Tag: Interest Rates

The Fed won’t be what drives markets in 2023, wealth manager says

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The Federal Reserve played a major role in moving markets in 2022, driving a campaign of monetary tightening as it tried to combat inflation that hit multi-decade highs.

Many who had money in stocks and even bonds suffered, as liquidity was sucked out of the market with every rate hike employed by the Fed — seven of them in the past year alone. In mid-December, the central bank rose its benchmark interest rate to the highest level in 15 years, taking it to a targeted range between 4.25% and 4.5%.

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Prior to that, the U.S. saw a four consecutive three-quarter point hikes — the most aggressive policy decisions since the early 1980s.

Fed officials and economists expect rates to stay high next year, with reductions unlikely until 2024. But that doesn’t mean the Fed will remain the primary driver of the markets. Patrick Armstrong, chief investment officer at Plurimi Wealth LLP, sees different financial drivers retaking the reins.

“Next year I think it’s not going to be the Fed determining the market. I think it’s going to be companies, fundamentals, companies that can grow earnings, defend their margins, probably move higher,” Armstrong told CNBC’s “Squawk Box Europe” on Friday.

“Bond yields are giving you a real return now, above inflation. So it’s a reasonable place to put capital now, whereas at the start of this year it didn’t make much sense. It was hard to expect a return above inflation where yields were.”

The yield on the U.S. 10-year Treasury was at 3.856% on Friday, a rapid climb from 1.628% at the start of 2022. The yield on the benchmark note hit an all-time low of 0.55% in July 2020. Bond yields move inversely to prices.

Screens on the trading floor at New York Stock Exchange (NYSE) display the Federal Reserve Chair Jerome Powell during a news conference after the Federal Reserve announced interest rates will raise half a percentage point, in New York City, December 14, 2022.

Andrew Kelly | Reuters

“What happened this year was driven by the Fed,” Armstrong said. “Quantitative tightening, higher interest rates, they were pushed by inflation, and anything that was liquidity driven sold off. If you were equities and bond investors, came into the year getting less than a percent on a 10-year Treasury which makes no sense. Liquidity was the driver of the market, [and] the liquidity, the carpet’s been pulled from underneath investors.”

Armstrong did suggest that the U.S. may be “flirting with recession probably by the end of the first half of next year,” but noted that “it’s a very strong job market there, wage growth and consumption is 70% of the U.S. economy, so it’s not even sure that the U.S. does fall into recession.”

Key for 2023, the CIO said, will be “to find companies that can defend their margins. Because that is the real risk for equities.”

He noted that analysts have a 13% profit margin expectation for the S&P 500 in 2023, which is a record high.

But inflation and Fed tightening can still present a challenge to that, Armstrong maintained.

“I don’t think you can achieve that with a consumer that’s having their purses pulled in so many directions, from energy costs, mortgage costs, food prices, and probably dealing with a little bit of unemployment starting to creep up as the Fed continues to hike, and it’s designed to destroy demand,” Armstrong said. “So I think that is going to be the key in equities.”

— CNBC’s Jeff Cox contributed to this report.

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December 30, 2022
Here are some smart moves borrowers should make while the fate of student loan forgiveness is still up in the air

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Creatas | Creatas | Getty Images

1. Make the most of extra cash

With headlines warning of a possible recession and layoffs picking up, experts recommend that you try to put 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%.

2. Consider making payments anyway

Boy_anupong | Moment | Getty Images

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.

3. Review your options for when payments resume

Even though there’s some uncertainty around the date that federal student loan bills will pick up again, you want to be prepared for whenever they do.

You can compare how much your monthly bill would be under different repayment plans using one of the calculators at Studentaid.gov or Freestudentloanadvice.org.

If you’re unemployed or dealing with another financial hardship, you might want to put in a request for an economic hardship or unemployment deferment. Those are the ideal ways to postpone your federal student loan payments, because interest doesn’t accrue.

If you don’t qualify for either, though, you can use a forbearance to continue suspending your bills. Just keep in mind that with forbearance, interest will rack up and your balance will be larger — possibly much larger — when you resume paying.

4. Check if refinancing makes sense now

Higher education expert Mark Kantrowitz had previously recommended that 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 on the table — if the president’s policy survives the Supreme Court — 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.

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.

Betsy Mayotte

president of The Institute of Student Loan Advisors

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, he said. The latter borrowers may want to look at refinancing the portion of their debt over the relief amounts, he added.

Still, borrowers should first understand the federal protections they’re giving up by refinancing, warns Betsy Mayotte, president of The Institute of Student Loan Advisors.

For example, the U.S. Department of Education 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,” said Mayotte in a previous interview about refinancing.

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December 29, 2022
How Bank of America achieved a massive comeback from the brink of collapse

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The 2008 financial crisis had a devastating impact on Bank of America. Shares of the bank were trading for as low as $2.53 in 2009 and net income dropped from a high of $21 billion in 2006, to just $4 billion in 2008.

“Bank of America was one reason why much of the investing public and consumers and government lost faith and trust in banking,” recalled Mike Mayo, a bank analyst at Wells Fargo. “If the government did not intervene for Bank of America and the other banks, Bank of America would have failed.”

Fast forward to today, BofA is thriving despite concerns over inflation and threats of a possible recession. The bank reported net income of $31.9 billion in 2021, compared with just $4 billion in 2008.

“As the rates have gone up and if the recession is shallow, then we’re going to see widening spreads and the ability of Bank of America to have significant earnings from net interest income,” said Kenneth Leon, a research director from CFRA Research. “This is unique to the banking industry and Bank of America being one of the largest banks, stands to benefit the most.”

The hard-learned lessons from the financial crisis have also led BofA to undergo significant changes, allowing it to earn its position as the bank with the second-largest total assets in the United States. JPMorgan is still comfortably ahead as the largest bank in the U.S. based on total assets.

“The big change at Bank of America is that they have gone from irresponsible growth to responsible growth,” said Mayo.

A more conservative lending standard is just one example of the bank’s aim for sustainable growth.

“One key aspect of Bank of America’s responsible growth is to say no and no more often,” explained Mayo. “So that when they say yes, it results in a lot more growth that’s sustainable, responsible and better for reputation.”

BofA was unable to participate in CNBC’s coverage of this story.

Watch the video to learn more about how Bank of America was able to achieve one of the biggest comebacks in banking history.

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December 27, 2022
How Bank of America came back from the brink of collapse

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With assets totaling more than $3 trillion, Bank of America is the second-largest bank in the U.S. today. Shares of the company have seen astonishing gains of over 290% in the last decade. But just more than a decade ago, the 2008 financial crisis pushed the bank to the brink of collapse. It was a loss so catastrophic that it required a $45 billion bailout from the U.S. Treasury. So how was Bank of America able to stage such an impressive comeback and where is it headed next?

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December 27, 2022
Subsidized vs. Unsubsidized Student Loans: What to Borrow?
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Disclaimer: This article is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other financial professional to determine what may be best for your individual needs.

A college education in the U.S. might be expensive, but it’s still accessible to many American students thanks to federal student loans. The only problem: It can be tough to know which student loans to choose from, mainly subsidized vs. unsubsidized student loans.

If you’re unsure what to borrow or the difference between these student loan types, you’ve come to the right place. Read on for more information about subsidized and unsubsidized student loans.

What are subsidized student loans?

A subsidized student loan, also called a direct subsidized loan, is a federal student loan available to undergraduate students if they show sufficient financial need.

Being subsidized means interest rates are temporarily paid for or halted by the government, and are generally much lower than unsubsidized loans. This allows students to focus on education without worrying about interest accruing on them for some of their terms.

More specifically, the US Department of Education pays all of the interest on subsidized student loans so long as the borrower is enrolled at least half-time in school. This arrangement continues for six months after graduation and during other applicable deferment periods.

What are unsubsidized student loans?

An unsubsidized student loan is also a kind of federal student loan. But unlike subsidized loans, the interest rates for unsubsidized loans begin accruing as soon as money is distributed to a borrower’s school.

However, this doesn’t mean that students need to pay the interest right off the bat. Students can choose not to pay the interest while in school and throughout a six-month grace period after graduation. However, unpaid interest accumulates during this time and constantly adds to the borrower’s total balance.

Main differences between subsidized and unsubsidized student loans

To recap: Subsidized student loans’ interest is paid for by the government while students are in school and for six months after graduation.

The government does not pay for unsubsidized student loans’ interest at any point, so it consistently accumulates. Graduate students only have eligibility for unsubsidized loans, and only in some cases.

However, there are many differences between subsidized and unsubsidized student loans aside from the above basic breakdown. Here’s a closer look at those differences.

Loan limits and qualifications

Direct subsidized student loans have lower annual loan limits than direct unsubsidized loans. For example, first-year dependent undergraduate students can borrow $3500 in subsidized loans and $5500 in unsubsidized loans. Both contribute to a total federal student loan limit of $23,000.

Furthermore, students must demonstrate sufficient financial need to qualify for subsidized types of loans. You can apply via the FAFSA or Free Application for Federal Student Aid. In contrast, unsubsidized student loans are available to any student borrower, no matter their financial need.

Interest and fees

As mentioned above, the most significant difference between subsidized and unsubsidized student loans is how interest is handled. Subsidized student loans have their interest paid by the government for a while, but unsubsidized loans do not.

There are other differences as well, however. Subsidized federal student loans have fixed annual percentage rates or APRs of 4.99% for all loans disbursed from July 1, 2022, through June 30, 2023. These apply to loan payments (usually monthly payments) required over the life of the loan.

Unsubsidized federal student loans have fixed APRs of 4.99% for undergraduate loans, 6.54% for graduate or professional student loans, and 7.54% for PLUS loans. These rates apply for the same timeframe as subsidized loans.

Meanwhile, subsidized and unsubsidized loans have fees of 1.057% for all loans disbursed between October 1, 2020, and October 1, 2021.

Grace periods and deferment

Subsidized and unsubsidized federal student loans have six-month grace periods, or periods of deferment, meaning student loan repayment won’t begin until six months after graduation.

However, unsubsidized loans’ interest capitalizes, meaning that it is added to the original loan amount. That’s because, as stated above, the federal government doesn’t pay the interest fees for unsubsidized student loans.

Unfortunately, this can lead to a spiraling and costly effect. The larger the principal loan balance gets, for example, the more each successive interest charge adds to the pile. Therefore, prospective students should be careful about using too many unsubsidized federal student loans.

As far as deferment is concerned, the Education Department pays interest for all subsidized loans during deferment periods, like the recent one for Covid-19. Unsubsidized loans, of course, have their interest continue to be collected during deferment.

Recently, the U.S. government released a student loan debt relief program. U.S. citizens could qualify for loan forgiveness. However, this program is currently blocked.

How much money can you borrow?

Now that you know the significant differences between subsidized and unsubsidized student loans, you might wonder what the maximum amount you can borrow is.

Dependent first-year undergraduate students can borrow $5500 in student loans, of which no more than $3,500 can be subsidized. Independent students, meanwhile, can borrow up to $9,500. Again, only up to $3,500 can be in subsidized loans.

The loan rates increase for each successive year of schooling. Here’s a breakdown:
- Dependent second-year undergraduate students: $4,500 in subsidized loans, $6,500 total.
- Independent second-year undergraduate students: $4,500 in subsidized loans, $10,500 total.
- Dependent third-year and beyond undergraduate students: $5,500 in subsidized loans, $7,500 total.
- Independent third-year and beyond undergraduate students: $5,500 in subsidized loans, $12,500 total.
As you can see, you can only take out a certain amount of money in loans per year from the federal government. If you have more financial needs, you’ll have to seek financial aid through scholarships, grants or loans from private lenders or other institutions.

Which should you use: subsidized or unsubsidized student loans?

Given all this information, you might ask yourself whether you should prioritize subsidized unsubsidized student loans.

For most American students, the answer is clear: Subsidized student loans are superior because you don’t have to worry about interest accruing while you are at school and through any grace or deferment periods.

In this way, you’ll pay less for subsidized loans over their lifespans than unsubsidized loans. However, you can’t take out as much money in federal direct subsidized loans as you can in unsubsidized loans.

The most followed strategy is this:
- Apply for as many federal student-subsidized loans as you can. Take out as much money through this system as possible, as it is the most cost-effective way to pay for your education and benefit from plentiful repayment options.
- Then, only if you still need a little more money, take out extra unsubsidized federal student loans for the remainder of the academic year to pay for the cost of attendance.
- Alternatively, pursue other means of financial aid, like scholarships, grants, and other loans with low-interest rates from secondary financial institutions and lenders like banks or credit unions.
If you do this, you’ll negate as many of your future interest payments as possible and walk away with as much financial aid as possible.

Related: Don’t Be a Victim: 4 Ways You Can Take Charge of Your Student Loans

Should you take out federal or private student loans?

Given the potentially high costs of unsubsidized federal student loans, some students might wonder whether private loans are better.

It’s almost always better to borrow federally first. Why? Private loans, even those offered by trustworthy financial institutions, usually have higher interest rates. They also usually require cosigners if student borrowers don’t have credit histories, which is very common for first-time college students.

Related: Private and Federal Student Loans for College: Which Works Best for Your Child?

Meanwhile, subsidized and unsubsidized federal student loans offer more forgiveness and refinancing options, borrower repayment plans and extra flexibility compared to private loans.

In the worst-case scenario, if you default on your loans and have a ton of student debt, you’ll have an easier time resolving things with federal student loans than with private student loans.

You should only use private student loans if you have to fill unexpected payment gaps to meet college expenses or if you find an excellent deal with a low-interest rate. In that case, a private student loan might be slightly better compared to an unsubsidized student loan, but that’s rarer than not.

Summary

In many ways, subsidized student loans might be superior to unsubsidized loans. Still, both could allow you to acquire a college education and open up new professional pathways for your future.

If you qualify for student loans, it may be best to take them, provided you plan to pay them back once you graduate. Additionally, consult your college’s financial aid office to receive more personalized counseling.

Looking for more resources to expand your financial knowledge? Explore Entrepreneur’s Money & Finance articles here
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December 26, 2022
Bank of Japan Governor Haruhiko Kuroda dismisses near-term chance of exiting easy policy

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Haruhiko Kuroda, governor of the Bank of Japan, speaks during a news conference at the central bank’s headquarters in Tokyo on Dec. 20, 2022.

Yuya Yamamoto | Jiji Press | Bloomberg | Getty Images

Bank of Japan Governor Haruhiko Kuroda on Monday brushed aside the chance of a near-term exit from ultra-loose monetary policy but voiced hope that intensifying labor shortages will prod firms to raise wages.

Kuroda said the BOJ’s decision last week to widen the allowance band around its yield target was aimed at enhancing the effect of its ultra-easy policy, rather than a first step toward withdrawing its massive stimulus program.

“This is definitely not a step toward an exit. The Bank will aim to achieve the price target in a sustainable and stable manner, accompanied by wage increases, by continuing with monetary easing under yield curve control,” Kuroda said in a speech delivered to a meeting of business lobby Keidanren.

He also said Japan’s average consumer inflation will likely slow below the BOJ’s 2% target in the next fiscal year as the effects of soaring import costs dissipate.

Stock picks and investing trends from CNBC Pro:

But Kuroda said wage growth will likely increase gradually due to intensifying labor shortages and structural changes in Japan’s job market, which are leading to higher pay for temporary workers and a rise in the number of permanent workers.

“Labor market conditions in Japan are projected to tighten further, and firms’ price- and wage-setting behavior is also likely to change,” Kuroda said.

“In this sense, Japan is approaching a critical juncture in breaking out of a prolonged period of low inflation and low growth,” he said.

The strength of wage growth is seen as key to how soon the BOJ could raise its yield curve control targets, which are set at -0.1% for short-term interest rates and around 0% for the 10-year bond yield.

The BOJ shocked markets last week with a surprise widening of the band around its 10-year yield target. Kuroda had described the move, which allows long-term rates to rise more, as aimed at easing some of the costs of prolonged stimulus rather than a prelude to a full-fledged policy normalization.

With inflation exceeding its 2% target, however, markets are rife with speculation that the BOJ will raise the yield targets when the dovish governor Kuroda’s term ends in April next year.

While more companies are starting to hike prices to pass on higher costs to households, the BOJ must examine whether such changes in corporate price-setting behavior will take hold as a new norm in Japan, Kuroda said.

The outcome of next year’s spring wage negotiations between big companies and unions will also be key to the outlook for wage growth, he said.

Speaking at the same meeting, Prime Minister Fumio Kishida called for business leaders’ help in achieving wage growth high enough to compensate households for the rising cost of living.

Japan’s core consumer inflation hit a fresh four-decade high of 3.7% in November as companies continued to pass on rising costs to households, a sign that price hikes were broadening.

But wages have barely risen for permanent workers, as companies remained cautious about increasing fixed costs amid an uncertain economic outlook.

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December 25, 2022
Why everyone thinks a recession is coming in 2023

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People who lost their jobs wait in line to file for unemployment following an outbreak of the coronavirus disease (COVID-19), at an Arkansas Workforce Center in Fort Smith, Arkansas, U.S. April 6, 2020.

Nick Oxford | File Photo | REUTERS

Recessions often take everyone by surprise. There’s a very good chance the next one will not.

Economists have been forecasting a recession for months now, and most see it starting early next year. Whether it’s deep or shallow, long or short, is up for debate, but the idea that the economy is going into a period of contraction is pretty much the consensus view among economists.

“Historically, when you have high inflation, and the Fed is jacking up interest rates to quell inflation, that results in a downturn or recession,” said Mark Zandi, chief economist at Moody’s Analytics. “That invariably happens – the classic overheating scenario that leads to a recession. We’ve seen this story before. When inflation picks up and the Fed responds by pushing up interest rates, the economy ultimately caves under the weight of higher interest rates.”

Zandi is in the minority of economists who believe the Federal Reserve can avoid a recession by raising rates just long enough to avoid squashing growth. But he said expectations are high that the economy will swoon.

“Usually recessions sneak up on us. CEOs never talk about recessions,” said Zandi. “Now it seems CEOs are falling over themselves to say we’re falling into a recession…Every person on TV says recession. Every economist says recession. I’ve never seen anything like it.”

Fed causing it this time

Ironically, the Federal Reserve is slowing the economy, after it came to the rescue in the last two economic downturns. The central bank helped stimulate lending by taking interest rates to zero, and boosted market liquidity by adding trillions of dollars in assets to its balance sheet. It is now unwinding that balance sheet, and has rapidly raised interest rates from zero in March – to a range of 4.25% to 4.5% this month.

But in those last two recessions, the central bank did not need to worry about high inflation biting into consumer or corporate spending power, and creeping across the economy through the supply chain and rising wages.

The Fed now has a serious battle with inflation. Central bank officials forecast there are more interest rate hikes to come, up to about 5.1% by early next year, and economists expect the central bank may keep rates high after that to control inflation.

Those high interest rates are already taking a toll on the housing market, with home sales down 35.4% from last year in November, the tenth month in a row of decline. The 30-year mortgage rate is close to 7%. Consumer inflation is still running at a hot 7.1% annual rate in November.

“You have to blow the dust off your economics text book. This is going to be be a classic recession,” said Tom Simons, money market economist at Jefferies. “The transmission mechanism we’re going to see it work through first in the beginning of next year, we’ll start to see some significant margin compression in corporate profits. Once that starts to take hold, they’re going to take steps to cut their expenses. The first place we’re going to see it is in reducing headcount. We’ll see that by the middle of next year, and that’s when we’ll see economic growth slowdown significantly and inflation will come down as well.”

How bad will it be?

A recession is considered to be a prolonged economic downturn that broadly impacts the economy and typically lasts two quarters or more. The National Bureau of Economic Research, the arbiter of recessions, considers how deep the slowdown is, how wide spread it is and how long it lasts.

However, if any factor is severe enough, the NBER could declare a recession. For instance, the pandemic downturn in 2020 was so sudden and sharp with wide-reaching impact that it was determined to be a recession even though it was very short.

“I’m hoping for a short, shallow one, but hope springs eternal,” said Diane Swonk, chief economist at KPMG. “The good news is we should be able to recover from it quickly. We do have good balance sheets, and you could get a response to lower rates once the Fed starts easing. The Fed induced recessions are not balance sheet recessions.”

The Federal Reserve’s latest economic projections show the economy growing at a pace of 0.5% in 2023, but it does not forecast a recession.

“We’ll have one because the Fed is trying to create one,” said Swonk. “When you say growth is going to stall out to zero and the unemployment rate is going to rise…it’s clear the Fed has got a recession in its forecast but they won’t say it.” The Fed forecasts unemployment could rise next year to 4.6% from its current 3.7%.

Fed reversal?

How long the Federal Reserve will be able to hold interest rates at high levels is unclear. Traders in the futures market expect the Fed to start cutting rates by the end of 2023. In its own forecast, the Fed shows rate cuts starting in 2024.

Swonk believes the Fed will have to backtrack on higher interest rates at some point because of the recession, but Simons expects a recession could run through the end of 2024 in a period of high rates.

“The market clearly things the Fed is going to reverse course on rates as things turn down,” said Simons. “What isn’t appreciated is the Fed needs this in order to keep their long term credibility on inflation.”

The last two recessions came after shocks. The recession in 2008 started in the financial system, and the pending recession will be nothing like that, Simons said.

“It became basically impossible to borrow money even though interest rates were low, the flow of credit slowed down a lot. Mortgage markets were broken. Financial markets suffered because of the contagion of derivatives,” said Simons. “It was financially generated. It wasn’t so much the Fed tightening policy by raising interest rates, but the market shut down because of a lack of liquidity and trust. I don’t think we have that now.”

That recession was longer than it seemed in retrospect, Swonk said. “It started in January, 2008…It was like a year and a half,” she said. “We had a year where you didn’t realize you were in it, but technically you were…The pandemic recession was two months long, March, April 2020. That’s it.”

While the potential for recession has been on the horizon for awhile, the Fed has so far failed to really slow employment and cool the economy through the labor market. But layoff announcements are mounting, and some economists see the potential for declines in employment next year.

“At the start of the year, we were getting 600,000 [new jobs] a month, and now we are getting about maybe 250,000,” Zandi said. “I think we’ll see 100,000 and then next year it will basically go to zero…That’s not enough to cause a recession but enough to cool the labor market.” He said there could be declines in employment next year.

“The irony here is that everybody is expecting a recession,” he said. That could change their behavior, the economy could cool and the Fed would not have to tighten so much as to choke the economy, he said.

“Debt service burdens have never been lower, households have a boatload of cash, corporates have good balance sheets, profit margins rolled over, but they’re close to record highs,” Zandi said. “The banking system has never been as well capitalized or as liquid. Every state has a rainy day fund. The housing market is underbuilt. It is usually overbuilt going into a recession…The foundations of the economy look strong.”

But Swonk said the Fed is not going to give up on the inflation fight until it believes it is winning. “Seeing this hawkish Fed, it’s harder to argue for a soft landing, and I think that’s because the better things are, the more hawkish they have to be. It means a more active Fed,” she said.

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December 23, 2022
Consumer spending barely rose at start of U.S. holiday shopping season

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The numbers: Consumer spending rose a tepid 0.1% in November, suggesting greater caution by households and heavy discounting in the holiday shopping season.

Analysts polled by The Wall Street Journal had forecast a 0.2% increase.

Incomes climbed 0.4% last month, the government said Friday, a bit faster than the rate of inflation.

Key details: Americans spent less on goods in November, especially new cars and trucks. Higher interest rates have put a dent in car sales while excess inventories forced companies to cut the prices of other products.

Consumers may have also started their holiday shopping early, economists say. Spending rose a sharper 0.9% in October.

Spending on services, meanwhile, increased again. Americans are spending more on things like recreation and travel and not buying as many goods as they were during the pandemic when they were cooped up at home.

The U.S. savings rate rate edged up to 2.4% last month from 2.2%, which was the second lowest savings rate on record going back to 1959.

Households have dipped into their savings to support their spending habits because incomes are not rising as fast as inflation.

The so-called PCE price index is up 5.5% in the past year. And the better known consumer price index has risen 7.1% in the same span.

Big picture: Consumer spending is the main engine of the economy, but it might be starting to sputter in the face of rising interest rates. The Federal Reserve has jacked up rates to try to tame inflation.

What’s likely to keep spending going up for the time being is a strong jobs market. If layoffs increase and unemployment rises, however, the economy is bound to suffer.

Higher borrowing costs depress the economy by making it more expensive to buy a home or car or take out a loan.

Looking ahead: “It seems reasonable to expect people to become more cautious, now that they have run down about half of their accumulated pandemic savings, and labor market conditions are softening,” said chief economist Ian Shepherdson of Pantheon Macroeconomics.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.53%
and S&P 500
SPX,
+0.59%
were set to open higher in Friday trades.

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December 23, 2022
How the Fed affects the stock market

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When members of the Federal Reserve make public statements, investors tend to listen. Over the past two decades, central bankers have consistently shared key information about the future trajectory of important inputs like interest rates. The Fed’s forward guidance on interest rates amid historic inflation has taken stock markets for a ride in 2022. As investors wait for a pivot, a panel of experts explains why many in the market choose not to fight the Fed.

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December 22, 2022
How the Federal Reserve affected 2022’s stock market

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The Federal Reserve, over its more than centurylong existence, has emerged as a leading force in the stock market.

This stature was bolstered by the central bank’s adoption of two unconventional policy tools in the 2000s – large-scale asset purchases and forward guidance.

Large-scale asset purchases refer to the Fed’s emergency buying of government debt and mortgage-backed securities. Forward guidance refers to the central bank’s public communications about the future trajectory of monetary policies. The guidance often hints at the expected path of the federal funds interest rate target in advance of a policy change.

Central bankers in 2022 repeatedly told the public to expect tighter economic conditions as it battles inflation. Economists believe this has contributed to months of declining prices across the S&P500.

“I think they know they gambled and lost and that they have to do something serious in order to get inflation back under control” said Jeffrey Campbell, an economics professor at Notre Dame University and former Federal Reserve economist. “I fear that they took a gamble that inflation wasn’t too real at the beginning of 2021.”

The Fed has reacted to hotter-than-expected inflation with seven interest rate hikes in 2022. These higher rates can weigh on publicly traded companies, particularly growth stocks in tech.

Meanwhile, the Fed’s asset portfolio has decreased more than $336 billion since April 2022. Experts tell CNBC that the full combined effects of this economic tightening are unknown.

That has many people on Wall Street waiting for the central bank to pivot, and bring interest rates back down. At the same time, many financial advisors are calling for caution.

“If you have somebody that has a thumb on the scale or has a decided advantage about what’s going to happen, whether we think good things or bad things are going to happen, it’s best not to fight that policy.” said Victoria Greene, founding partner and chief investment officer at G Squared Wealth Management.

Nonetheless, many experts believe that central bank policy is only one piece of the puzzle. Both black swan events and investor sentiment play a massive role in shaping the trajectory of markets, too. “Sure don’t fight the Fed but … don’t believe too much that the Fed is all powerful,” said John Weinberg, policy advisor emeritus in the research department at the Federal Reserve Bank of Richmond.

Watch the video above to learn how the Fed shaped 2022’s stock market.

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December 22, 2022
The US economy grew much faster than previously thought in the third quarter | CNN Business

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CNN
—

America’s economy grew much faster than previously thought in the third quarter, a sign that the Federal Reserve’s battle to cool the economy to fight inflation t is having only limited impact.

The Commerce Department’s final reading Thursday morning showed gross domestic product, the broadest measure of the US economy, grew at an annual pace of 3.2% between July and September. That was above the 2.9% estimate from a month ago. Economists surveyed by Refinitiv had expected GDP to stay unchanged from its previous reading.

The report said the stronger-than-expected reading was due to increases in exports and consumer spending that were partly offset by a decrease in spending on new housing. Consumer spending is responsible for more than two-thirds of the nation’s economic activity.

The Fed has been raising interest rates throughout the year to cool demand for goods and services and reduce inflation. Economists have been worried for quite some time that the Fed’s actions could tip the US economy into recession next year.

Inflation has cooled in recent readings, but the US economy has stayed strong. Some surveys released this week suggest the Fed’s higher rates are not slowing spending by businesses or consumers.

A recent survey of chief financial officers found the current level of interest rates have not impacted their spending plans. And consumer confidence improved in December according to a survey by the Conference Board, reaching the highest level since April.

In addition, employers have continued to hire at a historically strong pace, although layoffs have increased in some industries, especially technology.

A separate Labor Department report Thursday showed that unemployment claims remained relatively unchanged.

Initial weekly claims for unemployment insurance benefits ticked up to 216,000 for the week ended, December 17. The previous week’s total was upwardly revised by 3,000 to 214,000.

Economists were expecting initial claims to land at 222,000, according to Refinitiv.

The weekly initial claims totals are hovering around pre-pandemic levels. In 2019, weekly claims averaged 218,000.

Continuing claims, which include people who are collecting benefits on an ongoing basis, dropped slightly to 1.672 million for the week ended December 10. The prior week’s number of continuing claims were revised up to 1.678 million.

The final GDP report is one of most backward-looking readings the government releases, looking at the state of the economy nearly three months ago. The current forecast from economists is that growth in the current period will be only 2.4%, significantly slower than Thursday’s reading.

Still, Wall Street was concerned that the GDP report could give the Fed more runway to raise rates. Stocks fell modestly Thursday. Dow futures were 200 points, or 0.6% lower. S&P 500 futures fell 0.8%.

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December 22, 2022
Asia’s emerging markets face two ‘evolving risks’ in 2023, Mizuho Bank says

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Vishnu Varathan of Mizuho Bank says emerging markets in Asia are gauging “whether there will be any unwanted … macro stability risks from the Fed doing more than what markets are betting on.”

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December 21, 2022
Housing slump likely to continue but some see hopeful signs ahead | CNN Business

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A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here.

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CNN
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Mortgage rates have ticked down recently, but are still up dramatically from a year ago thanks to the surge in long-term bond yields as the Federal Reserve hiked interest rates.

While that’s already had a negative impact on the housing market, we’ll get more details this week about how much worse the damage has become.

A long list of housing data is on tap. On Tuesday the US Census Bureau will report housing starts and building permits figures for November, followed by Friday’s release of new home sales data for the same month. In between that will be the November existing home sales numbers from the National Association of Realtors on Wednesday, as well as weekly data on mortgage rates and applications on Thursday.

For the past few months, existing and new home sales have been steadily declining because of the spike in rates and the fact that home prices remain stubbornly high for first-time buyers. Housing starts and building permits have been choppier on a month-to-month basis, but those figures are both down from a year ago.

Still, there are some promising signs that the worst could soon be over. Shares of Lennar

(LEN), one of the largest homebuilders in the US, rallied after reporting earnings last week. Revenue topped forecasts and the company’s guidance for the number of homes it expected to deliver next year was a little higher than analysts’ estimates as well.

Lennar investors “may be looking ahead to 2023, perhaps crossing the valley from recession to potential recovery,” according to CFRA Research analyst Kenneth Leon.

Others in the industry are cautiously optimistic as well.

According to data from Amherst Group, an investment firm that buys single-family homes to rent out, it’s important to put the recent slide in prices in context.

Amherst said home prices are still up about 40% from pre-pandemic levels. So even a further drop of about 15% would merely bring them to mid-2021 levels. In other words, this isn’t like the mid-2000s real estate bubble bursting.

It’s also worth noting that the job market is still strong and wages are growing. What’s more, many consumers still have decent levels of excess savings thanks to pandemic era government stimulus.

That all amounts to a few good reasons why the housing market could avoid a severe and prolonged slump.

“The U.S. housing market is still supported by a tight labor market, the lock-in effect of low fixed mortgage rates for existing homeowners, tight mortgage underwriting, low leverage in the mortgage sector, and low housing supply,” said Brandywine fixed-income analyst Tracy Chen in a report this month.

“We believe we can avoid a severe housing downturn like the one in the Global Financial Crisis,” Chen added.

Others point out that even though housing sales may remain weak due to high home prices and still elevated mortgage rates, the good news is that most existing homeowners are still paying their monthly mortgage on time.

Again, that’s a stark contrast from 2008 when many people with subprime loans or borrowers with poor credit histories were unable to keep up with their mortgage payments.

“Housing is not bringing down the economy. Yes, the housing market has been impacted. But mortgage delinquencies are still low,” said Gene Goldman, chief investment officer at Cetera Investment Management.

There aren’t a ton of companies reporting their latest earnings this week. But the few that are could give more clues about the financial health of consumers and the state of corporate spending.

Cereal giant General Mills

(GIS) will release earnings on Tuesday. Analysts are expecting a slight increase in both sales and profit. Consumers may be growing increasingly wary about inflation and the broader economy, but they’re still eating their Wheaties. Shares of General Mills

(GIS) have soared nearly 30% this year.

Analysts are less optimistic about the outlooks for sneaker king and Dow component Nike

(NKE), used car retailer CarMax

(KMX) and memory chip maker Micron

(MU), whose semiconductors are used in devices ranging from cell phones and computers to cars.

Earnings are expected to decline for these three companies. They won’t be the only leaders of Corporate America to report weak results.

According to data from FactSet, fourth-quarter earnings for S&P 500 companies are expected to decline 2.8% from a year ago. Analysts have been busy cutting their forecasts too. John Butters, senior earnings analyst at FactSet, noted in a report that fourth-quarter profits were expected to rise 3.7% as recently as September 30.

Investors are also going to be paying very close attention to what companies say in their earnings reports about their outlooks for 2023. Analysts currently are anticipating earnings growth of 5.3% for 2023. That could be too optimistic… especially if companies start cutting their own forecasts due to worries about the broader economy.

“Odds of a recession are pretty high,” said Vincent Reinhart, chief economist and macro strategist at Dreyfus & Mellon. “That will have a knock-on effect for corporate earnings. Higher rates and weaker earnings suggest more pain for stocks.”

Monday: Germany Ifo business climate index

Tuesday: US housing starts and building permits; China sets loan prime rate; Bank of Japan interest rate decision; earnings from General Mills, Nike, FedEx

(FDX) and Blackberry

(BB)

Wednesday: US existing home sales; Germany consumer confidence; earnings from Rite Aid

(RAD), Carnival

(CCL), Cintas

(CTAS), Toro

(TTC) and Micron

Thursday: US weekly jobless claims; US Q3 GDP (third estimate); earnings from CarMax

(KMX) and Paychex

Friday: US personal income and spending; US PCE inflation; US new home sales; US durable goods orders; US U. of Michigan consumer sentiment; Japan inflation; UK markets close early

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December 18, 2022
Mortgage rates dip for the fifth week in a row despite Federal Reserve hike

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Mortgage rates dip for the fifth week in a row despite Federal Reserve hike – CBS News

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Mortgage rates drop for the fifth week in a row despite the Federal Reserve’s recent interest rate hike. BancAlliance President Lori Bettinger joins CBS News Mornings to explain what’s spurring the dip.

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December 16, 2022
Student loan forgiveness is headed to the Supreme Court. What that means for the payment pause

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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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December 16, 2022
The Grinch comes for retailers | CNN Business

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A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

New York
CNN
—

Weaker-than-expected retail sales in November pummeled market sentiment on Thursday and raised the odds that the Federal Reserve’s inflation-fighting interest rate hikes would push the economy into recession.

What’s happening: US retail sales, which measure the total amount of money that stores make from selling goods to customers, fell 0.6% in November, the weakest performance in nearly a year. The drop concerned economists who had expected monthly sales to shrink by just 0.1%. It’s also a sharp reversal from October’s sales increase of 1.3%.

That’s a bad sign for the economy. Just last month Bank of America CEO Brian Moynihan told CNN that the continued strength of the US consumer is nearly single-handedly staving off recession. Consumer spending is a major driver of the economy, and the last two months of the year can account for about 20% of total retail sales — even more for some retailers, according to National Retail Federation data.

Market mania: The weak report means that spending faltered just as the holiday season started, a critical time for retailers to ramp up profits and get rid of excess inventory. Investors weren’t too happy about that.

Shares of Costco

(COST) closed Thursday 4.1% lower, Target

(CBDY) fell by 3.2%, Macy’s

(M) dropped 3.5% and Abercrombie & Fitch

(ANF) was down 6.2%.

The entire sector took a blow — the VanEck Retail ETF, with Amazon

(AMZN), Home Depot

(HD) and Walmart

(WMT)as its top three holdings, fell by 2.2%. The SPDR S&P Retail ETF, which follows all S&P retail stocks, was down 2.9%.

Weak sales are likely to continue, say analysts, and if they do, then retailers’ bottom lines and fourth-quarter earnings will suffer.

“The headwinds of the past year are catching up to consumers and forcing them to be more conservative in their holiday shopping this winter,” warned Morgan Stanley economist Ellen Zentner in a note.

The Fed factor: November’s report could indicate that consumers are feeling the double-punch of sky-high inflation and painful interest rate hikes from the central bank. This retail sales data adds to recessionary concerns, as it suggests that consumers may be becoming more cautious with their spending.

“Households are increasingly relying on their savings to sustain their spending, and many families are resorting to credit to offset the burden of high prices. These trends are unsustainable, and the current credit splurge is a true risk, especially for families at the lower end of the income spectrum,” said Gregory Daco and Lydia Boussour, economists at EY Parthenon.

While American bank accounts are still fairly robust, they’re beginning to dwindle. In the third quarter of 2022, credit card balances jumped 15% year over year. That’s the largest annual jump since the New York Fed began keeping track of the data in 2004.

“Against this backdrop, we expect consumers will rein in their spending further in coming months,” said Daco and Boussour. “Real consumer spending should see modest growth in the final quarter of the year, but we expect it will barely grow in 2023.”

Bottom line: If Bank of America’s Moynihan was right, the US economy is in trouble.

US mortgage rates came in lower once again this week, marking the fifth consecutive drop in a row.

The 30-year fixed-rate mortgage averaged 6.31% in the week ending December 15, down from 6.33% the week before, according to Freddie Mac. A year ago, the 30-year fixed rate was 3.12%, reports my colleague Anna Bahney.

That’s a sharp reversal from the upward trend in rates we’ve seen for most of 2022. Those increases were spurred by the Federal Reserve’s unprecedented campaign of harsh interest rate hikes to tame soaring inflation. But mortgage rates have tumbled in the last several weeks, following data that showed inflation may have finally reached its peak.

The Fed announced on Wednesday that it will continue to raise interest rates — albeit by a smaller amount than it has been.

“Mortgage rates continued their downward trajectory this week, as softer inflation data and a modest shift in the Federal Reserve’s monetary policy reverberated through the economy,” said Sam Khater, Freddie Mac’s chief economist.

“The good news for the housing market is that recent declines in rates have led to a stabilization in purchase demand,” he added. “The bad news is that demand remains very weak in the face of affordability hurdles that are still quite high.”

American regulators have been granted unprecedented access to the full audits of Chinese companies like Alibaba

(BABA) and JD.com

(JD) after threatening to kick the tech giants off US stock exchanges if they did not receive the data.

The announcement marks a major breakthrough in a yearslong standoff over how Chinese companies listed on Wall Street should be regulated. It will come as a huge relief for these firms and investors who have invested billions of dollars in them, reports my colleague Laura He.

“For the first time in history, we are able to perform full and thorough inspections and investigations to root out potential problems and hold firms accountable to fix them,” Erica Williams, chair of the Public Company Accounting Oversight Board, said in a statement Thursday, adding that such access was “historic and unprecedented.”

More than 100 Chinese companies had been identified by the US securities regulator as facing delisting in 2024 if they did not hand over the audits of their financial statements.

On Friday, China’s securities regulator said it’s looking forward to working with US officials to continue promoting future audit supervision of companies listed in the United States.

There are more than 260 Chinese companies listed on US stock exchanges, with a combined market capitalization of more than $770 billion, according to recent calculations posted by the US-China Economic and Security Review Commission.

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December 16, 2022
Bank of England slows rate hike pace to a half point

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The Bank of England on Thursday slowed the pace of interest-rate hikes down to a half point, as the U.K. central bank balances a need to fight inflation with signs the economy is decelerating.

The Bank of England increased its main interest rate to 3.5% from 3%. There were two votes for no change and one for a 75 basis point hike.

U.K. inflation…

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December 15, 2022
Swiss National Bank Slows Tightening Cycle With a 50 Basis Points Interest-Rate Rise

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By Xavier Fontdegloria

Switzerland’s National Bank on Thursday increased interest rates for a third consecutive time in as many meetings, but slowed the pace of rises as inflation pressures moderated.

The Swiss central bank increased its policy rate by 50 basis points, to 1.0%, after a larger increase of 75 basis points at its September meeting.

…

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December 15, 2022
How The Fed’s Interest Rate Hikes Could Affect Your Finances

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NEW YORK (AP) — The Federal Reserve’s move Wednesday to raise its key rate by a half-point brought it to a range of 4.25% to 4.5%, the highest level in 14 years.

The Fed’s latest increase — its seventh rate hike this year — will make it even costlier for consumers and businesses to borrow for homes, autos and other purchases. If, on the other hand, you have money to save, you’ll earn a bit more interest on it.

Wednesday’s rate hike, part of the Fed’s drive to curb high inflation, was smaller than its previous four straight three-quarter-point increases. The downshift reflects, in part, the easing of inflation and the cooling of the economy.

As interest rates increase, many economists say they fear that a recession remains inevitable — and with it, job losses that could cause hardship for households already badly hurt by inflation.

WHAT’S PROMPTING THE RATE INCREASES?

The short answer: Inflation. Over the past year, consumer inflation in the United States has clocked in at 7.1% — the fifth straight monthly drop but still a painfully high level.

The Fed’s goal is to slow consumer spending, thereby reducing demand for homes, cars and other goods and services, eventually cooling the economy and lowering prices.

Fed Chair Jerome Powell has acknowledged that aggressively raising interest rates would bring “some pain” for households but that doing so is necessary to crush high inflation.

WHICH CONSUMERS ARE MOST AFFECTED?

Anyone borrowing money to make a large purchase, such as a home, car or large appliance, will take a hit, according to Scott Hoyt, an analyst with Moody’s Analytics.

“The new rate pretty dramatically increases your monthly payments and your cost,” he said. “It also affects consumers who have a lot of credit card debt — that will hit right away.”

That said, Hoyt noted that household debt payments, as a proportion of income, remain relatively low, though they have risen lately. So even as borrowing rates steadily rise, many households might not feel a much heavier debt burden immediately.

“I’m not sure interest rates are top of mind for most consumers right now,” Hoyt said. “They seem more worried about groceries and what’s going on at the gas pump. Rates can be something tricky for consumers to wrap their minds around.”

Filmstax via Getty Images

HOW WILL THIS AFFECT CREDIT CARD RATES?

Even before the Fed’s latest move, credit card borrowing rates had reached their highest level since 1996, according to Bankrate.com, and these will likely continue to rise.

And with prices still surging, there are signs that Americans are increasingly relying on credit cards to help maintain their spending. Total credit card balances have topped $900 billion, according to the Fed, a record high, though that amount isn’t adjusted for inflation.

John Leer, chief economist at Morning Consult, a survey research firm, said its polling suggests that more Americans are spending down the savings they accumulated during the pandemic and are using credit instead. Eventually, rising rates could make it harder for those households to pay off their debts.

Those who don’t qualify for low-rate credit cards because of weak credit scores are already paying significantly higher interest on their balances, and they’ll continue to.

As rates have risen, zero percent loans marketed as “Buy Now, Pay Later” have also become popular with consumers. But longer-term loans of more than four payments that these companies offer are subject to the same increased borrowing rates as credit cards.

For people who have home equity lines of credit or other variable-interest debt, rates will increase by roughly the same amount as the Fed hike, usually within one or two billing cycles. That’s because those rates are based in part on banks’ prime rate, which follows the Fed’s.

HOW ARE SAVERS AFFECTED?

The rising returns on high-yield savings accounts and certificates of deposit (CDs) have put them at levels not seen since 2009, which means that households may want to boost savings if possible. You can also now earn more on bonds and other fixed-income investments.

Though savings, CDs, and money market accounts don’t typically track the Fed’s changes, online banks and others that offer high-yield savings accounts can be exceptions. These institutions typically compete aggressively for depositors. (The catch: They sometimes require significantly high deposits.)

In general, banks tend to capitalize on a higher-rate environment to boost their profits by imposing higher rates on borrowers, without necessarily offering juicer rates to savers.

ThinkNeo via Getty Images

WILL THIS AFFECT HOME OWNERSHIP?

Last week, mortgage buyer Freddie Mac reported that the average rate on the benchmark 30-year mortgage dipped to 6.33%. That means the rate on a typical home loan is still about twice as expensive as it was a year ago.

Mortgage rates don’t always move in tandem with the Fed’s benchmark rate. They instead tend to track the yield on the 10-year Treasury note.

Sales of existing homes have declined for nine straight months as borrowing costs have become too high a hurdle for many Americans who are already paying much more for food, gas and other necessities.

WILL IT BE EASIER TO FIND A HOUSE IF I’M STILL LOOKING TO BUY?

If you’re financially able to proceed with a home purchase, you’re likely to have more options than at any time in the past year.

WHAT IF I WANT TO BUY A CAR?

Since the Fed began increasing rates in March, the average new vehicle loan has jumped more than 2 percentage points, from 4.5% to 6.6% in November, according to the Edmunds.com auto site. Used vehicle loans are up 2.1 percentage points to 10.2%. Loan durations for new vehicles average just under 70 months, and they’ve passed 70 months for used vehicles.

Most important, though, is the monthly payment, on which most people base their auto purchases. Edmunds says that since March, it’s up by an average of $61 to $718 for new vehicles. The average payment for used vehicles is up $22 per month to $565.

Ivan Drury, Edmunds’ director of insights, says financing the average new vehicle with a price of $47,000 now costs $8,436 in interest. That’s enough to chase many out of the auto market.

“I think we’re actually starting to see that these interest rates, they’re doing what the Fed wants,” Drury said. “They’re taking away the buying power so that you can’t buy a vehicle anymore. There’s going to be fewer people that can afford it.”

Any rate increase by the Fed will likely be passed through to auto borrowers, though it will be slightly offset by subsidized rates from manufacturers. Drury predicts that new-vehicle prices will start to ease next year as demand wanes a little.

HOW HAVE THE RATE HIKES INFLUENCED CRYPTO?

Cryptocurrencies like bitcoin have dropped in value since the Fed began raising rates. So have many previously high-valued technology stocks.

Higher rates mean that safe assets like Treasuries have become more attractive to investors because their yields have increased. That makes risky assets like technology stocks and cryptocurrencies less attractive.

Still, bitcoin continues to suffer from problems separate from economic policy. Three major crypto firms have failed, most recently the high-profile FTX exchange, shaking the confidence of crypto investors.

WHAT ABOUT MY JOB?

Some economists argue that layoffs could be necessary to slow rising prices. One argument is that a tight labor market fuels wage growth and higher inflation. But the nation’s employers kept hiring briskly in November.

“Job openings continue to exceed job hires, indicating employers are still struggling to fill vacancies,” said Odeta Kushi, an economist with First American.

WILL THIS AFFECT STUDENT LOANS?

Borrowers who take out new private student loans should prepare to pay more as as rates increase. The current range for federal loans is between about 5% and 7.5%.

That said, payments on federal student loans are suspended with zero interest until summer 2023 as part of an emergency measure put in place early in the pandemic. President Joe Biden has also announced some loan forgiveness, of up to $10,000 for most borrowers, and up to $20,000 for Pell Grant recipients — a policy that’s now being challenged in the courts.

IS THERE A CHANCE THE RATE HIKES WILL BE REVERSED?

It looks increasingly unlikely that rates will come down anytime soon. On Wednesday, the Fed signaled that it will raise its rate as high as roughly 5.1% early next year — and keep it there for the rest of 2023.

AP Business Writers Christopher Rugaber in Washington, Tom Krisher in Detroit and Damian Troise and Ken Sweet in New York contributed to this report.

The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.

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December 14, 2022
Federal Reserve boosts interest rates — again. Here’s what it means for your wallet.

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With inflation still high, though cooling, the Federal Reserve is again turning to its most effective weapon in its battle against soaring prices: Another rate hike.

The central bank on Wednesday boosted its benchmark interest rate by 0.5 percentage point, marking its seventh consecutive hike this year. There are some signs that its campaign against the hottest inflation in four decades is paying off, with the consumer price index last month easing to its slowest rate of inflation since December 2021.

Yet despite the gradual slowing in the CPI, inflation remains historically high, with prices rising 7.1% last month from a year ago. In order to tame runaway prices, the Fed is boosting the cost of borrowing, which in theory should dissuade consumers and businesses from making purchases — and that slowdown in demand, should in turn put the brakes on inflation.

But by boosting the cost of borrowing, that effort has made it more costly for consumers to take out loans and carry a balance on their credit cards.

“The cost of borrowing is a whole lot more expensive than it was just a year ago,” said Matt Schulz, chief credit analyst at LendingTree. “The best thing is for people to assume when they are making their budgets and estimating what their expenses will be is to assume that prices are gong to continue to rise, and interest rates will also continue to rise.”

Economists expect that the Fed will continue to boost rates in 2023, although rate hikes are expected to get smaller as inflation eases.

Federal Reserve raises interest rates for seventh time this year

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Read on to learn how the next Fed rate hike could affect your money.

What is the Fed’s new rate?

The central bank on Wednesday boosted its benchmark rate by 0.5 percentage point, bringing the Fed’s target range to between 4.25% and 4.5%. That marks a step-down from a string of bigger rate hikes this summer, when the bank made four consecutive 0.75 percentage point hikes.

But investors and economists will be listening for hints from Fed Chair Jerome Powell on Wednesday about the potential pace of rate hikes next year, as well as the policymakers’ stance on the pace of inflation. Another topic of concern is whether the Fed sees an economic slowdown or recession ahead.

“[T]he cumulative increase to date ranks amongst the most aggressive increases since the 1980s,” noted Lawrence Gillum, fixed income strategist for LPL Financial, in a research note.

Impact on borrowers

Each 0.25 percentage-point increase in the federal funds rate translates into an extra $25 a year in interest on $10,000 in debt.

Prior to Wednesday’s rate hike, the Fed had already boosted rates six times this year, for a total increase of 3.75 percentage points since the beginning of the year, or an additional $375 in interest for each $10,000 in debt.

Factoring in this week’s 0.5 percentage point hike, Americans will now pay an additional $425 in interest for every $10,000 they have in debt.

Impact on credit cards

The Fed’s to further ratchet up its short-term interest rate means higher APRs on your credit cards, Schulz said.

Consumers “will see their credit card’s APR rise by that 50 basis point amount within the next billing cycle or two,” he predicted. Already, the average APR on a new credit card offer is higher than 22%, Schulz noted.

That won’t impact people who pay off their cards every month, but Americans who keep a balance could be facing hefty interest charges. One of the best methods for coping with a balance is to get a zero-percent balance-transfer card, which allows you to transfer your balance from one card that charges interest to another that charges 0% for an introductory period.

Many of these cards are still available, Schulz said. Another option is to call your credit card companies and request a lower rate, which issuers are often willing to grant, he added.

Impact on mortgage rates

Earlier this year, mortgage rates soared in tandem with the Fed’s series of rate hikes, edging over 7% for a traditional 30-year loan — more than double the rate from January.

But mortgage rates have been trending downward in recent weeks. That’s due to lenders anticipating fewer Fed rate hikes in the coming months, according to D. Brian Blank, assistant professor of finance at Mississippi State University, in The Conversation.

30-year fixed mortgage rate climbs back to two-decade high

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Mortgage rates could continue to slide lower, especially given November’s better-than-expected inflation report, noted Jacob Channel, senior economist at LendingTree, in an email.

“We could end the year with rates at about 6% — or potentially even lower — if inflation figures are very encouraging,” he said. “With that said, there are no guarantees regarding where rates will end up.”

Impact on savings accounts and CDs

If there’s an upside to higher interest rates, it’s that it means better returns for savers.

“Although deposit account rates have lagged the federal funds rate increases, deposit rates are reaching highs not seen in more than a decade,” said Ken Tumin of DepositAccounts.com, in an email. “Further deposit rate increases are likely as the Fed continues to hike rates.”

Online banks are offering the best rates, with the average online savings account now yielding 3.02%, he added. Meanwhile, the average online 1-year CD yield now stands at 4.15%.

Still, with inflation still trending above 7%, that means savers are still losing money by putting their funds in accounts bearing 3% or 4%.

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December 14, 2022