How should a retail investor deal with Wednesday’s interest rate cut by the Federal Reserve and with the future rate cuts that seem to be on the horizon?
What I plan to do is nothing. Which may be what you should do too.
How can I say “do nothing” when the airwaves, print media, and the internet are filled with advice and suggestions — and warnings — about how to handle the Fed’s rate cut?
Let me show you why my wife and I aren’t planning to do anything about the rate cuts, which will reduce our interest income but not threaten our overall financial well-being. And why you may not want to do anything, either.
Here’s the deal. The Fed has cut the federal funds rate to between 4.5% and 4.75% from the former 5% to 5.25%. Fed Chairman Jerome Powell has made it clear that the Fed is planning at least one more rate cut this year.
8/29/24
The Fed controls only this short-term rate, but lowering it puts downward pressure on longer-term rates as well. That’s great, of course, for many of us, making it easier and cheaper to borrow. But it’s not great for savers. That’s because the income they get on their savings is going to decline.
We have significant cash holdings, which we keep in low-cost, high-quality money market funds. Our income from those funds, which has risen nicely over the past few years, is going to decline. But such is life.
Some people advise you to lock up yields by switching cash into long-term bonds or long-term certificates of deposit, whose interest rates are fixed and won’t fall because of the Fed’s rate cuts.
However, there’s a problem with doing that.
Locking up yields by buying long-term bonds or CDs makes your money illiquid. This exposes you to some long-term risks, such as having to sell at a loss if rates rise — which they will sooner or later, trust me —or if you need the cash that you’ve locked up long-term.
Money market man? Federal Reserve Bank Chair Jerome Powell (Photo: Chip Somodevilla/Getty Images) (Chip Somodevilla via Getty Images)
By contrast, if you’ve done what we have done — put our surplus cash into well-regarded, low-cost money market funds — your income will go down when the Fed’s rate cuts work their way through the financial system. But you’ve still got liquidity, the ability to access your cash on demand, which is very important.
The one thing that I won’t do — and that you shouldn’t do, either — is to put my money into a bank savings account, which typically pays yields approaching zero. The rates on those accounts aren’t likely to fall much, if at all, because they’re already so low.
So if you’ve got $3,000 or more of cash sitting in a bank savings account but don’t have a money fund account, you’ll probably do well to open an account in a low-cost, high-quality fund.
To be sure, unlike bank accounts, money funds aren’t backed by the Federal Deposit Insurance Corp. But there are plenty of high-quality, conservatively run low-cost funds. It’s a very competitive business, with $6.68 trillion in assets, according to Crane Data. They are highly unlikely to fail.
The most important thing for you to do now is to stay calm and remember that if you end up doing nothing to cope with lower interest rates, you’ll have plenty of company. Including me.
Berkshire has since rallied and outperformed the S&P 500.
At Thursday’s market close, Berkshire was up 253% (15.6% a year) since we bought it. During that same period, the index fund has returned 242% (15.2% a year), according to Jeff DeMaso of the Independent Vanguard Adviser.
Score one for the Oracle of Omaha.
Allan Sloan, a contributor to Yahoo Finance, is a seven-time winner of the Loeb Award, business journalism’s highest honor.
(CNN) — High interest rates have begun their initial descent.
The Federal Reserve on Wednesday announced it would cut its key overnight lending rate by half a percentage point — aka 50 basis points — marking the first time the US central bank has lowered rates since March 2020.
It is expected to continue cutting rates over the next year or two. But Federal Reserve Chairman Jerome Powell said Wednesday the board will “make decisions meeting by meeting based on incoming economic data.” Barring a big economic slowdown, however, further cuts may be smaller (e.g.., a quarter point). Of today’s cut, Powell said, “We made a good strong start — a sign of our confidence that inflation is coming down … on a sustainable basis. I think we’ll go carefully meeting by meeting.”
The Fed’s moves will result in lower interest rates on various consumer financial products and interest-bearing accounts. But don’t expect Wednesday’s single cut — or even another moderate cut or two this year — to necessarily drastically alter your financial life in every way.
For borrowers, “rates are not going to fall fast enough to bail you out of a bad situation,” said Greg McBride, chief financial analyst at Bankrate.com. “And for savers, these rate cuts won’t erase the benefit you got from rising rates in 2022 and 2023. Savers with competitive high-yielding accounts will still be way ahead of the game.”
Here’s a more specific look at how the Fed’s rate cutting will affect your credit cards, car loans, home loans, high-yield savings accounts, certificates of deposits and other financial accounts.
Your credit cards
It may take two or three statement cycles before you start to see a lower rate on your credit cards, McBride said.
But given that the average credit card rate is just under 21% — and the average rate on retail store cards is north of 30% — a half point drop may not help much. Even if a sustained rate-cutting campaign over the next two years pushes the average credit card rate to 16.3% — where it was at the start of 2022, before the Fed started hiking rates to beat back inflation — it will still be a pricey loan.
What to do: If you have credit card debt, the advice is the same as it ever was: Pay it off.
Try to get a zero-rate balance transfer card that can buy you at least 12 to 18 months interest free so you can meaningfully pay down the principal you owe. If you can’t secure that, see if you can transfer your balance to a credit card from a credit union or local bank that offers lower rates than the biggest banks. “They typically have fewer perks, but their rates can be half as high,” said Chris Diodato, a fee-only certified financial planner and founder of WELLth Financial Planning.
Your car
Car loan rates are likely to move down fairly quickly in response to the Fed, said Jessica Caldwell, head of insights at Edmunds.com, an online guide to car shopping. In its August survey of car shoppers, a majority (64%) said a Fed rate cut likely would affect the timing of their purchase.
But here’s the thing: Car loan rates are pretty high — the average is 7.1% for new cars and 11.3% for used cars, according to Edmunds. So a half-point drop may not save you as much as you think.
What to do:Every quarter-point cut in your rate knocks $4 a month off a typical loan on a $35,000 car, according to Bankrate. So a full percentage point drop amounts to just $16 a month, or less than $200 a year. “Your real lever for savings is the price of the car you choose, how much you’re financing and your credit rating,” McBride said.
For instance, Caldwell noted, you may think a used car will save you money, but if you’re financing it, do the math. Loans for new cars and certified pre-owned cars often come with subsidized loan incentives, so those incentives coupled with a rate drop might result in better savings than a specific used car loan you’re considering, she said. “Shop the loan. See how much you’ll be paying in total interest (over the loan term).”
Your home
Mortgage rates have already fallen quite a bit in recent months. As of September 12, the 30-year fixed-rate mortgage averaged 6.20%. That’s almost two percentage points below its peak in October.
That’s because mortgage rates are more closely aligned with movements in the 10-year Treasury yield, which typically rises and falls on various economic factors (e.g. inflation, growth, etc.), rather than being directly tied to the Fed’s moves.
McBride thinks further drops in mortgage rates, if they occur, will be more modest over the next year, depending on the health of the economy. “We’re not going back to the sub-3% mortgage rates of 2020 and 2021,” he said.
What to consider if you want to:
Buy a home: Figuring out when to buy a home and what you can afford isn’t just a question of rates. “Other variables like home prices and the availability of homes for sale will be just as important,” McBride noted.
If you do buy a home this year and are considering buying down points to reduce your mortgage rate, crunch some numbers first, Diodato advised. If rates drop further and you think you’ll be tempted to refinance in a year or two, figure out what buying down points will net you in savings, he said. That’s because you will pay thousands of dollars to buy down your mortgage rate now, and then thousands more in fees to refinance.
To buy down a quarter of a point might cost you 1% of your loan or 4% for a full point, he said. To refinance, the costs could be between 2% and 6% of your loan, according to Lending Tree.
Refinance your mortgage: Given where rates already are, if you have a mortgage at 7.25% or more, McBride said refinancing your loan may be worth it if you can get the new rate down to at least 6.25%. That percentage point drop could save you $200 a month on a $300,000 loan. Then calculate how much your refi costs will be to determine how quickly you can recoup them. For instance, if you’re saving $200 a month on a refi, and your refi costs are below $5,000, you can make that back in two years or less.
Get a home equity line of credit: If you want to take out a HELOC, know that it’s no longer cheap money to borrow: Average rates on HELOCs range roughly between 9% and 11%. So a couple of quarter-point rate cuts from the Fed won’t make it meaningfully cheaper, McBride said.
Of course, if the HELOC is meant to serve as an emergency lifeline and you never tap it, the rate may not concern you. But it still may cost you money by way of closing costs, any minimum withdrawal requirements, or an annual fee or inactivity fee, McBride noted.
For those who already owe money on a HELOC, he suggested, “aggressively pay it down. It’s high-cost debt that won’t get significantly cheaper anytime soon.”
Your savings
In the past two years, it was easy for savers and retirees to make a real return (5% or more) on their cash for little to no risk, if they parked their money in high-yield savings accounts and various fixed income vehicles.
The good news: Bank account rates may drop but not so much that you can’t continue to find returns that will handily outpace inflation, which is currently 2.5%, very near the Fed’s 2% target. And competition for deposits among banks mean some will continue to offer attractive returns.
For example, plenty of online high-yield savings accounts at FDIC-insured banks were offering yields between 4.25% and 5.3% on Wednesday, according to listings on Bankrate.com. Such accounts are good for money you’ll need on hand in the next year (e.g. for a big expense or an emergency fund). By contrast, regular savings accounts at big banks could earn you as little as 0.1%.
FDIC-insured certificates of deposit are also still offering inflation-beating returns. At Schwab.com, for instance, CDs ranging in maturities from three months to 10 years were offering rates of between 3.65% and 4.99%.
On short-term Treasury bills with durations of three months to one year, yields were at least 4% on Wednesday morning. On longer-term Treasurys a two-year note was yielding 3.6% while the 10-year offered 3.64%. Inflation is currently 2.5%, according to the latest reading.
What to do if you’re near retirement or have an intermediate term goal: Lock in higher rates now if you’re within five years of retirement, McBride suggests. That way you can grow the cash you’ll need to cover living expenses in the first few years after you stop working. Having that cash on hand means you won’t be forced to pull from your longer-term portfolio should there be a big market downturn at the start of your retirement.
One way to do that is through buying individual CDs or setting up a CD ladder, which lets you allocate savings across CDs of varying durations and reinvests the money when each one matures.
Another option: Create a ladder of high-quality bonds that reinvest every six months to a year, said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.
Jones thinks that yields on Treasurys, which have fallen recently, may have already priced in lower rates going forward. So you might get better yields on AAA-rated corporate bonds, she said.
For money you need access to in less than three years, Jones recommends putting it in money market funds focused on Treasurys or top-grade municipal bonds; in Treasury bills (with durations of less than two years) or in CDs. For money you won’t need for three to 10 years, you might consider a low-cost bond market index fund or an exchange-traded bond fund that tracks Bloomberg’s Aggregate Bond Index or its US Corporate Bond Index.
Keep the tax bite in mind too. If you live in a high-tax area, and especially if you have a high income, Treasuries might be a better bet than CDs, since they are exempt from state and local taxes. Municipal bonds are typically tax exempt at the state and federal levels, and some are also exempt at the local level, too.
What to do if you’re not near retirement: Reconsider how much money you’re keeping in cash or cash-equivalent investments.
“I caution people against the cash trap. A lot of people, used to these nice savings rates, were diverting money from stocks and longer-term bonds,” said Diodato, who predicts yields on savings will eventually fall to 3% in the next two years.
His advice: Don’t keep more than six months’ to a year’s worth of living expenses in cash or cash equivalents.
“Anything more than that and you’re putting a drag on your future net worth,” he said.
new video loaded: Federal Reserve Cuts Interest Rates for the First Time in Four Years
transcript
transcript
Federal Reserve Cuts Interest Rates for the First Time in Four Years
Jerome H. Powell, the Fed chair, said that the central bank would take future interest rate cuts “meeting by meeting” after lowering rates by a half percentage point, an unusually large move.
Today, the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by a half percentage point. Our patient approach over the past year has paid dividends. Inflation is now much closer to our objective, and we have gained greater confidence that inflation is moving sustainably toward 2 percent. We’re going to take it meeting by meeting. As I mentioned, there’s no sense that the committee feels it’s in a rush to do this. We made a good, strong start to this, and that’s really, frankly, a sign of our confidence — confidence that inflation is coming down.
If Robert Kaplan still had a say in the matter, he’d be pushing for a half percentage point interest rate reduction at this week’s Federal Reserve meeting.
The former Dallas Fed president told CNBC on Tuesday that making the bolder move of 50 basis points would better position policymakers heading into the latter part of the year and the economic challenges ahead.
“If I were sitting at the table, I would be advocating for 50 in this meeting,” Kaplan said during a “Squawk Box” interview. “I think the Fed may be a meeting or so late, and if I had a do-over, I might prefer we had started the cutting in July, not September.”
Markets currently are putting about 2 to 1 odds that the Federal Open Market Committee will approve a 50 basis point reduction, as opposed to the 25 basis point cut it had been pricing in leading up to Friday, according to the CME Group’s FedWatch. One basis point equals 0.01%.
Fed funds, the central bank’s benchmark overnight lending rate, currently stands at 5.25% to 5.50%.
Should the committee decide to make the more aggressive move, Kaplan said it would then be incumbent on Chair Jerome Powell in his post-meeting press conference on Wednesday to indicate that additional cuts ahead are “likely to be more measured.” The Fed’s two-day policy meeting gets underway Tuesday.
“From a risk management point of view, 50 makes the most sense,” Kaplan said. “If the group is split, a lot of this will depend, actually, on what Jay Powell personally thinks, what is his personal disposition on all this, and then his ability to wrangle everybody to a unanimous decision.”
Kaplan ran the Dallas Fed from 2015-21 and is now a managing director at Goldman Sachs.
It’s been a long and bumpy road to the Federal Reserve’s first interest rate cut in more than four years — a moment that could prove decisive to the finances of millions of Americans.
On Wednesday, the Fed is expected to reduce its benchmark rate, which currently stands at its highest point in 23 years, after the central bank introduced a flurry of rate hikes to tame the pandemic’s high inflation. While economists are unanimous in expecting a rate cut on September 18, they’re split between predicting a 0.25 percentage point cut versus a 0.5 percentage point reduction, according to financial data firm FactSet.
Whatever the size of the cut, the Fed’s first rate reduction since March 2020 will provide some welcome relief for consumers who are in the market for a home or auto purchase, as well as for those carrying pricey credit card debt. The decision is also expected to kick off a series of rate reductions later this year and into 2025, which could have lasting implications on mortgage and auto loan rates, but could also have a downside of shaving the relatively high returns recently enjoyed by savers.
“It’s been a long marathon — the Fed feels it’s time to lower interest rates again,” Sara Rathner, co-host of the Smart Money podcast and a personal finance expert for NerdWallet, told CBS MoneyWatch. “Consumers are definitely feeling the pinch. It’s been this one-two punch of higher interest rates and inflation.”
Wednesday’s rate cut will “present an opportunity for consumers to take a look at their finances and save money on some of their borrowing,” she said.
When is the Fed’s September 2024 meeting?
The Fed’s September 2024 meeting will be held from September 17-18, with the central bank scheduled to announce its rate decision at 2 p.m. Eastern time on September 18.
That will be followed by a press conference with Fed Chair Jerome Powell at 2:30 p.m. E.T., where Powell will discuss the central bank’s economic outlook.
Powell has recently signaled the central bank is ready to reduce its benchmark rate, noting at an August speech that “the time has come” for the Fed to adjust its monetary policy after inflation dropped below 3% on an annual basis and amid some signs of weakness in the labor market.
What size of rate cut is expected?
That’s the big debate among economists, with some predicting that the Fed will shave its benchmark rate by 0.25 percentage points — the Fed’s standard reduction — while others are predicting a jumbo cut of 0.5 percentage points.
Regardless of the size, the rate cut will provide some relief to borrowers, albeit at a relatively small dose given that the current Fed funds’ target stands in a range of 5.25% to 5.5%. A reduction of 0.25 percentage points, for instance, would take the target range down to 5% to 5.25%, providing only a small reduction in borrowing costs.
“By itself, one rate cut isn’t a panacea for borrowers grappling with high financing costs and has a minimal impact on the overall household budget,” noted Greg McBride, chief financial analyst at Bankrate, in an email. “What will be more significant is the cumulative effect of a series of interest rate cuts over time.”
Will the Fed cut rates later in 2024?
Yes, economists polled by FactSet are predicting rate cuts at the Fed’s November and December meetings —there is no October rate decision meeting. Additionally, many economists expect the Fed to continue to cut throughout 2025, with most forecasting that, by May 2025, the benchmark rate will stand between 3% to 3.5%, according to FactSet.
“Our baseline forecast is for three consecutive 25bp cuts in September, November and December, and an eventual terminal rate of 3.25%-3.5%,” Goldman Sachs analysts wrote in a September 15 research note.
How will the rate cut impact mortgage rates?
Mortgage rates have surged alongside the Fed’s hikes, with the 30-year fixed-rate loan topping 7% in 2023 as well as earlier this year. That placed homebuying out of financial reach for many would-be buyers, especially as home prices continue to climb.
Already, mortgage rates have slid ahead of the September 18 rate decision, partly due to anticipation of a cut as well as weaker economic data. The 30-year fixed-rate mortgage currently sits at about 6.29%, the lowest rate since February 2023, according to the Mortgage Bankers Association.
But the September 18 rate cut may not result in a significant additional drop in rates, especially if the economy remains relatively strong, Orphe Divounguy, senior economist at Zillow, told CBS MoneyWatch.
“We expect mortgage rates to end the year kind of roughly where they are now,” he said.
Even so, this could prove to be the right time for recently sidelined homebuyers to enter the market, Divounguy added. That’s because housing affordability is improving while inventory is scaling back up after a dip in 2022, providing buyers with more choices.
Some homeowners with mortgages of more than 7% may also want to consider refinancing into a lower rate, experts said. For instance, a homeowner with a $400,000 mortgage could save about $400 a month by refinancing into a loan at today’s rate of about 6.3% versus the peak of about 7.8% in 2023.
“Generally, lenders would recommend refinancing when it’s a difference of 1 percentage point or more,” noted Smart Money’s Rathner.
What about auto loans, credit cards and other debt?
Auto loan rates are likely to see reductions after the rate cut, experts said. And that could convince some consumers to start shopping around for a vehicle according to Edmunds, which found that about 6 in 10 car shoppers have held off on buying because of high rates.
Currently, the average APR on a loan for a new car is 7.1%, and 11.3% for a used car, according to Edmunds.
“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, especially coupled with some of the advertising messages that automakers typically push during Black Friday and through the end of the year,” said Jessica Caldwell, Edmunds’ head of insights, in an email.
Likewise, credit card rates, which have been at historic highs, are likely to follow the rate cut, but this probably won’t make much of a difference for people carrying balances, said LendingTree credit analyst Matt Schulz. He calculates that someone with a $5,000 balance and a card with a 24.92% APR could save less than $1 a month on interest if their APR is reduced by one-quarter percentage point.
A better bet, experts say, is to pay down the debt, if possible, or look for a zero-percent balance transfer card or a personal loan, which typically carries a lower rate than credit cards.
How will a Fed cut impact savings accounts and CDs?
If rate hikes have a silver lining, it’s that savers have enjoyed high rates on certificate of deposits (CDs) and high-yield savings accounts. Some banks have offered APYs as high as 5%, giving Americans a chance to juice their savings accounts.
But that may be finally coming to a close, Schulz noted.
There’s still time for people to take advantage of relatively high rates, even if they slide slightly in the coming months, he added. “I don’t think anybody should expect rates to fall off a cliff immediately,” he said.
Still, some experts have predicted that the top savings accounts could see rates drop by as much as 0.75 percentage points after the Fed cuts rates. Even so, consumers can still benefit by moving money from a traditional savings account into a high-yield savings account, which can help them build up an emergency fund or bolster their savings with higher returns.
As for CDs, Schulz recommends people lock in rates now, if they can. “Rates are already starting to come down, and they’re only going to continue to come down,” he said.
Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.
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.
“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:
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.”
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 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.
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.
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.”
A top Federal Reserve official on Tuesday unveiled changes to a proposed set of U.S. banking regulations that roughly cuts in half the extra capital that the largest institutions will be forced to hold.
Introduced in July 2023, the regulatory overhaul known as the Basel Endgame would have boosted capital requirements for the world’s largest banks by roughly 19%.
Instead, officials at the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have agreed to resubmit the massive proposal with a more modest 9% increase to big bank capital, according to prepared remarks from Fed Vice Chair for Supervision Michael Barr.
The change comes after banks, business groups, lawmakers and others weighed in on the possible impact of the original proposal, Barr told an audience at the Brookings Institution.
“This process has led us to conclude that broad and material changes to the proposals are warranted,” Barr said in the remarks. “There are benefits and costs to increasing capital requirements. The changes we intend to make will bring these two important objectives into better balance.”
The original proposal, a long-in-the-works response to the 2008 global financial crisis, sought to boost safety and tighten oversight of risky activities including lending and trading. But by raising the capital that banks are required to hold as a cushion against losses, the plan could’ve also made loans more expensive or harder to obtain, pushing more activity to nonbank providers, according to trade organizations.
The earlier version brought howls of protest from industry executives including JPMorgan Chase CEO Jamie Dimon, who helped lead the industry’s efforts to push back against the demands. Now, it looks like those efforts have paid off.
But big banks aren’t the only ones to benefit. Regional banks with between $100 billion and $250 billion in assets are excluded from the latest proposal, except for a requirement that they recognize unrealized gains and losses on securities in their regulatory capital.
That part will likely boost capital requirements by 3% to 4% over time, Barr said. It’s an apparent response to the failures last year of midsized banks caused by deposit runs tied to unrealized losses on bonds and loans amid sharply higher interest rates.
Key parts of the proposal that apply to big banks bring several measures of risk more in line with international standards, while the original draft was more onerous for things such as mortgages and retail loans, Barr said.
It also cuts the risk weighting for tax credit equity funding structures, often used to finance green energy projects; tempers a surcharge proposed for firms with a history of operational failures; and recognizes the relatively lower-risk nature of investment management operations.
Barr said he will push to resubmit the proposed Basel Endgame regulations, as well as a separate set of capital surcharge rules for the biggest global institutions, which starts anew a public review process that has already taken longer than a year.
That means it won’t be finalized until well after the November election, which creates the risk that if Republican candidate Donald Trump wins, the rules could be further weakened or never implemented, a situation that some regulators and lawmakers hoped to avoid.
It’s unclear if the changes appease the industry and their constituents; banks and their trade groups have threatened to litigate to prevent the original draft’s implementation.
“The journey to improve capital requirements since the Global Financial Crisis has been a long one, and Basel III Endgame is an important element of this effort,” Barr said. “The broad and material changes to both proposals that I’ve outlined today would better balance the benefits and costs of capital.”
Reaction to Barr’s proposal was swift and predictable; Sen. Elizabeth Warren, D-Mass., called it a gift to Wall Street.
“The revised bank capital standards are a Wall Street giveaway, increasing the risk of a future financial crisis and keeping taxpayers on the hook for bailouts,” Warren said in an emailed statement. “After years of needless delay, rather than bolster the security of the financial system, the Fed caved to the lobbying of big bank executives.”
The American Bankers Association, a trade group, said it welcomed Barr’s announcement but stopped short of giving its approval to the latest version of the regulation.
“We will carefully review this new proposal with our members, recognizing that America’s banks are already well-capitalized and … any increase in capital requirements will still carry a cost for the economy and must be appropriately tailored,” said ABA President Rob Nichols.
“The time has come for policy to adjust,” the central bank leader said in his keynote address at the Fed’s annual retreat in Jackson Hole, Wyoming.
For Americans struggling to keep up with sky-high interest charges, a likely quarter-point cut in September may bring some welcome relief — especially with the right preparation.(A more aggressive half-point move has a roughly a 1-in-3 chance of happening, according to the CME’s FedWatch measure of futures market pricing.)
“If you are a consumer, now is the time to say: ‘What does my spending look like? Where would my money grow the most and what options do I have?’” said Leslie Tayne, an attorney specializing in debt relief at Tayne Law in New York and author of “Life & Debt.”
Currently, the federal funds rate is at the highest level in two decades, in a range of 5.25% to 5.50%.
If the Fed cuts rates in September, as expected, it would mark the first time officials lowered its benchmark in more than four years, when they slashed them to near zero at the beginning of the Covid-19 pandemic.
“From a consumer perspective, it’s important to note that lower interest rates will be a gradual process,” said Ted Rossman, senior industry analyst at Bankrate.com. “The trip down is likely to be much slower than the series of interest rate hikes which quickly pushed the federal funds rate higher by 5.25 percentage points in 2022 and 2023.”
Here are five ways to prepare for this policy shift:
People shop at a store in Brooklyn on August 14, 2024 in New York City.
Spencer Platt | Getty Images
With a rate cut, the prime rate lowers, too, and the interest rates on variable-rate debt — most notably credit cards — are likely to follow, reducing your monthly payments. But even then, APRs will only ease off extremely high levels.
For example, the average interest rate on a new credit card today is nearly 25%, according to LendingTree data. At that rate, if you pay $250 per month on a card with a $5,000 balance, it will cost you more than $1,500 in interest and take 27 months to pay off.
If the central bank cuts rates by a quarter point, you’ll save $21 altogether and be able to pay off the balance one month faster. “That’s not nothing, but it is far less than what you could save with a 0% balance transfer credit card,” said Matt Schulz, chief credit analyst at LendingTree.
Rather than wait for a small adjustment in the months ahead, borrowers could switch now to a zero-interest balance transfer credit card or consolidate and pay off high-interest credit cards with a lower-rate personal loan, Tayne said.
Since rates on online savings accounts, money market accounts and certificates of deposit are all poised to go down, experts say this is the time to lock in some of the highest returns in decades.
For now, top-yielding online savings accounts are paying more than 5% — well above the rate of inflation.
Although those rates will fall once the central bank lowers its benchmark, a typical saver with about $8,000 in a checking or savings account could earn an additional $200 a year by moving that money into a high-yield account that earns an interest rate of 2.5% or more, according to a recent survey by Santander Bank in June. The majority of Americans keep their savings in traditional accounts, Santander found, which FDIC data shows are currently paying 0.46%, on average.
Alternatively, “now is a great time to lock in the most competitive CD yields at a level that is well ahead of targeted inflation,” said Greg McBride, Bankrate’s chief financial analyst. “There is no sense in holding out for better returns later.”
Currently, a top-yielding one-year CD pays more than 5.3%, according to Bankrate, as good as a high-yield savings account.
If you’re planning a major purchase, like a home or car, then it may pay to wait, since lower interest rates could reduce the cost of financing down the road.
“Timing your purchase to coincide with lower rates can save money over the life of the loan,” Tayne said.
Although mortgage rates are fixed and tied to Treasury yields and the economy, they’ve already started to come down from recent highs, largely due to the prospect of a Fed-induced economic slowdown. The average rate for a 30-year, fixed-rate mortgage is now just under 6.5%, according to Freddie Mac.
Compared with a recent high of 7.22% in May, today’s lower rate on a $350,000 loan would result in a savings of $171 a month, or $2,052 a year and $61,560 over the lifetime of the loan, according to calculations by Jacob Channel, senior economic analyst at LendingTree.
However, going forward, lower mortgage rates could also boost homebuying demand, which would push prices higher, McBride said. “If lower mortgage rates lead to a surge in prices, that’s going to offset the affordability benefit for would-be buyers.”
What exactly will happen in the housing market “is up in the air” depending on how much mortgage rates decline in the latter half of the year and the level of supply, according to Channel.
“Timing the market is virtually impossible,” he said.
For those struggling with existing debt, there may be more options for refinancing once rates drop.
Private student loans, for example, tend to have a variable rate tied to the prime, Treasury bill or another rate index, 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.
Currently, the fixed rates on a private refinance are as low as 5% and as high as 11%, he said.
However, refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, he added, “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.
Be mindful of potential loan-term extensions, cautioned David Peters, founder of Peters Professional Education in Richmond, Virginia. “Consider maintaining your original payment after refinancing to shave as much principal off as possible without changing your out-of-pocket cash flow,” he said.
Similar considerations may also apply for home and auto loan refinancing opportunities, depending in part on your existing rate.
Those with better credit could already qualify for a lower interest rate.
When it comes to auto loans, for instance, there’s no question inflation has hit financing costs — and vehicle prices — hard. The average rate on a five-year new car loan is now nearly 8%, according to Bankrate.
But in this case, “the financing is one variable, and it’s frankly one of the smaller variables,” McBride said. For example, a reduction of a quarter percentage point in rates on a $35,000, five-year loan is $4 a month, he calculated.
(Bloomberg) — Asian stocks advanced for a third session and the yen strengthened to a three-week high as the prospect of Federal Reserve interest rate cuts on the horizon stoked sentiment.
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Shares in Australia and Hong Kong climbed on Monday, benefiting from Chair Jerome Powell’s Jackson Hole speech, when he said the “time has come” to pivot to monetary easing. The Fed’s dovish tilt also lifted the yen against the dollar, as Asian-domiciled funds added to existing short positions on the greenback. Japanese stocks declined due to the stronger currency, while contracts for US equities were steady.
The positioning for lower US borrowing costs is rippling through financial markets, with global equities trading just shy of an all-time high, while the greenback is falling and investors are piling into sovereign debt. The yield on 10-year US Treasuries slipped two basis points to 3.78% on Monday.
Haven buying in response to rising tensions in the Middle East was an additional driver for currencies. Oil advanced 0.7% as the region braced for escalating conflict after an Israeli strike on Hezbollah targets in southern Lebanon.
“It should be risk-on,” said Chamath De Silva, head of fixed income at Betashares Holdings in Sydney. “Powell has confirmed that we’ll shortly be entering an easing cycle and that the fight against inflation is done, so I expect a bit of an everything rally, stocks and bonds both performing well.”
The Bloomberg Asia Dollar Index kicked off the week by advancing to its highest since January. The Korean won climbed, while Singapore’s dollar advanced to its strongest in almost a decade as traders weighed the difference between the local monetary authority’s relatively hawkish policy outlook compared with that of the Fed.
Powell’s keenly awaited Jackson Hole speech constitutes a turning point in the Fed’s two-year battle to slow inflation, and means officials are likely to cut the benchmark interest rate from its highest in more than two decades. While the world’s largest economy is showing signs of cooling — warranting a pivot — there’s no sign yet of an outright contraction.
“My view is that the US is heading toward a soft landing” and Asian exports are doing well, said Khoon Goh, head of Asia research at ANZ Group Holdings Ltd. “I think we’re set to see a strong rally, rebound in Asian currencies during this Fed easing cycle.”
China MLF
The People’s Bank of China left the rate on its one-year policy loans, or the medium-term lending facility, at 2.3%, after a slashing the rate by 20 basis points in July. The PBOC has signaled that it’s de-emphasizing the medium-term lending facility’s role as a policy tool, while elevating the seven-day reverse repurchase rate to greater prominence.
The decision underscores Beijing’s cautious approach in supporting the economy, even as China reported a rare contraction in bank loans amid weak demand. The PBOC has been walking a fine line of stimulating growth and cooling a government-bond buying spree to limit financial risks in recent months.
Reflecting the lackluster performance of the economy, the CSI 300 Index of stocks slipped 0.4% on Monday.
Authorities in China have also initiated stress tests with financial institutions on their bond investments, to make sure they can handle any market volatility should a record-breaking rally reverse, according to state-run media.
Elsewhere, gold steadied near a record high after Powell affirmed expectations of cuts. The precious metal has surged more than 20% this year in a blistering rally driven by Fed hopes, haven demand due to geopolitical risks, as well as buying from central banks and Asian consumers.
Key events this week:
Singapore industrial production, Monday
US durable goods, Monday
China industrial profits, Tuesday
Germany GDP, Tuesday
Hong Kong trade, Tuesday
Australia CPI, Wednesday,
Nvidia Corp. earnings, Wednesday
US GDP, Initial Jobless Claims Thursday
US personal income, spending, PCE price data, Friday
Some of the main moves in markets:
Stocks
S&P 500 futures were little changed as of 11:25 a.m. Tokyo time
Nikkei 225 futures (OSE) fell 1.3%
Japan’s Topix fell 1.2%
Australia’s S&P/ASX 200 rose 0.5%
Hong Kong’s Hang Seng rose 0.8%
The Shanghai Composite fell 0.3%
Euro Stoxx 50 futures fell 0.2%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.1191
The Japanese yen rose 0.5% to 143.71 per dollar
The offshore yuan was little changed at 7.1167 per dollar
The Australian dollar was little changed at $0.6789
Cryptocurrencies
Bitcoin fell 0.4% to $63,960.98
Ether fell 1.3% to $2,734.43
Bonds
The yield on 10-year Treasuries declined one basis point to 3.79%
Japan’s 10-year yield declined 2.5 basis points to 0.875%
Australia’s 10-year yield declined four basis points to 3.88%
Commodities
This story was produced with the assistance of Bloomberg Automation.
Carl Eschenbach, co-CEO of Workday, speaking on CNBC’s “Squawk Box” at the World Economic Forum Annual Meeting in Davos, Switzerland, on Jan. 18, 2024.
Adam Galici | CNBC
Workday shares soared 12% on Friday, one day after the finance and human resources software maker issued fiscal second-quarter results that exceeded analysts’ estimates and announced plans to further widen its adjusted operating margin through 2027.
Here is how the company did, compared to LSEG consensus:
Earnings per share: $1.75 adjusted vs. $1.65 expected
Revenue: $2.085 billion vs. $2.071 billion expected
Workday’s revenue was up about 17% year over year in the quarter ending July 31, according to a statement. Subscription revenue growth grew 17%. Net income, at $132 million, or 49 cents per share, increased from $79 million, or 30 cents per share, in the same quarter a year ago.
With respect to guidance, Workday is now looking for an adjusted operating margin of 25.25% in the 2025 fiscal year, compared to the 25% forecast it provided in May.
On a Thursday conference call with analysts, Zane Rowe, Workday’s finance chief, said he expects the company’s adjusted operating margin to expand to 30% in the 2026 and 2027 fiscal years, along with an annual subscription revenue growth of 15%. In September 2023, Workday said it was targeting a 25% adjusted operating margin for fiscal 2027 and subscription revenue growth between 17% and 19%.
“We are relentlessly focused on scaling all of our processes across the company as we review our product and go-to-market initiatives,” Rowe said. “We’re also becoming increasingly more targeted in our growth investments, balancing product development with go-to-market resources.”
Deutsche Bank analysts led by Brad Zelnick increased their 12-month price target on Workday stock to $275 from $265. They have a hold rating on the stock.
“The increased 30% operating margin target was the big upside surprise as it is now committed both sooner and greater than most were expecting,” the analysts wrote.
Citi, Evercore ISI and Piper Sandler analysts also raised their Workday price targets following the company’s report.
Conditions aren’t perfect for Workday, however. Organizations are still being more careful than usual before agreeing to sign contracts, Rowe said, adding that headcount growth among the existing customer base has slowed down.
Many other software companies have pointed to rougher economic conditions in recent quarters. But on Friday, Federal Reserve Chair Jerome Powell said “the time has come for policy to adjust,” an indication that the central bank will lower its benchmark rate. That might benefit growing cloud software companies such as Workday. Investors moved away from those assets and opted for more defensive investments in 2022 as they anticipated rate hikes to ward off inflation.
The WisdomTree Cloud Computing Fund, an exchange-traded fund that includes Workday, ended the day up 2% in Friday’s trading session. The S&P 500 index gained 1%.
But Workday CEO Carl Eschenbach did not suggest that market conditions will improve soon.
“In fact, we think the current environment of IT spending and the environment we’re selling into isn’t something that’s just been here the last couple quarters,” he said. “We think it’s the new norm going forward. We’re prepared because we have a great product.”
Federal Reserve Chair Jerome Powell said “the time has come” for the central bank to adjust its monetary policy, signaling that rate cuts could soon lower borrowing costs for American consumers and businesses.
Powell, who spoke at an annual conference of central bankers in Jackson Hole, Wyoming, didn’t disclose specifics about when a rate cut could arrive, or its size, although economists have penciled in a reduction at the Fed’s September 18 meeting. The federal funds rate now stands in a range of 5.25% to 5.5%, its highest level in 23 years.
In conveying that the Fed is likely to start cutting its benchmark rate, Powell cited some weakening in the labor market, as well as progress in battling high inflation. A slowdown in hiring and an uptick in the unemployment rate last month heightened concerns the Fed could mistake in the other direction, keeping rates too high for too long, throttling growth and plunging the economy into recession.
“We do not seek or welcome further cooling in labor market conditions,” Powell said in his speech.
“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he said.
Powell also signaled the Federal Reserve is increasingly confident that inflation will continue to cool, eventually reaching the bank’s goal of a 2% annual rate, even with a reduction in borrowing costs. In previous speeches, Powell had raised concerns that rate cuts could spur inflation to flare up, erasing the gains the Fed had made in taming the hottest price increases in four decades.
“With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market,” Powell said.
Wall Street surged after Powell’s comments, with the Dow Jones Industrial Average jumping 378 points, or 0.9%, to 41,091. The S&P 500 gained 1.1% and the tech-heavy Nasdaq composite rose 1.5%.
“Powell has rung the bell for the start of the cutting cycle,” said Seema Shah, chief global strategist at Principal Asset Management, in an email. “The Federal Reserve now has strong confidence about inflation’s path forward — it is time to shift to the other side of the dual mandate, and labor market risks now have their full attention.”
How big of a rate cut?
One question left unanswered by Powell’s speech was the potential size of a September rate cut. At the moment, about 3 in 4 economists polled by financial services firm FactSet are forecasting a reduction of 0.25 percentage points.
But if the August jobs data comes in weaker than expected, that could increase the chances of a bigger cut of 0.5 percentage points, experts noted. The August jobs report will be released on September 6.
“We continue to expect a cautious [0.25 percentage point] rate cut, but Powell underscored a view we have held that the Fed has room to ramp up the pace of rate cuts if the labor market deteriorates unexpectedly,” Kathy Bostjancic, chief economist for Nationwide, noted in an email, referring to basis points.
She added that she expects additional rate cuts before year-end, bringing the total reductions to 0.75 percentage points, adding, “but we see the possibility of more rate reduction if employment growth slows abruptly.”
How will this impact mortgage rates?
Already, mortgage rates have dropped to their lowest levels in 15 months, ahead of expectations that the Federal Reserve will cut its benchmark interest rate next month for the first time in four years.
But a rate cut of 0.25 to 0.5 percentage points will likely only make small changes in borrowing costs for consumers, noted Ted Rossman, senior industry analyst at Bankrate, in an email. Even so, mortgage rates could continue to decline, especially if inflation continues to fall and the job market shows some weakness, experts have noted.
“From a consumer perspective, it’s important to note that lower interest rates will be a gradual process,” he said. “The trip down is likely to be much slower than the series of interest rate hikes which quickly pushed the federal funds rate higher by 5.25 percentage points in 2022 and 2023.”
Even though mortgage rates are already declining, there hasn’t yet been a meaningful change in credit card or auto loan rates, he added.
Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.
“Time has come for policy to adjust. The direction of travel is clear,” Jerome Powell said. Bonnie Cash/Getty Images
At the 2024 Jackson Hole Economic Symposium in Wyoming this morning (Aug. 23), Federal Reserve Chair Jerome Powell signaled that the central bank is ready to cut interest rates from their 23-year high next month as inflation continues to cool while the jobs market shows signs of strain.
“Time has come for policy to adjust. The direction of travel is clear,” Powell said during a highly anticipated speech today. Pointing to consumer prices rising only 2.5 percent over the last year, Powell affirmed that inflation is on track to return to the Fed’s 2 percent target. “While the task is not complete, we’ve made a good deal of progress towards that outcome,” he said.
Powell pointed to the weakening in the labor market as providing a sense of urgency for rate cuts. “We do not seek or welcome further cooling in labor market conditions,” he said. The unemployment rate rose to 4.3 percent in July, the highest level in two years.
The U.S. economy has added jobs more slowly than anticipated this year, especially after the Bureau of Labor Statistics yesterday (Aug. 22) announced a data revision showing that it had over-reported the number of new jobs created by 818,000 in March. While data revisions are common, and the figure is a fraction of the 160 million Americans who currently have jobs, the news worried many that employment growth was weaker than many had thought.
Powell projected confidence that inflation will continue to decline. He painted a picture of fluctuating price growth driven largely by supply-side limitations, citing strained supply chains and a highly tight U.S. labor market in 2022. At its peak tightness, the U.S. labor market saw twice as many job openings as the number of unemployed people available to fill them. While this supply-demand imbalance increased wages, it also put upward pressure on consumer prices.
“High rates of inflation were a global phenomenon, reflecting common experiences: rapid increases in the demand for goods, strained supply chains, tight labor markets and sharp hikes in commodity prices,” Powell summarized.
By highlighting how supply-side economic factors have contributed to easing inflation, Powell positions monetary policy as a tool that can now be wielded toward addressing rising unemployment.
Markets responded positively to Powell’s latest remarks: The S&P 500 jumped 1 percent during his speech.
new video loaded: Fed’s Powell Signals an Upcoming Rate Cut in Jackson Hole Remarks
transcript
transcript
Fed’s Powell Signals an Upcoming Rate Cut in Jackson Hole Remarks
Jerome H. Powell indicated the Federal Reserve will begin to cut interest rates in September, but stopped short of stating how large that move might be.
The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. We will do everything we can to support a strong labor market as we make further progress toward price stability. Today, the labor market has cooled considerably from its formerly overheated state. The unemployment rate began to rise over a year ago and is now at 4.3 percent — still low by historical standards, but almost a full percentage point above its level in early 2023. The upside risks to inflation have diminished. And the downside risks to employment have increased. After a pause earlier this year, progress toward our 2 percent objective has resumed. My confidence has grown that inflation is on a sustainable path back to 2 percent. So let me wrap up by emphasizing that the pandemic economy has proved to be unlike any other and that there remains much to be learned from this extraordinary period.
US stocks resumed gains on Thursday with the S&P 500 (^GSPC) inching closer toward record levels as investors weighed how deeply the Federal Reserve might lower interest rates in September on the eve of a key speech by Chair Jerome Powell.
Both the broader market index and the tech-heavy Nasdaq Composite (^IXIC) rose roughly 0.5%. The Dow Jones Industrial Average (^DJI) was up 0.2%, after the three indexes closed in the green on Wednesday.
Stocks took a positive tone after minutes from the Fed’s last meeting showed several officials were open to a July rate cut, signaling a pivot is likely in next month’s policy decision. Mounting hopes for lower rates have already helped markets recoup losses from an early August rout.
The Fed’s Jackson Hole symposium kicks off Thursday with the market on high alert for any shift in tone from the policymakers when Powell speaks at the event on Friday.
Initial jobless claims jumped to 232,000 last week, matching expectations, while the prior week’s reading was revised up to 228,000. The data released on Thursday morning was in higher focus given an official revision to payrolls showed the labor market — a key input for policymakers — may have been cooling long before initially thought. Signs of stress could factor into how deeply the Fed cuts rates, with hopes for a 0.5% reduction in play.
Stocks edge higher as Fed’s Jackson Hole kicks off
Stocks rose slightly on Thursday with the S&P 500 inching closer towards record levels as the investors look for clues from the Fed’s Jackson Hole symposium on the depth of the likely interest rate cut expected next month.
The S&P 500 (^GSPC) rose 0.3% while the tech-heavy Nasdaq Composite (IXIC) rose 0.5%. The Dow Jones Industrial Average (^DJI) was up 0.2%, after the three indexes closed in the green on Wednesday.
In early trading the S&P 500 was less than 1% away from touching its July all-time intraday high.
The Fed’s Jackson Hole symposium kicks off Thursday with investors on high alert for any shift in tone from the policymakers when Powell speaks at the event on Friday.
Minutes from the Fed’s last meeting showed several officials were open to a July rate cut, solidifying the probability of a pivot in September.
Hopes for lower rates have already helped markets recoup all of its losses from an early August rout during a stunning rebound.
Nvidia (NVDA) has been one of the biggest winners of that bounc. On Thursday the stock gained more than 1% following a bullish note from Citi analysts. Wall Street firms have recently reiterated their Buy ratings ahead of the AI chip giant’s quarterly results next week.
Nvidia shares have gained roughly 30% since their August lows.
The U.S. economy created 818,000 fewer jobs than originally reported in the 12-month period through March 2024, the Labor Department reported Wednesday.
As part of its preliminary annual benchmark revisions to the nonfarm payroll numbers, the Bureau of Labor Statistics said the actual job growth was nearly 30% less than the initially reported 2.9 million from April 2023 through March of this year.
The revision to the total payrolls level of -0.5% is the largest since 2009. The numbers are routinely revised each month, but the BLS does a broader revision each year when it gets the results of the Quarterly Census of Employment and Wages.
Wall Street had been waiting for the revisions numbers, with many economists expecting a sizeable reduction in the originally reported figures. The new numbers, if they hold up when the BLS issues its final revisions in February, imply monthly job gains of 174,000 during the period, as opposed to the initial indication of 242,000.
Even with the revisions, job creation during the period stood at more than 2 million, but the report could be seen as an indication that the labor market is not as strong as the previous BLS reporting had made it out to be. That in turn could provide further impetus for the Federal Reserve to start lowering interest rates.
“The labor market appears weaker than originally reported,” said Jeffrey Roach, chief economist at LPL Financial. “A deteriorating labor market will allow the Fed to highlight both sides of the dual mandate and investors should expect the Fed to prepare markets for a cut at the September meeting.”
At the sector level, the biggest downward revision came in professional and business services, where job growth was 358,000 less. Other areas revised lower included leisure and hospitality (-150,000), manufacturing (-115,000), and trade, transportation and utilities (-104,000).
Within the trade category, retail trade numbers were cut by 129,000.
A few sectors saw upward revisions, including private education and health services (87,000), transportation and warehousing (56,400), and other services (21,000).
Government jobs were little changed after the revisions, picking up just 1,000.
Nonfarm payroll jobs totaled 158.7 million through July, an increase of 1.6% from the same month in 2023. There have been concerns, though, that the labor market is starting to weaken, with the rise in the unemployment rate to 4.3% representing a 0.8 percentage point gain from the 12-month low and triggering a historically accurate measure known as the “Sahm Rule” that indicates an economy in recession.
However, much of the gain in the unemployment rate has been attributed to an increase in people returning to the workforce rather than a pronounced surge in layoffs.
“This preliminary estimate doesn’t change the fact that the jobs recovery has been and remains historically strong, delivering solid job and wage gains, strong consumer spending, and record small business creation,” White House economist Jared Bernstein said in a statement.
To be sure, economists at Goldman Sachs said later Wednesday that they think the BLS may have overstated the revisions by as much as half a million. The firm said undocumented immigrants who now are not in the unemployment system but were listed initially as employed amounted for some of the discrepancy, along with a general tendency for the initial revision to be overstated.
Federal Reserve officials nonetheless are watching the jobs situation closely and are expected to approve their first interest rate cut in four years when they next meet in September. Chair Jerome Powell will deliver a much-anticipated policy speech Friday at the Fed’s annual retreat in Jackson Hole, Wyoming, that could lay the groundwork for easier monetary policy ahead.
“We think that the time is approaching,” Fed Chair Jerome Powell said at a press conference after the last Federal Open Market Committee meeting in July.
For Americans struggling to keep up with sky-high interest charges, a likely September rate cut may bring some welcome relief — even more so with the right planning.
“If you are a consumer, now is the time to say: ‘What does my spending look like? Where would my money grow the most and what options do I have?’” said Leslie Tayne, an attorney specializing in debt relief at Tayne Law in New York and author of “Life & Debt.”
That could bring the 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.
The federal funds rate is the one 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 rates they see every day on things such as private student loans and credit cards.
Here are five ways to position your finances for the months ahead:
Since rates on online savings accounts, money market accounts and certificates of deposit are all poised to go down, experts say this is the time to lock in some of the highest returns in decades.
For now, top-yielding online savings accounts are paying more than 5% — well above the rate of inflation.
Although those rates will fall once the central bank lowers its benchmark, a typical saver with about $8,000 in a checking or savings account could earn an additional $200 a year by moving that money into a high-yield account that earns an interest rate of 2.5% or more, according to a recent survey by Santander Bank in June. The majority of Americans keep their savings in traditional accounts, Santander found, which FDIC data shows are currently paying 0.45%, on average.
Alternatively, “now is a great time to lock in the most competitive CD yields at a level that is well ahead of targeted inflation,” said Greg McBride, chief financial analyst at Bankrate.com. “There is no sense in holding out for better returns later.”
Currently, a top-yielding one-year CD pays more than 5.3%, according to Bankrate, as good as a high-yield savings account.
With a rate cut, the prime rate lowers, too, and the interest rates on variable-rate debt — most notably credit cards — are likely to follow, reducing your monthly payments. But even then, APRs will only ease off extremely high levels.
For example, the average interest rate on a new credit card today is nearly 25%, according to LendingTree data. At that rate, if you pay $250 per month on a card with a $5,000 balance, it will cost you more than $1,500 in interest and take 27 months to pay off.
If the central bank cuts rates by a quarter point, you’ll save $21 and be able to pay off the balance one month faster. “That’s not nothing, but it is far less than what you could save with a 0% balance transfer credit card,” said Matt Schulz, chief credit analyst at LendingTree.
Rather than wait for a small adjustment in the months ahead, borrowers could switch now to a zero-interest balance transfer credit card or consolidate and pay off high-interest credit cards with a personal loan, Tayne said.
If you’re planning a major purchase, like a home or car, then it may pay to wait, since lower interest rates could reduce the cost of financing down the road.
“Timing your purchase to coincide with lower rates can save money over the life of the loan,” Tayne said.
Although mortgage rates are fixed and tied to Treasury yields and the economy, they’ve already started to come down from recent highs, largely due to the prospect of a Fed-induced economic slowdown. The average rate for a 30-year, fixed-rate mortgage is now around 6.5%, according to Freddie Mac.
Compared to a recent high of 7.22% in May, today’s lower rate on a $350,000 loan would result in a savings of $171 a month, or $2,052 a year and $61,560 over the lifetime of the loan, according to calculations by Jacob Channel, senior economic analyst at LendingTree.
However, going forward, lower mortgage rates could also boost homebuying demand, which would push prices higher, McBride said. “If lower mortgage rates lead to a surge in prices, that’s going to offset the affordability benefit for would-be buyers.”
What exactly will happen in the housing market “is up in the air” depending on how much mortgage rates decline in the latter half of the year and the level of supply, according to Channel.
“Timing the market is virtually impossible,” he said.
For those struggling with existing debt, there may be more options for refinancing once rates drop.
Private student loans, for example, tend to have a variable rate tied to the prime, Treasury bill or another rate index, 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.
Currently, the fixed rates on a private refinance are as low as 5% and as high as 11%, he said.
However, refinancing a federal loan into a private student loan will forgo the safety nets that come with federal loans, he added, “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.
Be mindful of potential loan -term extensions, cautioned David Peters, founder of Peters Professional Education in Richmond, Virginia. “Consider maintaining your original payment after refinancing to shave as much principal off as possible without changing your out-of-pocket cash flow,” he said.
Similar considerations may also apply for home and auto loan refinancing opportunities, depending in part on your existing rate.
Those with better credit could already qualify for a lower interest rate.
When it comes to auto loans, for instance, there’s no question inflation has hit financing costs — and vehicle prices — hard. The average rate on a five-year new car loan is now nearly 8%, according to Bankrate.
But in this case, “the financing is one variable, and it’s frankly one of the smaller variables,” McBride said. For example, a reduction of a quarter percentage point in rates on a $35,000, five-year loan is $4 a month, he calculated.
U.S. Vice President and Democratic presidential candidate Kamala Harris speaks with members of the media before boarding Air Force Two at Detroit Metropolitan Wayne County Airport in Romulus, Michigan, U.S., August 7, 2024.
Elizabeth Frantz | Reuters
Vice President Kamala Harris on Saturday fiercely disagreed with former President Donald Trump‘s suggestion this week that U.S. presidents should have a say in the Federal Reserve’s interest rate decisions.
“I couldn’t … disagree more strongly,” Harris told reporters in Arizona, referring to the Republican presidential nominee’s comments. “The Fed is an independent entity, and as president, I would never interfere in the decisions that the Fed makes.”
With just 87 days until the election, the vice president also told reporters that she is preparing to unveil an official economic policy platform in the coming days.
“It’ll be focused on the economy and what we need to do to bring down costs and also strengthen the economy,” said Harris.
Harris’ comments drew a stark contrast between her and Trump, who said this week that the president should “have at least [a] say” in Fed policy.
“I think that in my case, I made a lot of money, I was very successful, and I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman,” Trump said Thursday during a press conference at his Mar-a-Lago resort.
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Harris also said Saturday that she is watching to see where the Fed moves next on interest rates.
“As we know we’ve there was some turbulence this week [in global markets], but it seems to have settled itself, and we’ll see what [decisions] they make next,” she told reporters. Harris added that she learns about Fed decisions “about the same time you do.”
At his Florida press conference, Trump also reminisced about the very public disagreements he used to have with Fed Chair Jerome Powell, a fellow Republican, while he was president. Especially when the board decided to raise interest rates.
“I used to have it out with him,” Trump said.
Powell has repeatedly emphasized how important it is for the Fed to be completely independent, in order for the central bank to fulfill its mission.
Free from political pressure, the Fed board can make its decisions based solely on whether they further the U.S. economy’s long-term interests — not whether voters approve of them.
And while President Joe Biden has not tried to wield influence over the Federal Reserve Board one way or another, Powell occasionally faces pressure from the general public.
After this past week’s tumult in the stock markets, many investors called on Powell to move more quickly to lower interest rates, ahead of the bank’s widely expected cuts coming in September.
For his part, Powell says he wants to know that the economy is going to hit the bank’s traditional 2% inflation target before he and the board move to cut interest rates.
The Federal Reserve is leaving its benchmark interest rate unchanged, yet policy makers hinted that they are moving closer to a rate cut.
While members of the Federal Open Market Committee, the central bank’s rate-setting panel, said in a policy statement on Wednesday that they are waiting for for more evidence that inflation is back on track as the economy cools, they acknowledged progress in taming price increases.
The FOMC said they will hold the federal funds rate in a range of 5.25% to 5.5%, leaving it at its highest level in 23 years. The Fed’s announcement, which was widely expected by investors, means the federal funds rate has been parked at that level since July 2023, when the central bank last raised rates.
The statement included a few important changes in the Fed’s outlook. For one, the Fed described inflation as “somewhat elevated,” a more moderate description than its June characterization as simply “elevated.” And it stressed its mandate to focus on full employment, as well as taming inflation.
Although Fed officials had telegraphed their intent to stand pat, Wall Street analysts interpreted the Wednesday statement as opening the door to a cut at the Fed’s next meeting, which will be held from September 17-18. About 9 in 10 economists have penciled in the September meeting for the Fed’s first rate cut since 2020, pointing to inflation that is easing faster than expected.
“As expected, the Fed is setting the table for interest rate cuts starting at their next meeting in September,” said Ryan Detrick, chief market strategist at Carson Group, in an email. “The reality is inflation is slowing and the Fed doesn’t need rates this high anymore.”
When will the Fed cut rates?
Some on Wall Street still project that the Fed could announced two additional cuts later in 2024, although the central bank has projected just one reduction this year.
“While the moderation in U.S. data has helped fuel market optimism around Fed cuts, the number of cuts still remains a question mark, with U.S. elections adding to uncertainty,” TD Securities analysts said in a July 26 research note.
A growing concern is the nation’s labor market, which is showing signs of fading. Job growth has slowed to an average 177,000 a month for the past three months, compared with a three-month average of 275,000 a year ago.
The July jobs report will be released on Friday, with economists forecasting payroll gains of 175,000 this month and the unemployment rate holding steady at 4.1%, according to financial data service FactSet.
Fed officials have said they are seeking to balance the need to keep rates high enough to quash inflation with avoiding a recession. The Fed’s dual mandate is to keep prices stable to ensure maximum employment.
At the Fed’s June meeting, Chair Jerome Powell said the central bank is closely monitoring the jobs data, underlining that officials are aware of the risk if they wait too long to cut rates.
But, he added, the bank sees “gradual cooling — gradual moving toward better balance. We’re monitoring it carefully for signs of something more than that, but we really don’t see that.”
Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.
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.
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.”
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 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.
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.
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.
One kilogram gold bullion at the YLG Bullion International Co. headquarters in Bangkok, Thailand, on Friday, Dec. 22, 2023.
Bloomberg | Bloomberg | Getty Images
Gold prices continued to notch new records Wednesday, lifted by increasing conviction that the Federal Reserve will cut interest rates in September following comments from Fed Chair Jerome Powell.
Spot gold prices rose 0.5% to $2,482.29 per ounce, hitting an all-time high according to LSEG data. Gold futures climbed to $2,478.4 an ounce.
On Monday, Powell said the Fed won’t wait for inflation to reach the central bank’s 2% target before it begins cutting, due to the delay in policy effects. He said the Fed is looking for “greater confidence” that inflation will return to the 2% level. The monthly inflation rate dipped in June — the first time in over four years.
“The move has been ignited by signs of slowing inflation. That has been followed up by weak economic data,” ANZ’s senior commodity strategist Daniel Hynes wrote in a note.
Gold prices have been breaching new highs in recent months due to its appeal as a safe-haven asset against the backdrop of escalating Middle East tensions, as well as central banks’ purchase of bullion.
“Gold’s ability to find support in any condition this year is worth highlighting,” said Vivek Dhar, Commonwealth Bank of Australia’s director of mining and energy commodities research.
“These drivers defied a stronger US dollar, which was largely driven by the market delaying expectations of Fed Fund rate cuts,” said the research analyst, adding that gold prices could rise above the bank’s forecast of $2,500 per ounce by the end of the year.
