heading higher.
Credit card annual percentage rates are now over 19%, on average, up from 16.3% at the beginning of the year, according to Bankrate.
The cost of existing credit card debt has already increased by at least $22.9 billion due to the Fed’s rate hikes, and it will rise by an additional $3.2 billion with this latest increase, according to a recent analysis by WalletHub.
If you’re carrying a balance, “grab one of the zero-percent or low-rate balance transfer offers,” McBride advised. Cards offering 15, 18 and even 21 months with no interest on transferred balances are still widely available, he said.
“This gives you a tailwind to get the debt paid off and shields you from the effect of additional rate hikes still to come.”
Otherwise, try consolidating and paying off high-interest credit cards with a lower interest home equity loan or personal loan.
Consumers with an adjustable-rate mortgage or home equity lines of credit may also want to switch to a fixed rate.
Because longer-term 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the broader economy, those homeowners won’t be immediately impacted by a rate hike.
However, the average interest rate for a 30-year fixed-rate mortgage is around 6.33% this week — up more than 3 full percentage points from 3.11% a year ago.
“These relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” said Jacob Channel, senior economic analyst at LendingTree.
The increase in mortgage rates since the start of 2022 has the same impact on affordability as a 32% increase in home prices, according to McBride’s analysis. “If you had been approved for a $300,000 mortgage in the beginning of the year, that’s the equivalent of less than $204,500 today.”
Anyone planning to finance a new car will also shell out more in the months ahead. Even though auto loans are fixed, payments are similarly getting bigger because interest rates are rising.
The average monthly payment jumped above $700 in November compared to $657 earlier in the year, despite the average amount financed and average loan term lengths staying more or less the same, according to data from Edmunds.
“Just as the industry is starting to see inventory levels get to a better place so that shoppers can actually find the vehicles they’re looking for, interest rates have risen to the point where more consumers are facing monthly payments that they likely cannot afford,” said Ivan Drury, Edmunds’ director of insights.
Federal student loan rates are also fixed, so most borrowers won’t be impacted immediately by a rate hike. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, prime or T-bill rates — which means that as the Fed raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.
That makes this a particularly good time to identify the loans you have outstanding and see if refinancing makes sense.
Shop for higher savings rates
While the Fed has no direct influence on deposit rates, they tend to be correlated to changes in the target federal funds rate, and the savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.24%, on average.
Thanks, in part, to lower overhead expenses, the average online savings account rate is closer to 4%, much higher than the average rate from a traditional, brick-and-mortar bank.
“The good news is savers are seeing the best returns in 14 years, if they are shopping around,” McBride said.
Top-yielding certificates of deposit, which pay between 4% and 5%, are even better than a high-yield savings account.
And yet, because the inflation rate is now higher than all of these rates, any money in savings loses purchasing power over time.
What’s coming next for interest rates
Consumers should prepare for even higher interest rates in the coming months.
Even though the Fed has already raised rates seven times this year, more hikes are on the horizon as the central bank slowly reins in inflation.
Recent data show that these moves are starting to take affect, including a better-than-expected consumer prices report for November. However, inflation remains well above the Fed’s 2% target.
“They will still be raising interest rates now and into 2023,” McBride said. “The ultimate stopping point is unknown, as is how long rates will stay at that eventual destination.”
Correction: A previous version of this story misstated the extent of previous rate hikes.
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Here’s why Mendon Capital Advisors’ Anton Schutz likes regional banks
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Anton Schutz, Mendon Capital Advisors president and CIO, joins ‘The Exchange’ to discuss the bright spots in the investing landscape this year, why the banks haven’t benefited from higher net interest income and more.
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Recent inflation print is unlikely to have a large short-term effect on stock markets, Deutsche Bank
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Henrik Johnsson of Deutsche Bank says though there are recession worries, there’s likely to be stability in the first quarter of 2023.
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4 hours ago
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Bank of England calls for ‘urgent’ global action after near-collapse of UK pension funds
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LONDON, February 03: Governor of the Bank of England Andrew Bailey leaves after a press conference at Bank of England on February 3, 2022 in London, England.
Dan Kitwood | Getty Images News | Getty Images
LONDON — The Bank of England on Tuesday called for “urgent international action” from regulators on non-bank financial institutions after it was forced to rescue U.K. pension funds in September.
A number of pension funds were hours from collapse when the central bank intervened in the long-dated bond market. It came after a series of massive moves in interest rates on U.K. government debt exposed vulnerabilities in liability-driven investment (LDI) funds, which are held by U.K. pension schemes.
In its latest financial stability report published Tuesday, the Bank said had it not acted, “the stress would have significantly affected households’ and businesses’ ability to access credit.”
Its temporary emergency bond-buying program allowed LDI funds time to shore up their liquidity positions and ensure the country’s financial stability.
The Bank emphasized the need for regulators across jurisdictions to strengthen the resilience of the sector, saying “there is a need for urgent international action to reduce risks in non-bank finance.”
The central bank said it will begin an “exploratory scenario exercise” focused on non-bank financial institutions in order to better understand and mitigate the associated risks.
“The resilience of this sector needs to be improved in a number of ways to make it more robust,” the Bank concluded.
“This includes the need for regulatory action to ensure LDI funds keep their higher levels of resilience. Some steps have already been taken, and further work will be done next year.”
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The Federal Reserve is about to hike interest rates one last time this year. Here’s how it may affect you
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The Federal Reserve is expected on Wednesday to raise interest rates for the seventh time this year to combat stubborn inflation.
The U.S. central bank will likely approve a 0.5 percentage point hike, a more typical pace compared with the super-size 75 basis point moves at each of the last four meetings.
This would push benchmark borrowing rates to a target range of 4.25% to 4.5%. Although that’s not the rate consumers pay, the Fed’s moves still affect the rates consumers see every day.
Why a smaller rate hike may be ‘pretty good news’
By raising rates, the Fed makes it costlier to take out a loan, causing people to borrow and spend less, effectively pumping the brakes on the economy and slowing down the pace of price increases.
“For most people this is pretty good news because prices are starting to stabilize,” said Laura Veldkamp, a professor of finance and economics at Columbia University Business School. “That’s going to bring a lot of reassurance to households.”
However, “there are some households that will be hurt by this,” she added — particularly those with variable rate debt.
For example, most credit cards come with a variable rate, which means there’s a direct connection to the Fed’s benchmark rate.
But it doesn’t stop there.
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Inflation boosts U.S. household spending by $433 a monthWhat the Fed’s rate hike means for you
Another increase in the prime rate will send financing costs even higher for many other forms of consumer debt. On the flip side, higher interest rates also mean savers will earn more money on their deposits.
“Credit card rates are at a record high and still increasing,” said Greg McBride, chief financial analyst at Bankrate.com. “Auto loan rates are at an 11-year high, home equity lines of credit are at a 15-year high, and online savings account and CD [certificate of deposit] yields haven’t been this high since 2008.”
Here’s a breakdown of how increases in the benchmark interest rate have impacted everything from mortgages and credit cards to car loans, student debt and savings:
1. Mortgages
Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
“Though they are falling, mortgage rates are still at a more than 10-year high,” said Jacob Channel, senior economic analyst at LendingTree.
The average rate for a 30-year, fixed-rate mortgage currently sits at 6.33%, down from mid-November, when it peaked at 7.08%.
For would-be buyers, a 30-year, fixed-rate mortgage on a $300,000 loan would cost about $1,283 a month at last year’s 3.11% rate. If you paid today’s 6.33% instead, that would cost an extra $580 a month or $6,960 more a year and another $208,800 over the lifetime of the loan, Channel calculated.
Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rises, the prime rate does, as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.3% from 4.24% earlier in the year.
2. Credit cards
Credit card annual percentage rates are now more than 19%, on average, up from 16.3% at the beginning of the year, according to Bankrate.
“Even those with the best credit card can expect to be offered APRs of 18% and higher,” said Matt Schulz, LendingTree’s chief credit analyst.
But “rates aren’t just going up on new cards,” he added. “The rate you’re paying on your current credit card is likely going up, too.”
Further, households are increasingly leaning on credit cards to afford basic necessities since incomes have not kept pace with inflation, making it even harder for those carrying a balance from month to month.
If the Fed announces a 50 basis point hike as expected, the cost of existing credit card debt will increase by an additional $3.2 billion in the next year alone, according to a new analysis by WalletHub.
3. Auto loans
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans. So if you are planning to buy a car, you’ll shell out more in the months ahead.
The average interest rate on a five-year new car loan is currently 6.05%, up from 3.86% at the beginning of the year, although consumers with higher credit scores may be able to secure better loan terms.
Paying an annual percentage rate of 6.05% instead of 3.86% could cost consumers roughly $5,731 more in interest over the course of a $40,000, 72-month car loan, according to data from Edmunds.
Still, it’s not the interest rate but the sticker price of the vehicle that’s primarily causing an affordability crunch, McBride said.
4. Student loans
The interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and 2.75% in 2020-21. It won’t budge until next summer: Congress sets the rate for federal student loans each May for the upcoming academic year based on the 10-year Treasury rate. That new rate goes into effect in July.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers are also paying more in interest. How much more, however, will vary with the benchmark.
Currently, average private student loan fixed rates can range from 2.99% to 14.96%, and 2.99% to 14.86% for variable rates, according to Bankrate. As with auto loans, they vary widely based on your credit score.
5. Savings accounts
On the upside, the interest rates on some savings accounts are also higher after consecutive rate hikes.
While the Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.24%, on average.
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4%, much higher than the average rate from a traditional, brick-and-mortar bank, according to Bankrate.
“Interest rates can vary substantially, especially in today’s interest rate environment in which the Fed has raised its benchmark rate to its highest level in more than a decade,” said Ken Tumin, founder of DepositAccounts.com.
“Banks make money off of customers who don’t monitor their interest rates,” Tumin said.
With balances of $1,000 to $25,000, the difference between the lowest and highest annual percentage yield can result in an additional $51 to $965 in a year and $646 to $11,685 in 10 years, according to an analysis by DepositAccounts.
Still, any money earning less than the rate of inflation loses purchasing power over time.
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Inflation has peaked — but it’s not returning to pre-Covid levels in 2023, Mastercard says
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Inflation has already peaked, but it will remain above pre-Covid levels in 2023, said David Mann, chief economist for Asia-Pacific, Middle East and Africa at the Mastercard Economics Institute.
“Inflation has seen its peak this year, but it will still be above what we had been used to pre-pandemic next year,” Mann told CNBC’s “Squawk Box Asia” on Friday.
It’ll take a few years to return to 2019 levels, he said.
“We do expect that we go back down in the direction of where we were back in 2019 where we were still debating how many countries needed negative interest rates.”
Central banks around the world have been hiking interest rates as recently as November in response to high inflation.
They include central banks from the Group of 10 countries — such as the U.S. Federal Reserve, the Bank of England and the Reserve Bank of Australia — as well those of emerging markets, such as Indonesia, Thailand, Malaysia and the Philippines, Reuters reported.
The Fed will hold its December policy meeting this week, where it is expected to hike interest rates by 50 basis points. The central bank has raised rates by 375 basis points so far this year.
“Inflation has become that big challenge. It’s been spiking and staying very high,” Mann said. But he warned that it would be risky if central banks end up hiking rates more than they need to.
“The challenge is if you’ve lost orientation of where the sky and the ground is, you’re not quite sure where you need to end up,” Mann said.
It would be a “serious scenario” if central banks “end up going slightly too far and then need to reverse relatively quickly,” he added.
Consumer spending
Despite high inflation, Mann said, U.S. consumers are still willing to engage in discretionary spending in areas such as travel.
Travel recovery in the U.S. is strong and people are still choosing to spend on experiences rather than material goods, Mann said.
And they are being frugal about their spending on necessities in order to be able to afford non-essentials, he added.
“There is something in the back of people’s minds that worries them that even though it’s not very likely, it’s still possible that those [Covid] restrictions [will] come back,” he said.
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There’s an opportunity to bring talent from other sectors into banking, says Citi
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Julia Raiskin of the investment bank discusses what it's doing to retain and attract staff.
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We expect China’s economy to grow 5.8% in 2023, Standard Chartered says
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Shuang Ding of Standard Chartered explains why its forecast for China's economy is above consensus.
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The Final Call: GLD, SLV, GDX, JPM & MET
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The traders make their final moves of the week. With CNBC's Dominic Chu and the Options Action traders, Carter Worth, Mike Khouw and Scott Nations.
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