The Chicago Journal

FedNow is set to debut later this month

Claire Peterson Claire Peterson on July 24, 2023

FedNow — Money transfers have become one of the most convenient ways to send allowances, loans, or earnings. Because of technical advancements, several methods of money transmission are now available, including:

  • Banks
  • Online payment platforms
  • Specialized remittance services

Money transfers may vary from local to worldwide, allowing for the completion of a wide range of financial operations. It enables you to send money fast and simply without the need of physical currency. However, not everyone is aware of the existence of money transfer services.

While Venmo and Zelle provide instant replies, the banking industry has lagged. Most money transfers employ outdated technologies and might take hours or even days to accomplish. The Federal Reserve, on the other hand, is attempting to alter the situation.

Read also: Retirement is now pricier, according to a new survey

A new system

The Federal Reserve will introduce FedNow later this month, a new system that will allow banks to instantly transfer domestic payments to each other at any time, even Saturday midnight and holidays.

Although no release date has been specified, the Fed indicated in June that FedNow will be available to the public in late July after getting clearance to use its services from 55 banks, credit unions, and other providers. As a consequence, firms may complete bills immediately, allowing employees and workers to receive their pay as soon as feasible.

While everything appears to be going well, there might be some snags. Customers, for example, could withdraw their whole bank account in a matter of seconds, resulting in a bank run in which the government does not have time to interfere.

FedNow will begin with a per-transaction threshold of $500,000, which may avert catastrophic bank runs. However, it is likely that it will be too low to provoke comparable runs on smaller banks.

Details

FedNow is simply a network that allows banks to transfer funds between themselves and account holders from other banks in real time. The Federal Reserve has attempted to build a comparable network at least twice previously, both times failing. However, the time appears to have come because a number of real-time payment networks built on identical designs have shown to be effective.

The impact of the service will be defined by the rate at which FedNow is adopted and the sorts of payment flows that generate the most volume. It will mostly be used for business-to-business payments, according to Kevin Jacques, a Cota Capital partner. Meanwhile, customers and individuals can use FedNow instead of sending a wire transfer to make monthly mortgage payments or other large payments.

“We have a number of regional banks that are limited partner investors in our fund, and we make it a point to talk to the executives at those banks, and they seem to be taking a wait-and-see approach,” Jacques added.

“One thing they have to think through is, should they connect and integrate into FedNow or should they integrate into The Clearing House (a banking association and payment company owned by the largest and oldest commercial banks). It’s going to cost them money to make that integration, so they don’t want to do both.”

Potential downsides

FedNow may spark bank runs, which might be far more destructive than a Silicon Valley bank failure. Customers attempted to withdraw $42 billion from other banks in one day using SVB. Wire transfers are now handled overnight, informing authorities of the amount that leaves the bank at the end of the day. They did, however, have the chance to intervene before the bank’s failure.

“If we switch to a system where that transaction happens instantly, regulators are going to have a lot less time to see what’s going on and to act and intervene,” Jacques explained.

“There will be times where regulators will need to intervene in the future, so our argument is for velocity controls. A lot of thinking should go into the transaction size limits.”

The number of bank deposits that leave in a given time period is recorded and constrained by velocity constraints.

Uncertainty for the Fed

While FedNow looks to be a solution, the Federal Reserve must address other challenges, such as the country’s unemployment rate.

The official unemployment data released last Friday revealed a mixed picture, with payrolls falling short of expectations. As a result, labor market activity slowed in June. That month, employment growth fell short of analysts’ predictions of 225,000 jobs, trailing May’s stronger-than-expected 306,000. Furthermore, it is the weakest monthly increase since December 2020.

According to Rucha Vankudre, Lightcast’s lead economist for labor market analytics:

“The job growth is slowing, but I don’t actually think that’s necessarily a bad thing. In some ways, this is great. We’re continuing to see the soft landing that we’re hoping for.”

Uncertainty has found its way in, and while employment growth slowed in June, wage growth remained stable. The monthly salary rise was 0.4%, the same as in May, and 4.4% more than in 2022.

“Wage growth ticked up and remains well above levels the Fed would be comfortable with in their efforts to bring inflation back to 2%,” said Joseph Davis of VanGuard.

According to Fed Chairman Jerome Powell, more pay increases in a tight labor market may lead to higher inflation. Meanwhile, markets plummeted on Friday, wiping off prior gains and ending the day and week in the red.

Mary Daly thinks more hikes would be beneficial

Claire Peterson Claire Peterson on March 6, 2023

Mary Daly – This year has been overshadowed by a succession of upheavals, but the impacts of inflation may still be felt today.

While it has fallen slightly, the Federal Reserve is on track to raise interest rates to address the underlying concern.

The necessity of another rate increase was also emphasized by Mary Daly, President of the San Francisco Fed.

The news

On Saturday, Mary Daly proposed that the Federal Reserve not only raise but also maintain interest rates at their present levels.

She said that doing so would allow them to deal with inflation-related pricing increases.

“There is more work to do,” said Daly at Princeton University.

“In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary.”

“Restoring price stability is our mandate, and it is what the American people expect. So, the FOMIC remains resolute in achieving this goal.”

Mary Daly also admitted that excessive inflation and the Fed’s aggressive rate rises to reduce prices scared both Main Street and Wall Street.

“The responses range from fearing these actions will tip the economy into a recession to fearing they won’t be enough to get the job done.”

The revelation of new economic data caused significant market volatility, as uncertainty motivates investors to seek immediate solutions.

Nonetheless, Daly believes that reaching the stated aim would take time and “a broader view.”

But still, Mary Daly noted that, given the volume and duration of high inflation readings, the Fed’s current tightening strategy was (and continues to be) reasonable.

Daly also puts into doubt the disinflationary trend, citing high inflation in the products, housing, and associated sectors, as well as solid economic indices.

Mary Daly is a member of the Federal Open Market Committee and attends policy meetings, although she does not vote on Fed policy at the moment.

Federal Reserve warnings

The Federal Reserve expressed similar worries a week before Mary Daly’s address.

Minneapolis Federal Reserve President Neel Kashkari stated last Wednesday that he is open to a larger interest rate rise during the Fed’s March policy meeting.

“Whether it’s 25 or 50 basis points,” said Kashkari.

Similarly, Atlanta Fed President Raphael Bostic suggested that at the next meeting, the Fed’s policy rate should be raised by half a percentage point.

The next day, Fed Governor Christopher suggested that interest rates might climb faster than expected.

He stressed a series of economic data that were stronger than expected.

Read also: Nishad Singh enters guilty plea with apologies

Interest rate progress

The Federal Reserve has done a lot in the last year to keep inflation under control.

It increased its goal range from close to zero to 4.5% to 4.75%.

After a half-point drop in December, they lowered increases to a quarter-point cut in February.

In 2022, inflation hit a four-decade high, although it began to recede in the last quarter.

Yet, January inflation figures revealed that the rate of price rises was progressively increasing once more.

Gold price

Gold prices have stalled as a result of the fresh concerns.

Prices fell from a two-and-a-half-week high on Monday as traders looked for indications about future rate rises from US Federal Reserve Chair Jerome Powell’s decision.

Spot gold reached a high of $1,858.19 per ounce on February 15, but it is presently down 0.3% at $1,849.33 per ounce.

Similarly, gold futures in the United States climbed little to $1,855.10.

Also, the dollar index rose 0.1%, making greenback-priced bullion more costly for foreign purchasers.

Awaiting testimony

Many people are anticipating Powell’s congressional testimony on Tuesday and Wednesday, followed by the February employment data, which is expected Friday.

“Currently, gold is in a wait-and-see mode,” said UBS analyst Giovanni Staunovo.

“There’s unlikely to be a change of script from Powell, reiterating the need for further rate hikes to bring inflation under control.”

While gold is commonly used as an inflation hedge, increasing interest rates may reduce demand for the zero-yielding metal.

Mary Daly speculated on the likelihood of interest rates rising (and staying there) if Saturday’s report is hotter than predicted.

According to Reuters technical expert Wang Tao, current gold prices may increase further into the $1,867 to $1,876 per ounce range if resistance at $1,853 is broken.

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Prices of 2022: the highs and lows

Edward Anderson Edward Anderson on February 13, 2023

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Prices: The United States experienced its highest level of inflation last year.

The Federal Reserve has been battling inflation throughout 2022 and has used all available options, including hiking interest rates.

Price hikes

Recent data on inflation from the Bureau of Labor Statistics show a decline in price rises to 7.1%.

Retail prices increased 7.6% (inflation unadjusted) between November 1 and December 24, making it impossible for customers to purchase gifts without going over budget.

The information was provided by the Mastercard Spending Pulse, which looks at retail purchases beyond auto sales.

The cost of holiday meals skyrocketed throughout 2022 as food prices increased faster than inflation.

Some products had remarkable double-digit growth, but others experienced no change or a drop.

Electronics

As soon as the demand for expensive electronics fell, retailers noticed a change in consumer behavior.

Prices for major electronics decreased throughout the year that ended in November.

  • Smartphones plunged 23.4%
  • TV prices dropped 17%
  • Computers rolled back prices by 4.4%
  • Major appliances fell by 1%

Several businesses, like Best Buy and Walmart, stocked up at the beginning of 2022 in preparation for supply chain problems and anticipated rises in consumer demand.

Their plans, however, were derailed by mounting prices and declining client confidence.

In addition, during the early stages of the epidemic, when people were confined, they made significant purchases or upgrades.

Read also: Real estate market hopes for consistency this year

Apparel & toys

Although slowly, apparel prices rose last year.

  • Clothing prices rose by 3.6%
  • Footwear increased by 2.3%
  • Sporting goods climbed 2.7%
  • Toys had a meager 0.6% increase

The items were a bargain despite the slight price increase because inflation surpassed it.

In December, Walmart CEO Doug McMillon made the following remarks:

“In toys, sporting goods, categories like that, prices have come down more aggressively.”

“We’re still inflated, but we’re not inflated nearly as much as we are in the other categories.”

However, because retailers overestimated client demand, there was a stockpile of extra goods.

Stores made offers to move inventory, enticing customers to make purchases.

Retailers were able to control prices as a result.

Plane tickets

The 2020 pandemic prompted air travel demand to decline, dropping to an all-time low.

However, it was revived last year.

However, the cost of travel increased by 36% yearly.

Glen Hauenstein, the president of Delta, described the increase as “unprecedented” in March.

“I have never seen… demand turn on so quickly as it has over Omicron,” said Hauenstein.

Airlines made a record amount of money in April, May, and June due to high airfares and congested flights.

Two years after the pandemic-induced lockdowns, they made a full-force comeback owing to travelers.

Gas prices

The cost of land travel increased.

The price of gasoline increased by 10.1%; however, it has since fallen from its record highs.

Gas price volatility was caused by the Russian invasion of Ukraine and geopolitical plans that depended on the availability of oil.

GasBuddy predicts the chances of the national average returning to the $4 per gallon price level could occur as early as May.

The fuel price tracking app GasBuddy does not anticipate another year of extreme volatility.

Read also: Minimum wage to go from $7 to $15 this year

Food prices

Food prices increased by 10.6% in 2022, which is more than overall inflation.

Numerous factors contributed to price increases for particular supermarket items through November 2022.

Egg prices rose by 49.1% as a result of the terrible avian influenza, a lack of supplies, and excessive demand.

Margarine prices increased by 47.4% due to the Russian invasion of Ukraine.

In addition, butter prices increased by 27% as the world’s milk supply plummeted.

Flour is an additional casualty of the Ukrainian situation.

The price of flour increased by 24.9% as a result of the disruption of the global grain market and high US transportation expenses.

In California, lettuce prices jumped by 19.8% as a result of crop disease.

Food prices increased by 12% over that period.

As the cost of eating out increased in 2022, many customers chose to accept higher prices as an alternative.

The price of dining out increased by 8.5% last year as restaurants raised menu prices to offset their rising material expenses.

Reference:

What got really expensive this year, and what got cheaper

Jobs see a new horizon in 2023, more available now

Claire Peterson Claire Peterson on February 6, 2023

Jobs – The American labor market once again demonstrated its tenacity and surpassed expectations on Friday.

Forecasts for market growth were more than three times overshot, making them nonsensical.

What happened

In a combined estimate released last week, analysts predicted that the US economy likely created 185,000 jobs in January.

The fact that the quantity would have exceeded the pre-pandemic average makes the news encouraging.

However, it turned out that the economy was volatile, creating over 500,000 new employment in its wake.

The report

On Friday morning, reports that the US added 517,000 jobs in January surprised American economists.

The jobless rate was expected to rise moderately, according to experts.

In fact, it dipped from 3.5% to 3.4%.

Furthermore, despite prominent layoffs in the media and technology sector, the economy as a whole is still doing well.

Other significant changes include:

  • A rise in employment total, primarily in the hotel and leisure industries.
  • After the adjustments, the US added 4.8 million new jobs in 2022, which was 300,000 more than expected.
  • The 4.4% increase in earnings from a year ago was higher than expected.

A weakening recession forecast

Everyone in 2022 was fazed by recessionary anxieties the whole year since it appeared as though the economy was moving in that way.

Experts and economists of today say that the projections were overplayed.

Moody’s Analytics’ chief economist, Mark Zandi, said:

“Any concern the economy is in recession or close to a recession should be completely dashed by these numbers.”

Read also: Prices of 2022: the highs and lows

The Federal Reserve’s efforts to control inflation by limiting the supply of money in circulation raised concerns for many individuals.

Regulations typically increase the likelihood of a recession by restricting business expansion (or, in some circumstances, stopping it altogether).

The labor market has not buckled as a result of the Fed’s activities, despite the growing inflation.

“Last year involved the biggest mis-reading [SIC] of the economy in the labor market,” Justin Wolfers, an economist, tweeted on Friday.

“The recession talk spiked to new highs, even as the economy recorded a rate of job growth that any real economist will tell you spelled ‘BOOM.'”

Although in the past they have relied on a variety of models to create their projections, the pandemic has forced economists to diverge from the conventional.

“My meta-theory of why so many people have been wrong about the economy for so long is that many economists (and econ journos) are incapable of acknowledging that sometimes, good things happen,” said Wolfers.

The Feds and hiking rates

The workers will benefit from the news, but Wall Street isn’t as impressed.

Stocks dropped early on Friday as a result of investors’ surprise at the jobs data, which gave some hint that high interest rates, which reduce corporate profitability, aren’t likely to fall any time soon.

The Fed made it clear that it will keep raising rates in an effort to bring inflation down to its target of about 2% and remove excess liquidity from the economy.

Since it peaked at 9.1% in the summer of last year, inflation has been declining.

In December, the PCE index—the Fed’s favored measure for gauging price hikes from last year.

The labor market’s high tolerance of the Fed’s most aggressive policy in recent memory demonstrates that the organization is free to keep high interest rates without driving unemployment and huge job cuts.

The economy is not fully secure, nevertheless.

People find it challenging to obtain loans due to the growing interest rate, which is bad news for anybody looking to fund a business, buy a home, or take out student loans.

Professor of finance and economics at Loyola Marymount University and head of SS Economics Sung Won Sohn said in a statement on Friday:

“A rolling recession – where various sectors of the economy take turns contracting rather than simultaneously – is in progress.”

Workers market

The most recent employment data reveal that there are still plenty of available jobs.

According to the Job Openings and Labor Turnover Survey (JOLTS), which was released on Wednesday, there were 11 million more job openings in December than was predicted and since July.

Office occupancy had been declining during the preceding three years as a result of the epidemic, but it has just begun to increase.

According to security-card swap data from Kastle Systems, office occupancy rates in 10 major US cities have hit 50% for the first time since March 2020.

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Mortgage rates to stay neutral if Feds hike rates this week

Edward Anderson Edward Anderson on December 13, 2022

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Mortgage rates: The Federal Reserve is expected to raise rates further this week, but mortgage rates are expected to remain unchanged.

Mortgage rates have had several ups and downs this year but peaked at 7% for weeks in October and November.

However, signs of slowing inflation pushed mortgage rates down.

According to a Bankrate survey (owned by Red Ventures alongside NextAdvisor), the average 30-year fixed-rate mortgage is down to 6.62%.

Expectations

JR Gondeck, financial advisory partner and managing director of Lerner Group, is optimistic about the interest rates.

“From a mortgage perspective, rates have actually gone down even though the Fed has raised rates. We would expect the worst is over,” said Gondeck.

“We think you’re going to see lower rates into the next year despite further rate hikes.”

Meanwhile, experts and financial markets expect the US Federal Reserve to raise its benchmark short-term interest rate (the federal funds rate) by 50 basis points this week.

However, experts also say the next steps for mortgage rates depend more on Fed Chairman Jerome Powell’s 2023 projection.

Odeta Kushi, the American Financial Corporation deputy chief economist, suggested it’s all about expectations.

“If the market is surprised by the Fed’s projections, we could see some movement in mortgage rates,” said Kushi.

“Whether that surprise is to the upside or the downside.”

The Fed

Housing costs are already a significant component of consumer spending.

The housing market was a critical indicator of the Fed’s continued efforts to contain inflation, standing at 7.7% year-over-year in October.

Since early 2022, the Fed has raised the federal funds rate from 0% to 3.75%, one of the central bank’s fastest rate hikes.

The hikes were an attempt to curb ongoing inflation.

Denis Poljak, the co-founder of Poljak Group Wealth Management, provided a unique perspective on inflation, saying:

“Inflation is, essentially, too much money chasing, too few foods.”

The Federal Reserve is making it harder to borrow money by raising interest rates.

Additionally, they said they will continue to increase rates until they see continued declines in consumer spending and inflation.

Read also: Flavored tobacco banned in California, stores required to add warning signs

Housing market

The current inflationary climate did not occur overnight.

It has gained momentum since the outbreak of the 2020 pandemic, of which the real estate market is a clear example.

The pandemic boom in the housing market led to massive price hikes, with demand failing to meet supply.

The rise in house prices continued until they peaked in the middle of the year.

Since then, prices have slowly declined as high mortgage rates have curbed demand. Also, the housing market has been in neutral territory lately.

However, falling home prices and stabilizing mortgage rates may make affordability difficult, especially for first-time buyers.

The Fed & mortgage rates

Mortgage rates are not directly tied to Federal Reserve actions but are affected by inflation.

When people take out a mortgage, it is sold to investors in the bond market as part of a pool of mortgages called mortgage-backed securities.

Inflation and rising borrowing costs have prompted lenders to increase mortgage rates to give investors higher yielding mortgage-backed securities.

When inflation eased in October, mortgage rates fell, and the bond market rallied.

The housing market represents an important sector of consumer spending.

If the Fed slows housing cost growth, it will likely substantially affect the economy.

“As long as new lease inflation keeps falling, we would expect housing service inflation to keep falling sometime next year,” said Jerome Powell.

“Indeed, a decline in this inflation underlies most forecasts of declining inflation.”

The Fed’s pace

The Federal Reserve has consistently maintained rate hikes through its December meeting.

The Fed aggressively hiked rates by 75 basis points after four consecutive meetings.

“And the reality is, it’s working,” said JR Gondeck. “They started late, but they’re catching up to where things are.”

Despite the progress, the Fed must find a balance between being aggressive and going too far too fast.

The decision to raise rates by 50 basis points instead of 75 suggests the Fed is hoping for a soft landing instead of an outright recession.

“This way, Powell can continue with his agenda to slow the economy down but help create a softer landing, a more moderate recessionary environment,” says Poljak.

The Fed should observe incoming data on housing inflation for a soft landing or a moderate recession.

“The housing market is the leading indicator of a recession,” says Odeta Kushi.

“But traditionally, it has also aided the economy in recovering from one.”

Read also: Foxconn production is back, reviving iPhone city

Projections

The Federal Reserve will adjust interest rates and make forecasts for 2023 at its December meeting.

The latest inflation report shows a positive sign, but the Fed needs more to curb rate hikes.

Additionally, the Fed has indicated that it is cautious about easing interest rate hikes until there are indications that inflation has been around or below the Fed Funds rate for several quarters.

However, further hikes may not lead to drastic mortgage rate changes.

Indications of easing inflation should stabilize mortgage rates at lower levels.

“I think the rate hike is pretty much already priced into the market. The Fed is going to raise their short-term rate by half a percent,” said Gondeck.

“But from there, it’s going to matter more what they say about the future, and specifically, the tone they use.”

Reference:

‘The worst is over’ for mortgage rates despite another looming Fed hike, experts say

Stock market movement largely positive in October this year

Edward Anderson Edward Anderson on October 31, 2022

The October stock market is known for its significant declines over the years, most notably in 1929, 1987 and 2008.

However, the stock market successfully managed to avoid similar crashes in 2022.

Wall Street investors have nothing to fear as the month closes.

The market continued its streak from October on Monday and recorded another strong rally.

Stocks

The Dow Jones closed up more than 420 points (1.3%) on Monday.

Additionally, the Dow Jones rose almost 10% in October, recovering from the sharp falls in August and September.

However, blue-chip industrials and other giants of the US economy remain 13% down this year, including:

  • Apple (AAPL)
  • Microsoft (MSFT)
  • Coca-Cola (KO)
  • McDonald’s (MCD)
  • Disney (DIS)

Read also: Huge rally in the stock market a good sign in October

Federal Reserve

The market rebounded this month, hoping the Federal Reserve would reverse its aggressive rate hikes to fight inflation.

Strong interest rate hikes are expected during Fed meetings on November 2 and later in December.

However, some people hope the Fed can suspend rate hikes next year.

The solid third-quarter results also help strengthen stocks.

The bear market

The S&P 500 rose 1.2%, while the Nasdaq gained 0.9% on Monday.

Both indexes also posted decent gains for October.

The Nasdaq is up more than 3.5%, while the S&P 500 is up almost 6%.

Unfortunately, the S&P 500 and Nasdaq are still down more than 20% each this year, putting them in a bear market.

The Nasdaq was in the green zone on Monday, which is better positioned than others.

Read also: US stock market goes steady after worst day since 2020

The Chinese market and other stocks

Several leading Chinese tech stocks trading in the US fell on fears of a crackdown in China.

The crackdown stemmed from news that Xi Jinping will serve for a third term as China’s leader.

Meanwhile, the e-commerce company Pinduoduo (PDD) lost more than 25%.

Electric vehicle manufacturers and significant Chinese tech stocks reported double-digit loss rates, including:

  • Nio (NIO)
  • Xpev
  • Li Auto
  • Alibaba (BABA)
  • Baidu (BIDU)
  • Tencent (TCEHY)

Tesla shares fell 1.5%, while Starbucks fell 5.5%.

The fast food giant Yum! Brands (YUM) fell 2%, while Yum China (YUMC) fell 14%.

Yum China distributes several popular food chains in China, such as:

  • KFC
  • Pizza Hut
  • Taco Bell

Wynn Resorts and (WYNN) and Las Vegas Sands (LVS), casino owners that have properties in Macau, also fell.

Reference:

October surprise? Stocks continue to sizzle this month

 

The Feds find themselves on the losing end in the battle against inflation

Nicholas Alexander Nicholas Alexander on October 20, 2022

The Federal Reserve has taken drastic measures against inflation with rapidly rising interest rates for months, but their efforts are barely noticeable.

CPI data for September showed little to no change on Thursday compared to March, when the Fed began raising rates.

Total consumer prices rose 8.5% year-on-year.

Today, consumer prices are up 8.2%.

The Fed

Core prices rose 6.6% annually in September, a level last seen in 1982.

Christopher S. Rupkey, the chief economist at Fwdbonds, an economic research firm, wrote:

“This inflation report today was an unmitigated disaster. It shows whatever Fed officials are doing, it is just not working.”

The Fed has redoubled its effort to drive inflation out of the US economy by any means necessary.

They introduced massive rate hikes to curb demand for goods and services.

Despite rising interest rates, there is almost no sign of price easing.

Either way, the Federal Reserve remains stoic about its decisions, betting that the country’s strong labor market can tolerate the stress of higher borrowing costs.

“The Fed will see this as a license to stay aggressive,” said Jan Szilagyi, the CEO of investment research firm Toggle AI.

Thursday’s inflation report is the final comprehensive economic review Fed policymakers will conduct before their next meeting in early November.

The report again guarantees a rate hike of 0.75%.

Investors currently have a 97% chance of seeing a fourth consecutive three-quarter percentage point rise.

Financial pain

The Federal Reserve strives to hold interest rates down to maintain price stability.

Fed Chairman Jerome Powell acknowledged that the broader impact of rising borrowing costs would inflict financial hardship on households and businesses.

The Fed recently adopted a mantra to hurt now rather than let inflation seep into the consumer psyche.

At Wednesday’s most recent meeting, Fed officials stressed that the cost of not doing enough to contain inflation outweighs the cost of doing too much.

The belief suggests that the Fed would push the US economy into recession rather than a downward inflationary spiral.

Meanwhile, consumers endure the pain of high prices and high borrowing costs.

The struggle could also escalate with job losses.

The Federal Reserve believes the strong labor market contributed to inflation.

They cited other factors, including supply chain disruptions, the war in Ukraine, and companies raising prices when costs fall.

Kurt Rankin, Senior Economist at PNC, said:

“Rather than walking a tightrope between a ‘soft landing’ and recession…the Fed now faces the potential of killing off the economy’s job creation impetus beyond a simple rebalancing of the labor market in the name of taming inflation.”

The fight against inflation

In the fight against inflation, the Federal Reserve is enduring an uphill battle.

Interest rate hikes’ impact should be felt in the real economy within a few months.

Fed Vice Chairman Lael Brainard said:

“The moderation in demand due to monetary policy tightening is only partly realized so far.”

He noted that the “transmission of tighter policies” is most evident in the housing market, especially with mortgage rates more than doubling this year.

“We continue to see a tale of two economies in the data,” chimed in Sam Khater, the chief economist at Freddie Mac.

“Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears, and housing affordability are driving housing demand down precipitously.”

Unequal pain

Recent CPI reports bring economists and investors back to reality, where millions of Americans feel deeply they are spending more on necessities like food and shelter.

More and more people are controlling inflation by relying on credit cards, which become more challenging to repay as interest rates rise.

The Food at Home Index rose 13% YoY last month.

Meanwhile, emergency shelters have grown 6.6%, the fastest over three decades.

Despite rising mortgage rates, housing costs have gotten bolder, according to Joe Brusuelas, chief economist at RSM, who also said:

“Whatever relief in core inflation that is in the pipeline… it is not flowing through to an easing in rents.”

According to Rupkey, rate hikes have won the battle against falling commodity prices but are losing ground due to price hikes in the service sector.

“Today’s red hot inflation report brings the economy closer than ever to recession next year,” said Rupkey.

“Supply chain bottlenecks, a volatile global energy market, and rampant corporate profiteering can’t be solved by additional rate hikes,” said Rakeen Mabud.

Mabud is the chief economist of the left-leaning Groundwork Collaborative policy group.

“It’s time for Chair Powell and the Fed to step aside and for Congress to step in.”

Reference:

The Fed is losing the war against inflation

Bank of America predicts high unemployment rate in 2023

Edward Anderson Edward Anderson on October 13, 2022

Efforts to curb inflation have prompted the Federal Reserve to act, but the Bank of America warns that this could lead to mass unemployment.

Bank of America noted the Fed’s aggressive rate hikes and said the US economy will lose tens of thousands of jobs each month early into 2023.

While September showed a strong job market, the Fed is doing everything it can to turn things around by raising interest rates.

Aggressive interest increases will therefore lead to a decrease in the demand for cars, homes, and household appliances.

Inflation pressure

The Fed’s fight against inflation is adding pressure, which means nonfarm payrolls will begin to decline in early 2023.

As a result, Bank of America said more than 175,000 jobs were lost each month in the first quarter of the year.

The bank’s charts suggest there will be job losses for the majority of 2023.

“The premise is a harder landing than a softer one,” said Michael Gapen, the head of US economics at Bank of America.

Ideally, the Fed would have dampened the labor market enough to bring inflation back to healthy levels without causing significant and permanent job losses.

However, Bank of America does not believe the Fed will make such a decision.

“We are looking for a recession to begin in the first half of next year,” Gapen said.

Unemployment peak

Friday’s jobs report showed the United States added more than 263,000 jobs in September despite the market slowdown.

It brought the unemployment rate down to 3.5%, the lowest level since 1969.

However, Gapen expects unemployment to rise between 5% and 5.5% next year.

Meanwhile, the Fed forecasts an unemployment rate of 4.4% in 2023.

The US Federal Reserve is raising interest rates at the fastest rate in four decades to curb inflation.

Fed officials said they were in no rush to exit inflation-fighting mode to help the economy avoid a slowdown or recession.

“They’ll accept some weakness in labor markets in order to bring inflation down,” said Gapen.

Fed officials say interest rates need to remain at “restrictive” levels for some time.

Gapen said that while recessions have “quick snapbacks,” the Fed’s stance on keeping interest rates high for an extended period suggests the situation is protracted.

“We could see six months of weakness in the labor market,” he said.

Recession

Meanwhile, some forecasters are optimistic about the state of the job market.

On Monday, the Conference Board announced that the September Employment Trend Index had been ticked.

The index is a combination of leading labor market indicators.

They said that this meant employment growth in the coming months, but that employment growth would likely slow from its recent pace.

On the bright side, however, people calling for a recession won’t see unemployment rise like in 2008 or 2020.

Bank of America expects the unemployment rate to peak at 5.5% in 2023, after peaking at nearly 15% in 2020.

“Although nobody wants to be callous about someone losing their job, this could be classified as a mild recession,” said Gapen.

Reference:

US economy will soon start losing 175,000 jobs a month, Bank of America warns

Mortgage rates finally start to ease after surging for six weeks

Nicholas Alexander Nicholas Alexander on October 10, 2022

For six weeks, mortgage rates have risen for six straight weeks, but last week they began to retreat.

According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.66% in the week ending October 5, up from 6.70% the week before.

Mortgage rates

Mortgage rates have more than doubled since the start of the year following the Federal Reserve’s unprecedented rate hike campaign.

Their decision was based on the objective of curbing rising inflation.

However, uncertainty about a possible recession and the impact of interest rate hikes on the economy affected the volatility of mortgage rates.

Sam Khater, Chief Economist at Freddie Mac, said:

“Mortgage rates decreased slightly this week due to ongoing uncertainty.”

“However, rates remain quite high compared to just one year ago, meaning housing continues to be more expensive for potential homebuyers.”

According to Freddie Mac, the average mortgage rate is generally based on a survey of conventional borrowers with excellent credit who have put 20% down.

However, buyers who deposit less money upfront or have imperfect credit will have to pay more.

Volatile rates

Danielle Hale, chief economist at Realtor.com, revealed that investors and analysts have sifted through all the economic data for clues on the Fed’s next steps.

They also want to predict the future of the United States and the global economy.

Although the Fed does not directly determine the interest rate that borrowers pay on mortgages, its actions affect interest rates.

Mortgage rates generally follow 10-year US Treasuries.

The more investors anticipate rising interest rates, the more likely they are to sell treasury bonds, causing interest rates and mortgage rates to rise.

10-year government bonds rose almost 4% from 3.25% last month before falling back to around 3.75% this week.

Danielle Hale compared investor stocks to a driver navigating the streets in fog, tending to overcorrect at every turn.

“Signs that we are closer to the end of the tightening cycle – such a surprisingly steep decline in job openings – tend to cause rates to slip, while rates bounce higher on signals like robust activity in the services sector,” Hale elaborated.

Homebuying

Despite this week’s low interest rates, the average interest rate for a 30-year loan remains more than double that of last October.

In 2021, buyers who put down 20% on a $390,000 home and financed the rest with a 30-year fixed-rate mortgage at an average interest rate of 2.99% would have a monthly mortgage payment of $1,314.

Today, homeowners who buy homes at the same price at an average rate of 6.66% would have to pay $2,005 per month in principal and interest, another $691 per month.

Bob Broeksmit, president and CEO of the Mortgage Bankers Association, noted that fewer people have applied for a mortgage as rates have continued to rise in recent weeks.

According to Broeksmit, ongoing economic uncertainty, coupled with the devastation of Hurricane Ian in Florida last week, led to a 14% drop in mortgage applications from the week before.

The MBA also found that more and more borrowers are applying for adjustable rate mortgages, or ARMs.

ARM applications increased to nearly 12% of all applications last week.

Freddie Mac calculated the average rate for ARMs at 5.36%, more than a percentage point lower than the 30-year fixed rate.

“While rate increases are needed to tame inflation and alleviate the burden it places on household budgets, higher borrowing costs have caused consumers to think twice about major purchases like homes and cars,” said Hale.

The longer potential buyers sit on the sidelines, the greater the leeway for potential buyers.

Reference:

Mortgage rates take a breather after rising for several weeks in a row

Increasing mortgage rates influence US home prices

Jason Robinson Jason Robinson on October 3, 2022

Home prices in the US rose steadily in July, but the current market is showing signs of slowing.

The movement in the market is due to rising mortgage rates, which marginalize more potential buyers.

Home prices rose 15.8% year-on-year in July, according to the US National S&P CoreLogic Case-Shiller Home Price Index.

The jump is less than the 18.1% growth in June.

However, the 2.3% gap between the two months makes it the largest decline in the history of the index.

Lower house prices

On a monthly basis, prices have fallen 0.2% since June, the first monthly decline for the national index since February 2012.

Craig J. Lazzara, Head of S&P Dow Jones Indices, commented on the situation, saying:

“Although US housing prices remain substantially above their year-ago levels, July’s report reflects a forceful deceleration.”

Twenty cities recorded lower price increases in July compared to a year ago.

Tampa was able to register the largest gain, with house prices rising 31.8% in July from a year earlier.

Miami follows with a 31.7% increase and Dallas with a 24.7% increase.

“As the Federal Reserve continues to move interest rates upward, mortgage financing has become more expensive, a process that continues to this day,” noted Lazarra.

“Given the prospects for a more challenging macroeconomic environment, home prices may well continue to decelerate.”

A similar move in house prices in July was seen in a report from the Federal Housing Finance Agency on Tuesday.

The FHFA House Price Index indicated that house prices rose 13.9% year-on-year in July.

However, they decreased by 0.6% compared to the previous month.

According to the agency, this is the first monthly decline in house prices since May 2020.

How mortgage rates are affecting demand

Recent house price reports show the chilling effect of rising mortgage rates.

Mortgage rates doubled year after year in July.

Interest rates continued to rise to nearly 6% in mid-June, and fears of a recession made rates even more volatile.

The Federal Reserve stepped up its rate hikes to curb inflation, and mortgage rates have risen accordingly.

Although the Fed does not directly determine the interest rates that borrowers pay on mortgages, its actions affect them.

Mortgage rates generally follow 10-year US Treasury bond yields.

Investors often sell government bonds on the basis of interest rate increases, which causes interest rates to rise and mortgage rates to rise.

As potential homebuyers followed the rise in interest rates, the intimidation began.

According to Steve Reich, chief operations officer of Finance of America Mortgage, home valuations also continued to decline after the peak in April.

“The gradual slowdown can be attributed to higher interest rates, which has tempered what many homebuyers can afford and, in turn, has softened home sales,” said Reich.

He also noted that home prices are beginning to moderate in some markets, especially those with a large influx of buyers following an outside operation during the pandemic.

George Ratiu, senior economist and chief of economic research for Realotor.com, said:

“The combination of still-tight inventory in most markets and buyers trying to lock in a fixed monthly payments before rates rose even higher ensured that prices continued advancing.”

“However, the upward momentum has lost steam, and it is clear that the market peak is now firmly behind us.”

Ratiu has also said that a postponement of price increases seems to offer buyers better opportunities in the coming months.

“The shares of homes with price cuts reached about 20% in August, the same level we saw in 2017 when real estate markets were on much more balanced footing,” he added.

“As mortgage rates are expected to keep rising, and current prices become even less sustainable for most buyers’ budgets, price cuts are likely to continue expanding.”

Ratiu has also noted that the current market is different from three weeks ago since home owners plan to sell.

Because the average monthly mortgage payment has increased by hundreds of dollars compared to last year due to the higher interest rates, the number of qualified buyers has decreased.

“Sellers who have a firm grasp of local market conditions and price accordingly from the get-go will be more likely to grab buyers’ attention and ensure a successful transaction,” said Ratiu.

Reference:

US home price reports show the cooling effect of rising mortgage rates