The economy survived the government shutdown but all is not well
Tag: Central banking
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IMF chief Kristalina Georgieva dismisses impact of Trump trade war: ‘Trade is like water, you put in an obstacle, it goes around it’ | Fortune
The escalating trade clash between the U.S. and China has investors on edge, fearing it could mark the beginning of the end for global cooperation as we know it. On Friday, President Donald Trump called China’s new export controls “extraordinarily aggressive” and “hostile”; he threatened a retaliatory 100% tariff. (He later sought to deescalate the situation, calming U.S. markets.)
For Kristalina Georgieva, head of the International Monetary Fund, it’s just another day in the office. Speaking at Fortune’s Most Powerful Women 2025 summit in Washington, D.C., she downplayed any fears of a trade war.
“Frankly, this thing that trade is dead is completely overstated,” Georgieva told Fortune’s Diane Brady. “Trade is like water. You put [up an] obstacle, it goes around it.”
And while Georgieva recognizes the world is becoming “foggier” and full of uncertainty, one of the biggest challenges comes from getting buy-in that cooperation is better than division: “We are in this one big boat. It is a rough sea. We better row together.”
Luckily, many countries already subscribe to this philosophy. She pointed out that following the onset of U.S. tariffs earlier this year, 188 out of the IMF’s 191 member states did not choose to retaliate. Instead, they’ve turned to regional partners for trade. Southeast Asia and the Gulf region are two examples she cited.
Even China has benefited from diversifying its trade portfolio: overall exports rose 8.3% in September—the highest total this year—thanks to strong trade growth with the European Union. Chinese shipments to the U.S. fell 27% in September, marking half a year of double-digit trade declines, according to data released by the General Administration of Customs.
But for business leaders, there’s a growing opportunity to be a grounding voice as long as they are willing to “buckle up,” Georgieva added.
“Good news for the world. The private sector is more agile, more adaptable,” she said. “Over the last years, we have seen in many countries where there was [a] big state presence in the economy—including because of IMF urging them to pull back—more private sector initiative. And in this time of strong winds, [business leaders] are an anchor of stability because you adapt, you just keep doing it.”
For female business leaders, in particular, she reiterated the need to always be thinking about worst case scenarios—and be ready to adapt to them.
“Think of the unthinkable so you’re ready when the unthinkable comes,” Georgieva said. “Because we know from COVID, we know from the war in Europe, it will come, and we women are so strong and resilient, and we can face it.”
Fortune Global Forum returns Oct. 26–27, 2025 in Riyadh. CEOs and global leaders will gather for a dynamic, invitation-only event shaping the future of business. Apply for an invitation.Preston Fore
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Monetary policy is not about interest rates, it’s about the money supply
The ongoing feud between President Trump and Fed Chairman Jerome Powell centers on interest rates. This tells us more about the near-universal view of what constitutes monetary policy than it does about Trump or Powell. While Trump and Powell might quibble over the proper level for the Fed funds rate, they both think monetary policy is all about interest rates.
Trump and Powell aren’t alone. Today, central bankers organize monetary policy around the overnight interest rate set on reserves supplied by central banks. Indeed, nearly every central bank these days describes its stance on monetary policy in terms of its policy rate. It’s not surprising, therefore, that most bankers, market analysts, economists, and financial journalists also embrace the view that monetary policy is all about central banks’ policy rates. That’s why markets wait with bated breath before each central bank policy rate decision.
Why the obsession over interest rates? One reason hinges on the fact that for over the past 30 years or so, macroeconomic models are neo-Keynesian extensions of dynamic stochastic general equilibrium (DSGE) models. These put interest rates front and center. Armed with these models, economists and central bankers believe that monetary policy has its impact on the economy via changes in central banks’ policy rates.
But that’s not what monetarists, who embrace the quantity theory of money, tell us. Unlike the neo-Keynesian macroeconomic models that exclude money, the quantity theory of money states that national income or nominal GDP is primarily determined by the movements of broad money, not by changes in interest rates.
As it turns out, the data talk loudly and support the quantity theory of money. They do not support the neo-Keynesian models which are centered on changes in interest rates. Indeed, the correlations between changes in policy rates and changes in real and nominal economic activity are considerably worse than those between rates of change in the quantity of money and nominal GDP. Three recent major episodes support this conclusion.
The case of Japan
First, let’s consider the case of Japan between 1996 and 2019. Throughout this period, the Bank of Japan’s (BOJ) overnight policy rate lingered at negligible levels, averaging 0.125%. As a result, most economists concluded that monetary policy in Japan was very “easy”. But monetarists, who focused on Japan’s anemic broad money (M2) growth of only 2.8% per year, concluded that monetary policy was “tight”. Which camp was right?
Japan’s inflation averaged a de minimis 0.2% per year in the 1996-2019 period. It is clear that the monetarists were correct. By focusing on the BOJ’s overnight policy rate and by ignoring the money supply, most mainstream economists completely misdiagnosed the tenor of Japan’s monetary policy.
The U.S. between 2010 and 2019
Second, let’s consider the U.S. between 2010 and 2019. During most of this decade, the Fed funds rate was held down at 0.25%. In addition, the Fed engaged in three episodes of quantitative easing (QE). Many concluded that this amounted to very “easy” monetary conditions. They warned that inflation would result. In fact, broad money growth (M2) remained low and stable at 5.8% per year. In consequence, inflation also remained low, averaging just 1.8% per year between 2010 and 2019. As was the case with Japan, interest rates turned out to be a highly misleading indicator of the stance of monetary policy. The growth in the money supply was a much better guide to economic activity and inflation than the course of the Fed funds rate.
The case of the pandemic
Third, let’s once again consider the U.S.
This time, we will examine the COVID pandemic period (2020-2024). Initially, interest rates were reduced to 0.25%, where they stayed between March 2020 and March 2022. In addition, the Fed conducted large-scale QE purchases. Because this policy mix had not caused inflation in the 2010-2019 period, the consensus of Keynesian economists expected the same results as before. By ignoring money growth, they predicted in 2020 and early 2021 that inflation would remain low. Indeed, some Keynesians predicted outright deflation. The deflationists argued that lockdowns were resulting in “weak aggregate supply,” that slow income growth was producing “weak aggregate demand,” and that unemployment, which reached 14.8% in April 2020, would remain elevated.
By contrast, monetary economists focused on the explosion of broad money (M2) growth, which averaged 17.3% per year between March 2020 and March 2022. In consequence, they predicted, as early as April 2020, that there would be a substantial inflation.
As it turned out, the monetarists were right once again. From spring 2021, inflation surged, with the U.S. CPI peaking at 9.1% in June 2022, and averaging 7.0% year-on-year between April 2021 and December 2022.
Why are the monetarists consistently correct?
In each of the major cases we present, the quantity theory of money generated the correct forecast, while the Keynesian theories, which are based on interest rates, resulted in misleading signals. Why?
The reason why central bank policy rates are a misguided mechanism for steering and forecasting the course of the economy is because interest rates are, in large part, symptoms of past money growth, not necessarily drivers of future money growth. Changes in the quantity of money, on the other hand, directly fuel spending, and therefore correctly signal the direction of spending and inflation.
When the quantity of money is increased substantially and for a sustained period, one of the first effects is that interest rates fall. But after six to nine months, business and consumer spending accelerate, and the demand for credit starts to increase. As a result, interest rates are pushed up. If the acceleration of money growth continues, inflation follows – typically after a year or so – and interest rates rise even further.
So, the first effect of faster money growth is lower interest rates, but this is only a temporary effect. The second and more permanent effect is higher interest rates. This is what happened in the U.S. during the 2020-2024 period.
Conversely, the first and temporary effect of slower money growth is higher interest rates. The second and more permanent effect is lower interest rates. This is what occurred in Japan between the mid-1990s and 2019.
By ignoring the quantity theory of money and employing neo-Keynesian macroeconomic models, central bankers are often wrong-footed. They think that by managing policy rates, they are controlling monetary policy when in reality, they are just reacting to changes in the quantity of money that occurred in a prior period.
For example, the Fed refused to raise rates in 2020 or 2021, asserting that inflation was “transitory”. The Fed only reluctantly started to raise rates in mid-2022. But the excess money creation the Fed had engineered in 2020-2021 generated inflation that peaked at 9.1% per year and forced the Fed to raise rates to 5.5%. If the Fed had refrained from letting the money supply surge in 2020-2021, the steep rate hikes would not have been needed, as evidenced by the experience of China and Switzerland, countries that did not allow excess money growth to occur during the COVID pandemic.
Monetary policy’s Holy Grail is money, not interest rates.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
Steve H. Hanke, John Greenwood
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Russia’s central bank raises key rate to 21% to rein in higher-than-forecast inflation
09 June 2024, Russia, Moskau: A guardhouse of the Kremlin (l) and the Foreign Ministry (M, background) stand in the center of the capital. Photo: Ulf Mauder/dpa (Photo by Ulf Mauder/picture alliance via Getty Images)
Picture Alliance | Picture Alliance | Getty Images
Russia’s central bank on Friday raised its key interest rate by 200 basis points to 21%, citing consumer price increases considerably above its forecast and warning of ongoing high inflation risks in the medium term.
The move exceeds the 100 basis-point hike expected by analysts and brings the institution’s benchmark rate to its highest since February 2003, according to Reuters. The key rate was previously taken up by 100 basis points to 19% in September.
On Friday, the central bank noted annual seasonally adjusted inflation hit an average of 9.8% in September, up from 7.5% in August. It now anticipates the print will sit in a 8.0–8.5% range by the end of 2024 — and is running “considerable above” a July forecast of near 6.5-7.0%.
“Over the medium-term horizon, the balance of inflation risks is still significantly tilted to the upside,” the bank said in a statement. “The key risks are associated with persistently high inflation expectations and the upward deviation of the Russian economy from a balanced growth path, as well as with a deterioration in foreign trade conditions.”
Russia’s economy has been constrained by depressed global prices for its key oil exports and by Western sanctions following Moscow’s invasion of Ukraine, leading to declines in the ruble.
This breaking news story is being updated.
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China’s monetary policy settings have been optimal so far: Fullerton Fund Management
Robert St Clair of Fullerton Fund Management says that the PBOC is using “all the tools it has at its disposal” and the monetary stimulus could make a difference as it is targeting the heart of the problem facing China.
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Allianz Global Investors: Recapitalization of Chinese banks critical to sustaining market rally
Jenny Zeng from Allianz Global Investors discusses whether the PBOC’s stimulus package is enough to sustain the current Chinese market rally, adding that she is watching if the Chinese government will stay ahead of market expectations.
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Higher for longer will be tougher on banks, says UBS’ Erika Najarian
Erika Najarian, UBS large cap banks analyst, joins ‘Squawk on the Street’ to discuss what bank investors want from interest rates, if the bank outlooks stand, and much more.
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China market investors adopting ‘Buy First Think Later’ approach: Wealth manager
Magellan Capital's Britney Lam explains why she remains bullish on the Chinese market, and where she's still hoping to see more gains come through.
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China is making the right moves to adjust its economy, doesn’t need bazooka-style stimulus anymore: Jim Walker
Jim Walker of Aletheia Capital discusses the recent policy package from the Chinese central bank and regulators and why he thinks there will not be a bazooka-style stimulus like there was in the past.
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Tue, Sep 24 202411:28 PM EDT
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Bank margins should ‘open up’ as Fed begins rate cuts, says RBC’s Gerard Cassidy
Gerard Cassidy, RBC Capital Markets managing director, joins ‘Squawk on the Street’ to discuss the impact of rate cuts on banks, what will happen with loan demand, and more.
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The Federal Reserve just cut interest rates by a half point. Here’s what that means for your wallet
People shop at a grocery store on August 14, 2024 in New York City.
Spencer Platt | Getty Images
The Federal Reserve announced Wednesday it will lower its benchmark rate by a half percentage point, or 50 basis points, paving the way for relief from the high borrowing costs that have hit consumers particularly hard.
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
Wednesday’s cut sets the federal funds rate at a range of 4.75%-5%.
A series of interest rate hikes starting in March 2022 took the central bank’s benchmark to its highest in more than 22 years, which caused most consumer borrowing costs to skyrocket — and put many households under pressure.
Now, with inflation backing down, “there are reasons to be optimistic,” said Greg McBride, chief financial analyst at Bankrate.com.
However, “one rate cut isn’t a panacea for borrowers grappling with high financing costs and has a minimal impact on the overall household budget,” he said. “What will be more significant is the cumulative effect of a series of interest rate cuts over time.”
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More Americans are struggling even as inflation cools“There are always winners and losers when there is a change in interest rates,” said Stephen Foerster, professor of finance at Ivey Business School in London, Ontario. “In general, lower rates favor borrowers and hurt lenders and savers.”
“It really depends on whether you are a borrower or saver or whether you currently have locked-in borrowing or savings rates,” he said.
From credit cards and mortgage rates to auto loans and savings accounts, here’s a look at how a Fed rate cut could affect your finances in the months ahead.
Credit cards
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. Because of the central bank’s rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — near an all-time high.
Going forward, annual percentage rates will start to come down, but even then, they will only ease off extremely high levels. With only a few cuts on deck for 2024, APRs would still be around 19% in the months ahead, according to McBride.
“Interest rates took the elevator going up, but they’ll be taking the stairs coming down,” he said.
That makes paying down high-cost credit card debt a top priority since “interest rates won’t fall fast enough to bail you out of a tight situation,” McBride said. “Zero percent balance transfer offers remain a great way to turbocharge your credit card debt repayment efforts.”
Mortgage rates
Although 15- 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 in the last two years, partly because of inflation and the Fed’s policy moves.
But rates are already significantly lower than where they were just a few months ago. Now, the average rate for a 30-year, fixed-rate mortgage is around 6.3%, according to Bankrate.
Jacob Channel, senior economist at LendingTree, expects mortgage rates will stay somewhere in the 6% to 6.5% range over the coming weeks, with a chance that they’ll even dip below 6%. But it’s unlikely they will return to their pandemic-era lows, he said.
“Though they are falling, mortgage rates nonetheless remain relatively high compared to where they stood through most of the last decade,” he said. “What’s more, home prices remain at or near record highs in many areas.” Despite the Fed’s move, “there are a lot of people who won’t be able to buy until the market becomes cheaper,” Channel said.
Auto loans
Even though auto loans are fixed, higher vehicle prices and high borrowing costs have stretched car buyers “to their financial limits,” according to Jessica Caldwell, Edmunds’ head of insights.
The average rate on a five-year new car loan is now more than 7%, up from 4% when the Fed started raising rates, according to Edmunds. However, rate cuts from the Fed will take some of the edge off the rising cost of financing a car — likely bringing rates below 7% — helped in part by competition between lenders and more incentives in the market.
“Many Americans have been holding off on making vehicle purchases in the hopes that prices and interest rates would come down, or that incentives would make a return,” Caldwell said. “A Fed rate cut wouldn’t necessarily drive all those consumers back into showrooms right away, but it would certainly help nudge holdout car buyers back into more of a spending mood.”
Student loans
Federal student loan rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the Treasury bill or other rates, which means once the Fed starts cutting interest rates, the rates on those private student loans will come down over a one- or three-month period, depending on the benchmark, according to higher education expert Mark Kantrowitz.
Eventually, borrowers with existing variable-rate private student loans may be able to refinance into a less expensive fixed-rate loan, he said. But refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.
Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.
Savings rates
While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.
As a result of Fed rate hikes, top-yielding online savings account rates have made significant moves and are now paying more than 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.
If you haven’t opened a high-yield savings account or locked in a certificate of deposit yet, you’ve likely already missed the rate peak, according to Matt Schulz, LendingTree’s credit analyst. However, “yields aren’t going to fall off a cliff immediately after the Fed cuts rates,” he said.
Although those rates have likely maxed out, it is still worth your time to make either of those moves now before rates fall even further, he advised.
One-year CDs are now averaging 1.78% but top-yielding CD rates pay more than 5%, according to Bankrate, as good as or better than a high-yield savings account.
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India’s central bank chief plays down fears of a deposit crunch
[ad_2]Despite widespread bullishness on India, with its stock market highs and healthy bank balance sheets, a shortage of deposits is causing some uneasiness in the country’s financial sector.
Speaking to CNBC in an exclusive interview, Reserve Bank of India (RBI) Governor Shaktikanta Das discussed the issue of slowing growth in bank deposits underperforming an expansion in loans.
There is not cause for concern currently, Das said, but there could be trouble ahead if the situation persists.
“So there is a gap of 350 to 400 basis points,” he said, referencing the difference between credit and deposit growth. Annual figures from August put loan growth at 13.6% with deposit growth at 10.8%, according to Reuters.
“If it persists, then naturally the ability of the banks to continue their lending will get affected,” Das added in the interview Friday.
Get a weekly roundup of news from India in your inbox every Thursday.
Subscribe nowWhen lending outpaces deposits, net interest margins — or the difference between what a bank earns on loans and pays out for deposits — take a hit. This could have ramifications for share prices, with many global institutional investors owning shares in Indian banks. In severe cases, it can lead to liquidity issues for banks if they have trouble meeting withdrawal demands.
Das noted that the loans could be being deposited elsewhere, remaining in the banking system, and wouldn't be drawn on the money that might be finding its way into potentially riskier investments, such as debt funds or equity markets.
"If people are going into the capital markets, it is their decision ... we have nothing to say on that," he said.
Das added that there was scope for banks to increase their deposits, however. "I am happy to note that most of the banks are today really working on their drawing boards, and they are working on coming out with new products for deposit mobilization."
Speaking on the same subject, Ashish Gupta, CIO at Axis Mutual Fund, said he sees a muted earnings picture for Indian banks compared to the last two years — partly due to this credit-deposit gap.
"I think that is clearly going to be visible. You will see earnings growth for the banks slow down," he told CNBC's Street Signs Asia."
He backed the view that deposit growth would be slower compared to the last couple of years, and highlighted that future rate cuts by the RBI would also have a negative impact on banks' profit margins.
India's GDP slowed to 6.7% in the second quarter compared to last year's 8.2%, piling pressure on the central bank to reverse a recent hiking cycle. Markets are currently pricing in a near-95% chance of a rate cut at the RBI's December meeting, with less conviction for the next meeting in October. Das highlighted there will be new members of the Monetary Policy Committee at its October meeting.
"We will discuss and decide in the MPC, but so far as growth and inflation dynamics are concerned, two things I would like to say. One, the growth momentum continues to be good, India's growth story is intact and, so far as inflation outlook is concerned, we have to look at the month-on-month momentum," he said.
He said the decision whether or not to cut rates in October will be based on that.
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It’s a big week for central banks around the world, with a slew of rate moves on the table
Federal Reserve Chair Jerome Powell announces interest rates will remain unchanged during a news conference at the Federal Reserves’ William McChesney Martin Building in Washington, D.C., on June 12, 2024.
Kevin Dietsch | Getty Images
A flurry of major central banks will hold monetary policy meetings this week, with investors bracing for interest rate moves in either direction.
The Federal Reserve’s highly anticipated two-day meeting, which gets underway on Tuesday, is poised to take center stage.
The U.S. central bank is widely expected to join others around the world in starting its own rate-cutting cycle. The only remaining question appears to be by how much the Fed will reduce rates.
Traders currently see a quarter-point cut as the most likely outcome, although as many as 41% anticipate a half-point move, according to the CME’s FedWatch Tool.
Elsewhere, Brazil’s central bank is scheduled to hold its next policy meeting across Tuesday and Wednesday. The Bank of England, Norway’s Norges Bank and South Africa’s Reserve Bank will all follow on Thursday.
A busy week of central bank meetings will be rounded off when the Bank of Japan delivers its latest rate decision at the conclusion of its two-day meeting on Friday.
“We’re entering a cutting phase,” John Bilton, global head of multi-asset strategy at J.P. Morgan Asset Management, told CNBC’s “Squawk Box Europe” on Thursday.
Speaking ahead of the European Central Bank’s most recent quarter-point rate cut, Bilton said the Fed was also set to cut interest rates by 25 basis points this week, with the Bank of England “likely getting in on the party” after the U.K. economy stagnated for a second consecutive month in July.
“We have all the ingredients for the beginning of a fairly extended cutting cycle but one that is probably not associated with a recession — and that’s an unusual set-up,” Bilton told CNBC’s “Squawk Box Europe.”
“It means that we get a lot of volatility to my mind in terms of price discovery around those who believe that actually the Fed [is] late, the ECB [is] late, this is a recession and those, like me, that believe that we don’t have the imbalances in the economy, and this will actually spur further upside.”
Fed decision
Policymakers at the Fed have laid the groundwork for interest rate cuts in recent weeks. Currently, the Fed’s target rate is sitting at 5.25% to 5.5%.
Some economists have argued the Fed should deliver a 50 basis point rate cut in September, accusing the central bank of having previously gone “too far, too fast” with monetary policy tightening.
Others have described such a move as one that would be “very dangerous” for markets, pushing instead for the central bank to deliver a 25 basis point rate cut.
“We are more likely 25 but [would] love to see 50,” David Volpe, deputy chief investment officer at Emerald Asset Management, told CNBC’s “Squawk Box Europe” on Friday.
“And the reason you do 50 next week would be as more or less a safety mechanism. You have seven weeks between next week and … the November meeting, and a lot can happen negatively,” Volpe said.
“So, it would be more of a method of trying to get in front of things. The Fed is caught on their heels a little bit, so we think that it would be good if they got in front of it, did the 50 now, and then made a decision in terms of November and December. Maybe they do 25 at that point in time,” he added.
Brazil and UK
For Brazil’s central bank, which has cut interest rates several times since July last year, stronger-than-anticipated second-quarter economic data is seen as likely to lead to an interest rate hike in September.
“We expect Banco Central to hike the Selic rate by 25bps next week (to 10.75%) and bring it to 11.50% by end-2024,” Wilson Ferrarezi, an economist at TS Lombard, said in a research note published on Sept. 11.
“Further rate hikes into 2025 cannot be ruled out and will depend on the strength of domestic activity in Q4/24,” he added.
Traffic outside the Central Bank of Brazil headquarters in Brasilia, Brazil, on Monday, June 17, 2024.
Bloomberg | Bloomberg | Getty Images
In the U.K., an interest rate cut from the Bank of England (BOE) on Thursday is thought to be unlikely. A Reuters poll, published Friday, found that all 65 economists surveyed expected the BOE to hold rates steady at 5%.
The central bank delivered its first interest rate cut in more than four years at the start of August.
“We have quarterly cuts from here. We don’t think they are going to move next week, with a 7-2 vote,” Ruben Segura Cayuela, head of European economics at the Bank of America, told CNBC’s “Squawk Box Europe” on Friday.
He added that the next BOE rate cut is likely to take place in November.
South Africa, Norway and Japan
South Africa’s Reserve Bank is expected to cut interest rates on Thursday, according to economists surveyed by Reuters. The move would mark the first time it has done so since the central bank’s response to the coronavirus pandemic four years ago.
The Norges Bank is poised to hold its next meeting on Thursday. The Norwegian central bank kept its interest rate unchanged at a 16-year high of 4.5% in mid-August and said at the time that the policy rate “will likely be kept at that level for some time ahead.”
The Bank of Japan, meanwhile, is not expected to raise interest rates at the end of the week, although a majority of economists polled by Reuters expect an increase by year-end.
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Don’t expect ‘immediate relief’ from the Federal Reserve’s first rate cut in years, economist says. Here’s why
Recent signs of cooling inflation are paving the way for the Federal Reserve to cut rates when it meets next week, which is welcome news for Americans struggling to keep up with the elevated cost of living and sky-high interest charges.
“Consumers should feel good about [an interest rate reduction] but it’s not going to deliver sizable immediate relief,” said Brett House, economics professor at Columbia Business School.
Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels in more than 40 years. The central bank responded with a series of interest rate hikes that took its benchmark rate to the highest level in decades.
The spike in interest rates caused most consumer borrowing costs to skyrocket, putting many households under pressure.
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More Americans are struggling even as inflation cools“The cumulative progress on inflation — evidenced by the CPI now at 2.5% after having peaked at 9% in mid-2022 — has given the Federal Reserve the green light to begin cutting interest rates at next week’s meeting,” said Greg McBride, chief financial analyst at Bankrate.com, referring to the consumer price index, a broad measure of goods and services costs across the U.S. economy.
However, the impact from the first rate cut, expected to be a quarter percentage point, “is very minimal,” McBride said.
“What borrowers can be optimistic about is that we will see a series of rate cuts that cumulatively will have a meaningful impact on borrowing costs, but it will take time,” he said. “One rate cut is not going to be a panacea.”
Markets are pricing in a 100% probability that the Fed will start lowering rates when it meets Sept. 17-18, with the potential for more aggressive moves later in the year, according to the CME Group’s FedWatch measure.
That could bring the Fed’s benchmark federal funds rate from its current range, 5.25% to 5.50%, to below 4% by the end of 2025, according to some experts.
The federal funds rate, which the U.S. central bank sets, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
Rates for everything from credit cards to car loans to mortgages will be affected once the Fed starts trimming its benchmark. Here’s a breakdown of what to expect:
Credit cards
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — near an all-time high.
For those paying 20% interest — or more — on a revolving balance, annual percentage rates will start to come down when the Fed cuts rates. But even then they will only ease off extremely high levels, according to McBride.
“The Fed has to do a lot of rate cutting just to get to 19%, and that’s still significantly higher than where we were just three years ago,” McBride said.
The best move for those with credit card debt is to switch to a 0% balance transfer credit card and aggressively pay down the balance, he said. “Rates won’t fall fast enough to bail you out.”
Mortgage rates
While 15- and 30-year mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are partly influenced by the Fed’s policy. Home loan rates have already started to fall, largely due to the prospect of a Fed-induced economic slowdown.
As of Sept. 11, the average rate for a 30-year, fixed-rate mortgage was around 6.3%, nearly a full percentage point drop from where rates stood in May, according to the Mortgage Bankers Association.
But even though mortgage rates are falling, home prices remain at or near record highs in many areas, according to Jacob Channel, senior economist at LendingTree.
“This cut isn’t going to totally reshape the economy, and it’s not going to make doing things like buying a house or paying off debt orders of magnitude easier,” he said.
Auto loans
“Auto loan rates will head lower, too, but you shouldn’t expect the blocking and tackling around car shopping to change anytime soon,” said Matt Schulz, chief credit analyst at LendingTree.
The average rate on a five-year new car loan is now around 7.7%, according to Bankrate.
While anyone planning to finance a new car could benefit from lower rates to come, the Fed’s next move will not have any material effect on what you get, said Bankrate’s McBride. “Nobody is upgrading from a compact to an SUV on a quarter-point rate cut.” The quarter percentage point difference on a $35,000 loan is about $4 a month, he said.
Consumers would benefit more from improving their credit scores, which could pave the way to even better loan terms, McBride said.
Student loans
Federal student loan rates are also fixed, so most borrowers won’t be immediately affected by a rate cut. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the T-bill or other rates, which means once the Fed starts cutting interest rates, the rates on those private student loans will come down as well.
Eventually, borrowers with existing variable-rate private student loans may also be able to refinance into a less expensive fixed-rate loan, according to higher education expert Mark Kantrowitz.
However, refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, he said, “such as deferments, forbearances, income-driven repayment and loan forgiveness and discharge options.” Additionally, extending the term of the loan means you ultimately will pay more interest on the balance.
Savings rates
While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.
As a result of the Fed’s string of rate hikes in recent years, top-yielding online savings account rates have made significant moves and are now paying well over 5%, with no minimum deposit, according to Bankrate’s McBride.
With rate cuts on the horizon, those “deposit rates will come down,” he said. “But the important thing is, what is your return relative to inflation — and that is the good news. You are still earning a return that’s ahead of inflation, as long as you have your money in the right place.”
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Nobel winner Joseph Stiglitz says Fed raised rates ‘too far, too fast’ — and now needs to cut big
Nobel Prize-winning economist Joseph Stiglitz says the Federal Reserve should deliver a half-point interest rate cut at its forthcoming meeting, accusing the U.S. central bank of going “too far, too fast” with monetary policy tightening and making the inflation problem worse.
His comments come ahead of Friday’s pivotal release of U.S. jobs data, with investors closely monitoring the August nonfarm payrolls count for clues on the size of an expected rate cut this month. The jobs data is scheduled out at 8:30 a.m. ET.
Strategists have typically said that the most likely outcome from the Fed’s Sept. 17-18 meeting is a 25-basis-point rate cut, although bets for a 50-basis-point reduction have increased in recent days.
A basis point is 0.01 percentage point.
Stiglitz, who won the Nobel Prize in 2001 for his market analysis, joins the likes of JPMorgan’s chief U.S. economist in calling for a supersized rate cut this month.
“I’ve been criticizing the Fed for going too far, too fast,” Stiglitz told CNBC’s Steve Sedgwick on Friday at the annual Ambrosetti Forum held in Cernobbio, Italy.
Stiglitz said it was “really important” for the Fed to have normalized interest rates, adding that it was a mistake for the U.S. central bank to have held the benchmark borrowing rate near zero for such a long period since 2008.
“But then they went beyond that to where the interest rates have been, and I thought that put the economy at risk for very little benefit, probably actually worsening inflation, ironically, because if you looked more carefully at the sources of inflation, a big component was housing,” Stiglitz said.
American economist Joseph Stiglitz Economy Nobel Prize in 2001 attends the Trento Economy Festival 2023 at Sociale Theater on May 27, 2023 in Trento, Italy.
Roberto Serra – Iguana Press | Getty Images Entertainment | Getty Images
“If you think about, how do we deal with the problem of a housing shortage, which is increasing the price of inflation — do you think raising interest rates making it more difficult for real estate developers to build more houses, homeowners to buy more houses, is going to solve the housing shortage? No, it’s going in exactly the wrong way,” he continued.
“So, I believe that they have contributed to the problem of inflation. Now, even though their models don’t work this way, and they’re not looking at things, I think, as deeply as they should, their models tell them [to] look at the weaknesses in the economy, and therefore we should be lowering interest rates.”
The Fed’s benchmark borrowing rate is currently targeted in a range between 5.25%-5.5%.
If he were serving as a Fed policymaker, Stiglitz said he would vote for a bigger rate cut at the central bank’s September meeting, “because I think they went too far, and it would actually help on the issue of inflation and on jobs.”
Asked whether this meant he believed a 50-basis-point rate cut should be on the table regardless of the August nonfarm payrolls figure, Stiglitz replied: “Yes.”
A spokesperson at the Federal Reserve declined to comment.
Bets rising for a half-point reduction
Market participants are firmly pricing in a rate cut at the Fed’s next policy-setting meeting, with bets for a half-point reduction increasing shortly after Wednesday’s release of the report on Job Openings and Labor Turnover Survey, or JOLTS.
The data showed that U.S. job openings fell to their lowest level in in 3½ years in July, in what was seen as another sign of slack in the labor market.
Traders are currently pricing in a roughly 59% chance of a 25-basis-point rate cut in September, with 41% pricing in a 50-basis-point rate reduction, according to the CME Group’s FedWatch Tool. Bets for a 50-basis-point rate cut stood at 34% just over a week ago.
Not everyone says a big interest rate cut is necessary this month.
George Lagarias, chief economist at Forvis Mazars, said that, while no one can guarantee the scale of the Fed’s rate cut at its September meeting, he is “firmly” in the camp calling for a quarter-point reduction.
“I don’t see the urgency for the 50 [basis point] cut,” Lagarias told CNBC’s “Squawk Box Europe” on Thursday.
“The 50 [basis point] cut might send a wrong message to markets and the economy. It might send a message of urgency, and, you know, that could be a self-fulfilling prophecy,” he continued.
“So, it would be very dangerous if they went there without a specific reason. Unless you have an event, something that troubles markets, there is no reason for panic.”
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RBC Capital Markets: Market pricing of RBA rate cuts “totally misplaced”
Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets cites elevated inflation rates and slowing growth in Australia as proof that the easing path of the RBA will be more gradual, with rate cuts starting next year. Additionally, he examines the BOJ’s policy normalization path, saying that a rate hike would help to strengthen the yen in the long-term, but it would not be a “smooth ride” higher.
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The peak interest rate era is over. Here’s what investors are watching
A trader works on the floor of the New York Stock Exchange on Aug. 23, 2024.
Bloomberg | Bloomberg | Getty Images
Central banks around the world are set to kick off or continue interest rate cuts this fall, bringing an end to an era of historically high borrowing costs.
In September, the U.S. Federal Reserve is all but guaranteed to join the European Central Bank, the Bank of England, the People’s Bank of China, the Swiss National Bank, Sweden’s Riksbank, the Bank of Canada, the Bank of Mexico and others in cutting key rates, which have been held at levels not seen since before the Financial Crisis of 2007-2008.
Money markets had already fully priced in a rate cut from the Fed, but last week investors gained even more confidence in the path of easing ahead.
At the annual Jackson Hole symposium, Fed Chair Jerome Powell not only said the “time has come for policy to adjust,” but that the central bank could now equally focus on doing “everything” it can to keep the labor market strong and continue progress on inflation.
Current pricing suggests high expectations for three 25 basis point cuts by the Fed before the end of the year, according to CME’s FedWatch tool. That will keep the Fed roughly in-line with its peers, despite it moving later.
The European Central Bank is seen cutting rates by 25 basis points at least three times in total this year; and the Bank of England by the same increment a total of three times, according to LSEG data. All three central banks are seen further continuing monetary easing at least in early 2025, even as stickiness in services inflation continues to trouble policymakers.
For the global economy, that means a broadly lower-rate environment next year, along with significantly reduced pressures from inflation. In the U.S., a recent spike in recession fear has largely abated, and despite where there is weakness in big manufacturing-oriented economies such as Germany, the likes of the more services-focused U.K. are recording solid growth.
What all that means for markets is less clear. European stocks, as measured on the regional Stoxx 600 index, rebounded in 2023 from a downturn in 2022 and gained nearly 10% in the year-to-date to reach an intraday record high on Friday. On Wall Street, the S&P 500 index is 17% higher so far in 2024.
The VIX volatility index — which spiked amid the global equities downturn at the start of August — is back below average, Beat Wittmann, chairman and partner at Porta Advisors, told CNBC’s “Squawk Box Europe” on Thursday.
“The market, in terms of price momentum, in terms of valuations, of sentiment, has pretty much recovered, and we are going into the seasonally weak September, October period here. So I would expect choppy markets driven by various factors, geopolitics, corporate earnings, bellwethers like from the AI sector,” Wittmann said.
Choppiness will also be due to an “overdue consolidation correction” and some sector rotation occuring; but “the asset class of choice here very clearly for the rest of this year, and then especially for ’25 and beyond, is equities,” Wittmann added.
Even if recent Fed commentary appears supportive for stocks, data from the U.S. jobs market — with the next key report due Sept. 6 — remains important to watch, Manpreet Gill, chief investment officer for Africa, Middle East and Europe at Standard Chartered, told CNBC’s “Capital Connection” on Monday.
“Our baseline is still very much that a [U.S.] soft landing is achievable… It almost becomes a little bit more binary, because as long as we avoid that downside risk, equity earnings growth is still very supportive, and we’ve had sort of the positioning clean out in the recent pullback,” Gill said.
“And I think rate cuts, or at least expectation of those, really was the last piece markets were looking for. So on balance, we think it’s a positive outcome,” Gill said, referring to the risk of U.S. economic data causing volatility in the coming months.
Arnaud Girod, head of economics and cross asset strategy at Kepler Cheuvreux, told CNBC Tuesday that bonds have had a strong summer and equities have recovered; but that investors must now take a “leap of faith” on where the U.S. economy is heading and the pace of rate cuts.
“I truly think that the more rate cuts you get, the likelihood that [these cuts are] coming with negative data and hence weakening earnings momentum is very high. So it’s difficult, I think, to be too optimistic,” he said.
The stock market has meanwhile shown that there is an element to which it “couldn’t care less about interest rates,” Girod added, since Big Tech has rallied across the peak rate months — which conventional wisdom states should harm growth and technology stocks. That will keep events such as Nvidia earnings as the key ones to watch, according to Girod.
FX focus on rates
In currency markets, attention will remain on the interplay between inflation, rate expectations and economic growth, Jane Foley, head of foreign exchange strategy at Rabobank, told CNBC by email.
If the euro rises significantly against the dollar, “the disinflationary implication may have some impact on market expectations regarding the timing of the ECB rate cuts,” she said.
Stateside, Foley continued, “the result of the U.S. election will have implications for the Fed. If Trump wins, he could use an executive order to increase tariffs fairly quickly which would spur inflation risk and could cut the Fed’s easing cycle short.”
Rabobank currently sees four Fed rate cuts between September and January and then a hold for the rest of 2025, providing the U.S. dollar with the potential to strengthen into the spring.
“The BOE’s hand will likely remain constrained by services sector inflation, which is a function of wage inflation. This could limit the pace of BOE rate cuts to once a quarter,” Foley added.
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‘We would feel comfortable even if there are more rate cuts,’ says Commerzbank CFO
Commerzbank CFO Bettina Orlopp says the bank is in a good position even if there are more rate cuts from the ECB.
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UK lenders slash mortgages as Bank of England rate cut brings relief to homeowners
A row of traditional houses on a street in London’s Muswell Hill suburb, located to the north of London, with views of the Canary Wharf on the horizon.
Georgeclerk | Istock | Getty Images
LONDON — Britain’s major high street lenders have begun slashing their mortgage rates in a sign that financial pressure on households may be easing after the Bank of England cut interest rates for the first time in over four years.
HSBC, Santander and Nationwide are among the lenders to have trimmed borrowing costs following the BOE’s decision on Thursday to lower its Bank Rate to 5% from its 16-year high of 5.25%.
Homeowners on tracker mortgages, which follow the Bank’s base rate, will be the first to benefit from the savings. Barclays, Santander, Metro Bank, Lloyds, Halifax, Nationwide and HSBC all cut repayments costs by 25 basis points shortly after the BOE’s announcement.
Those on standard variable rates, which typically take effect once a borrower’s tracker or fixed rate deal ends, will also see savings. From September, Santander will trim its SVR from 7.50% to 7.25%, Lloyds from 7.25% to 7.0%, and Halifax from 8.74% to 8.49%.
Given their more volatile nature, tracker and SVR mortgages remain a relatively niche part of the U.K. mortgage market. Of the 8.39 million outstanding residential mortgages as of Dec. 2023, 643,000 were trackers and 624,000 were SVRs, according to trade body UK Finance.
However, analysts suggest it may not be long until reductions feed through to the 6.93 million households on fixed rate mortgages. Indeed, last week Nationwide became the first lender since April to offer a sub 4% deal on its five-year fixed rate in anticipation of the BOE’s monetary policy shift.
“[Borrowers can] expect to see further pricing improvements in fixed rates, as lenders continue to fight hard to gain a share in a very competitive market,” David Hollingworth, associate director at L&C Mortgages, said via email.
Laura Suter, director of personal finance at AJ Bell, agreed that other lenders “will follow suit” as Thursday’s decision “fires the starting gun” for the BOE’s rate cutting cycle.
A boost for UK property
While initial savings for homeowners are set to be minimal — averaging around £28 per month for those on tracker rates, according to Hargreaves Lansdown — the savings are expected to boost confidence that Britain is emerging from its cost of living crisis, with knock on effects for the U.K. housing market.
“It could persuade more buyers that this is the right kind of market to take a leap of faith and buy,” Sarah Coles, head of personal finance Hargreaves Lansdown, said.
Savills’ director of research, Emily Williams, said an increase in buyers should lead to an uptick in market activity in the autumn, with price growth expected to total +2.5% this year.
Still, with the BOE voting to cut rates by a slim 5-4 majority, the future path for rate cuts remains uncertain, and the central bank has warned it will move ahead with caution. As such, some analysts have warned it will be some time yet before more significant savings are fed through to homeowners.
“The split vote decision among rate setters suggests this was a rather hawkish rate cut, so this policy loosening is unlikely to herald the start of a major interest rate-cutting cycle,” Suren Thiru, economics directors at ICAEW, said via email.
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The Federal Reserve sets the stage for a rate cut — here’s what that means for your money
Customer shopping for school supplies with employee restocking shelves, Target store, Queens, New York.
Lindsey Nicholson | UCG | Universal Images Group | Getty Images
Now, as the central bank sets the stage to lower interest rates for the first time in years when it meets again in September, consumers may see their borrowing costs start come down as well — some are already.
The federal funds rate, which the U.S. central bank sets, is the rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.
“The first cut will not make a meaningful difference to people’s pocketbooks but it will be the beginning of a series of rate cuts at the end the of this year and into next year that will,” House said.
That could bring the the Fed’s benchmark fed funds rate from the current range of 5.25% to 5.50% to below 4% by the end of next year, according to some experts.
From credit cards and mortgage rates to auto loans and student debt, here’s a look at where those monthly interest expenses stand as we move closer to that initial interest rate cut.
Credit cards
Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. In the wake of the rate hike cycle, the average credit card rate rose from 16.34% in March 2022 to more than 20% today — nearing an all-time high.
At the same time, with households struggling to keep up with the high cost of living, credit card balances are also higher and more cardholders are carrying debt from month to month or falling behind on payments.
A recent report from the Philadelphia Federal Reserve showed credit card delinquencies at an all-time high, according to data going back to 2012. Revolving debt balances also reached a new high even as banks reported tightening credit standards and declining new card originations.
For those paying 20% interest — or more — on a revolving balance, annual percentage rates will start to come down when the Fed cuts rates. But even then they will only ease off extremely high levels, offering little in the way of relief, according to Greg McBride, chief financial analyst at Bankrate.com.
“Rates are not going to fall fast enough to bail you out of a bad situation,” McBride said.
The best move for those with credit card debt is to take matters into their own hands, advised Matt Schulz, chief credit analyst at LendingTree.
“They can do that by getting a 0% balance transfer credit card or a low-interest personal loan or by calling their card issuer and requesting a lower interest rate on a card,” he said. “That works more often that you might think.”
Mortgage rates
While 15- and 30-year mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are partly influenced by the Fed’s policy. Home loan rates have already started to fall, largely due to the prospect of a Fed-induced economic slowdown.
The average rate for a 30-year, fixed-rate mortgage is now just below 7%, according to Bankrate.
“If we continue to get good news on things like inflation, [mortgage rates] could continue trending downward,” said Jacob Channel, senior economist at LendingTree. “We shouldn’t expect any gargantuan drops in the immediate future, but we might see rates trending back to their 2024 lows over the coming weeks and months,” he said.
“If all goes really well, we could even end the year with the average rate on a 30-year, fixed mortgage closer to 6% than 6.5% or 7%.”
At first glance, that might not seem significant, Channel added, but “in mortgage land,” a nearly 50 basis-point drop “is nothing to scoff at.”
Auto loans
Auto loans are fixed. However, payments have been getting bigger because the interest rates on new loans are higher, along with rising car prices, resulting in less affordable monthly payments.
The average rate on a five-year new car loan is now just shy of 8%, according to Bankrate.
However, here, “the financing is one variable, and it’s frankly one of the smaller variables,” McBride said. For example, a quarter percentage point reduction in rates on a $35,000, five-year loan is $4 a month, he calculated.
Consumers would benefit more from improving their credit scores, which could pave the way to even better loan terms, McBride said.
Student loans
Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But undergraduate students who took out direct federal student loans for the 2023-24 academic year are paying 5.50%, up from 4.99% in 2022-23 — and the interest rate on federal direct undergraduate loans for the 2024-2025 academic year is 6.53%, the highest rate in at least a decade.
Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are already paying more in interest. How much more, however, varies with the benchmark.
Savings rates
While the central bank has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.
As a result, top-yielding online savings account rates have made significant moves and are now paying as much as 5.5% — well above the rate of inflation, which is a rare win for anyone building up a cash cushion, according to Bankrate’s McBride.
But those rates will fall once the Fed lowers its benchmark, he added. “If you’ve been considering a certificate of deposit, now is the time to lock it in,” McBride said. “Those yields will not get better, so there is no advantage to waiting.”
Currently, a top-yielding one-year CD pays more than 5.3%, as good as a high-yield savings account.
