Tag: New York Fed

Why Fed rate hikes take so long to affect the economy, and why that effect may last a decade or more

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The U.S. economy continues to grow despite the 5.5% benchmark federal funds interest rate set by the Federal Reserve in 2023.

The Fed’s leaders expect their interest rate decisions to eventually slow that growth.

The increase in borrowing costs that stems from Fed decisions does not affect all consumers immediately. It typically affects people who need to take new loans — first-time homebuyers, for example. Other dynamics, such as the use of contracts in business, can slow the ripple of Fed decisions through an economy.

“It might not all hit at once, but the longer rates stay elevated, the more you’re going to feel those effects,” said Sarah House, managing director and senior economist at Wells Fargo.

“Consumers did have additional savings that we wouldn’t have expected if they had continued to save at the same pre-Covid rate. And so that’s giving some more insulation in terms of their need to borrow,” said House. “That’s an example of why this cycle might be different in terms of when those lags hit, versus compared to prior cycles.”

A 1% interest rate increase can reduce gross domestic product by 5% for 12 years after an unexpected hike, according to a research paper from the Federal Reserve Bank of San Francisco.

“It’s bad in the short term because we worry about unemployment, we worry about recessions,” said Douglas Holtz-Eakin, president of the American Action Forum, referring to the paper’s implications for central bank policymakers. “It’s bad in the long term because that’s where increases in your wages come from; we want to be more productive.”

Some economists say that financial markets may be responding to Federal Reserve policy more quickly, if not instantaneously. “Policy tightening occurs with the announcement of policy tightening, not when the rate change actually happens,” said Federal Reserve Governor Christopher Waller in remarks July 13 at an event in New York.

“We’ve seen this cycle where the stock market moved more quickly in some cases, more slowly in other cases,” said Roger Ferguson, former vice chair of the Federal Reserve. “So, you know, this question of variability comes into play, as in how long it’s going to take. We think it’s a long time, but sometimes it can be faster.”

Watch the video above to see why the Fed’s interest rate hikes take time to affect the economy.

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December 12, 2023
Americans are spending big with credit cards. Here’s what that means for the possibility of a recession

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Economists have been forecasting a recession for months, and that looming downturn is one of the most anticipated in U.S. history. But it’s not yet materialized, in part due to strong consumer spending.

“Consumer spending represents more than half of the economy,” said Curt Long, chief economist at the National Association of Federally-Insured Credit Unions. “So if consumer spending is strong, that alone is, generally speaking, enough to keep the economy from slipping into a recession.”

In the first quarter of 2023, gross domestic product grew at a 1.1% rate compared to the previous quarter. This modest level of growth is an improvement from mid-2022 GDP figures, which initially brought recession fears to light.

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A key reason for the fear: Inflation stayed stickier than economists anticipated. In May, the U.S. Bureau of Labor Statistics reported headline annual inflation of 4.9%.

To combat inflation, the Federal Reserve has hiked its overnight bank lending rate 10 times over the past year or so. At the Fed’s May meeting, policymakers hinted that they may pause further interest rate increases, barring unexpected developments.

The end of this tightening cycle may be coming into focus as consumers reach their breaking point. As the pandemic fades, historic levels of personal saving have taken a nosedive. Deposits at banks have crested as consumers keep spending amid continually rising prices.

This is happening as the least well off are increasingly relying on credit in their day-to-day lives. Roughly 29% of households earning less than $50,000 a year were using credit cards to finance their spending, according Bank of America Institute economists. Credit-use rates have risen steadily in recent years despite being below higher pre-pandemic levels.

Moderate-income Americans also are facing the significant headwind of less tax-refund money. The average refund this year is $2,777 through April 28, down 8% from the same period last year, according to IRS data.

“Because this is the same household that rely more on the tax refund to finance their spending, a lower refund really has some negative impact on their spending,” said Anna Zhou, an economist at the Bank of America Institute.

Analysts at the New York Federal Reserve report record levels of credit card debt in 2023. This underscores the economic split in the country, with some consumers flush with savings following a thrifty pandemic while others are finding it increasingly difficult to spend wisely amid rising prices, mounting layoffs and the potential of recession.

Still economists see the chance for a soft landing. “We don’t think … the slowdown process will be as dramatic as some people have feared,” said Zhou. “And it will be a gradual process.”

Watch the video above to learn how U.S. consumer spending has so far fended off a recession.

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May 11, 2023
Rent or buy? Here’s how to make that decision in the current real estate market

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Choosing whether to rent or buy has never been a simple decision — and this ever-changing housing market isn’t making it any easier. With surging mortgage rates, record rents and home prices, a potential economic downturn and other lifestyle considerations, there’s so much to factor in.

“This is an extraordinarily unique market because of the pandemic and because there was such a run on housing so you have home prices very high, you also have rent prices very high,” said Diana Olick, senior climate and real estate correspondent for CNBC.

By the numbers, renting is often cheaper. On average across the 50 largest metro areas in the U.S., a typical renter pays about 40% less per month than a first-time homeowner, based on asking rents and monthly mortgage payments, according to Realtor.com.

In December 2022, it was more cost-effective to rent than buy in 45 of those metros, the real estate site found. That’s up from 30 markets the prior year.

How does that work out in terms of monthly costs? In the top 10 metro regions that favored renting, monthly starter homeownership costs were an average of $1,920 higher than rents.

But that has not proven to be the case for everyone.

Leland and Stephanie Jernigan recently purchased their first home in Cleveland for $285,000 — or about $100 per square foot. The family of seven will also have Leland’s mother, who has been fighting breast cancer, moving in with them.

By their calculations, this move — which expands their space threefold and allowing them to take care of Leland’s mother — will be saving them more than $700 per month.

‘You don’t buy a house based on the price of the house’

“You don’t buy a house based on the price of the house,” Olick said. “You buy it based on the monthly payment that’s going to be principal and interest and insurance and property taxes. If that calculation works for you and it’s not that much of your income, perhaps a third of your income, then it’s probably a good bet for you, especially if you expect to stay in that home for more than 10 years. You will build equity in the home over the long term, and renting a house is really just throwing money out.”

Mortgage rates dropped slightly in early March, due to the stress on the banking system from the recent bank failures. They are moving up again, although they are currently not as high as they were last fall. The average rate on a 30-year fixed-rate mortgage is 6.59% as of April — up from 3.3% around the same time in 2021.

But that hasn’t significantly dampened demand.

“As the markets kind of bubbled in certain parts of the country and other parts of the country priced out, we’ve seen a lot of investors coming in looking for affordable homes that they can buy and rent,” said Michael Azzam, a real estate agent and founder of The Azzam Group in Cleveland.

“We’re still seeing relatively high demand” he added. “Prices have still continued to appreciate even with interest rates where they’re at. And so we’re still seeing a pretty active market here.”

Buying a home is part of the American Dream

The Jernigans are achieving a big part of the American Dream. Buying a home is a life event that 74% of respondents in a 2022 Bankrate survey ranked as the highest gauge of prosperity — eclipsing even having a career, children or a college degree.

The purchase is also a full-circle moment for Leland, who grew up in East Cleveland, where his family was on government assistance.

“I came from a single-mother home who struggled to put food on the table and always wanted better for her children … it was more criminals than there were police … It is not the type of neighborhood that I wanted my children to grow up in,” said Jernigan.

The new homeowner also has his eye on building a brighter future for more children than just his own. Jernigan plans to purchase homes in his old neighborhood, renovate them and create a safe space for those growing up like he did.

“I’m here because someone saw me and saw the potential in me and gave me advice that helped me. … and I just want to pay it forward to someone else” Jernigan said.

Watch the video above to learn more.

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April 26, 2023
Inflation has peaked — but it’s not returning to pre-Covid levels in 2023, Mastercard says

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Inflation has already peaked, but it will remain above pre-Covid levels in 2023, said David Mann, chief economist for Asia-Pacific, Middle East and Africa at the Mastercard Economics Institute.

“Inflation has seen its peak this year, but it will still be above what we had been used to pre-pandemic next year,” Mann told CNBC’s “Squawk Box Asia” on Friday.

It’ll take a few years to return to 2019 levels, he said.

“We do expect that we go back down in the direction of where we were back in 2019 where we were still debating how many countries needed negative interest rates.”

Central banks around the world have been hiking interest rates as recently as November in response to high inflation.

They include central banks from the Group of 10 countries — such as the U.S. Federal Reserve, the Bank of England and the Reserve Bank of Australia — as well those of emerging markets, such as Indonesia, Thailand, Malaysia and the Philippines, Reuters reported.

The Fed will hold its December policy meeting this week, where it is expected to hike interest rates by 50 basis points. The central bank has raised rates by 375 basis points so far this year.

“Inflation has become that big challenge. It’s been spiking and staying very high,” Mann said. But he warned that it would be risky if central banks end up hiking rates more than they need to.

“The challenge is if you’ve lost orientation of where the sky and the ground is, you’re not quite sure where you need to end up,” Mann said.

It would be a “serious scenario” if central banks “end up going slightly too far and then need to reverse relatively quickly,” he added.

Consumer spending

Despite high inflation, Mann said, U.S. consumers are still willing to engage in discretionary spending in areas such as travel.

Travel recovery in the U.S. is strong and people are still choosing to spend on experiences rather than material goods, Mann said.

And they are being frugal about their spending on necessities in order to be able to afford non-essentials, he added.

“There is something in the back of people’s minds that worries them that even though it’s not very likely, it’s still possible that those [Covid] restrictions [will] come back,” he said.

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December 11, 2022