Federal Reserve interest rates have sent CD rates on a wild ride
4 hours and 48 minutes ago
The Federal Reserve's fight against inflation has pushed up interest rates on mortgages, auto loans and credit card debt, putting strain on household budgets.
But it wasn't all bad. Rapidly rising interest rates have led to banks offering the highest deposit returns in decades.
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CD rates began rising in 2022 as inflation skyrocketed and the Fed launched a rate hike campaign to curb inflation. Even though average interest rates are falling from their peak in September, there are still plenty of banks offering interest rates above the 5.5 percent mark.
Inflation has fallen faster than many experts thought possible
5 hours 41 minutes ago
Back in December 2022, Federal Reserve officials gave their best estimates of how quickly inflation would rise at the end of 2023. The median answer from their best estimates was that prices, as measured by the personal consumption expenditures index, would have increased by 3.1% by the end of the year.
The actual number reported on Friday would have seemed extremely optimistic at the time. In fact, only one of the 19 Federal Open Market Committee members who got their guesses right predicted a decline to 2.6%.
In 2022, there were few predictions of a rapid slowdown in inflation. Price increases reached their highest level since 1981 in June of the same year and only began to ease.
One of the economists who predicted a rapid decline in inflation was James Knightley, chief international affairs economist at ING. In October 2022, he predicted that the Fed's series of anti-inflation rate hikes would quickly curb inflation, bringing it back down to the Fed's desired 2% annual rate by the end of 2023.
By some measures, inflation in December was actually at a level in line with the 2% target. Investopedia emailed Knightley asking if he wanted to take a victory lap on behalf of inflation optimists, but he declined, pointing out that despite the recent slowdown, prices have risen more than 2% for the year.
“However, there is a ‘two’ handle to the inflation gauge that few in the market expected at the time,” Knightley wrote in an email. “I wouldn't be so bold as to say that I called it that, but the statement that inflation would fall sharply was, in my opinion, correct. “Early 2024” may be too early to be below 2%, but I think we’ll be there by summer.”
The Fed is unlikely to change interest rates next week. But will we get more information about a cut?
6 hours and 36 minutes ago
Federal Reserve officials are widely expected to keep their key interest rate steady at their meeting next Wednesday. That means all eyes will be on their communications for clues as to whether they will cut that rate at their next meeting in March.
The Federal Open Market Committee's statement and Fed Chair Jerome Powell's press conference on Wednesday could provide some clues about the direction of interest rates. However, don't expect definitive answers. Powell is likely to say officials will need to review upcoming economic reports before deciding whether to cut rates.
“We continue to expect the first rate cut in March, although we do not expect a strong signal in January,” Michael Gapen, U.S. economist at Bank of America Securities, wrote in a commentary. “The Fed needs to buy time to see more data.”
Read more about expectations for the next FOMC meeting here.
Miami renters are seeing double-digit annual rent increases
8 hours 30 minutes ago
The Bureau of Labor Statistics said Friday that rents rose sharply in major metropolitan areas last year, with rents in the Miami metro area taking the hardest hit, up 10.1% annually.
One important caveat: Because of the way it is collected, the government's data may be somewhat out of date. Other more recent rental metrics such as the Zillow Observed Rent Index show that rents rose just 3.3% on average, just over half of the 6.5% increase reported by the BLS nationwide.
Rent increases have moderated after the spike during the pandemic. Nevertheless, rent increases have placed a heavy burden on household budgets. According to a study released this week by the Harvard Joint Center on Housing, the share of renters who were cost-burdened (that is, spending more than 30% of their income on rent) rose to a record high of 50% in 2022.
The trend in car sales in January: smaller, cheaper and powered by gasoline
8 hours and 54 minutes ago
US consumers are buying smaller and cheaper vehicles in January than in the same month last year and are less likely to switch to electric vehicles.
This is according to JD Power's automotive forecast released on Friday morning, which predicted that average transaction prices for new and used cars fell last year. The average new vehicle sells for $45,106, a decrease of $1,636 from last year, while the typical used vehicle sells for $28,100, a decrease of $694.
Those lower costs are largely due to automakers producing more of the smaller, cheaper cars in demand today, JD Power said.
Electric vehicles account for 8.6% of all vehicles sold, up from 9.2% at the end of 2023. A change to the electric vehicle tax credit — which is up to $7,500 — that took effect Jan. 1 may have been responsible for the decline said JD Power. Starting in 2024, the number of vehicles eligible for the credit has been reduced.
Despite the drop in transaction prices, consumers overall aren't seeing much relief from their finances, as average auto loan interest rates are expected to rise to 7.1%, leaving the average monthly payment just $6 lower than December.
Pending Home Sales Rise 8.3% in December
10 hours 18 minutes ago
An index measuring the number of homes listed for sale reached 77.3 in December, up 8.3% from November. That's a change from November, when pending home sales remained stable.
The index rose 1.3% year-on-year.
“The housing market is off to a strong start this year as consumers benefit from falling mortgage rates and stable home prices,” said Lawrence Yun, NAR chief economist. “Additional jobs and income increases will further improve housing affordability, but increased supply will be critical to meeting all potential demand.”
Pending home sales rose the most in the West, where the index rose 14%.
Income rose as the U.S. economy heads for a soft landing
10 hours 30 minutes ago
Personal incomes again rose faster than prices in December, according to personal consumption expenditure data released Friday by the Bureau of Economic Analysis. Personal income rose 0.3% since November, while prices rose just 0.2% and spending rose 0.7%, the largest increase since September.
“I'm sorry, but we can no longer say 'we're landing softly' when we've been sitting on the runway for many months,” wrote Arin Dube, a professor of economics at the University of Massachusetts Amherst, on X, the social media platform, formerly called Twitter. “The great inflation of 2021/22 is over and that’s it.”
Read more about Friday's PCE report here.
Consumers spend at the expense of their savings
11 hrs 20 mins ago
According to Friday's PCE report, the savings rate hit a 12-month low.
Personal savings totaled about $766.7 billion in December, and savings accounted for just 3.7% of total disposable income. During the pandemic, this rate, also known as the personal savings rate, was as high as 32%. Friday's personal savings rate is nearly half its pre-pandemic level, which averaged 6.2% from 2016 to 2019, according to the Council of Economic Advisers.
“With consumer confidence recovering and household balance sheets strong, savings rates could remain low this year,” wrote Michael Pearce, senior U.S. economist at Oxford Economics. “But chances are good that the savings rate will recover at least somewhat as consumers use up the last of the excess savings left over from the pandemic.”
Friday's report gave added impetus to economists who have been predicting a slowdown in spending for months as savings fell and credit card balances rose to record highs.
“Households have used up most of the $2.1 trillion in pandemic-related savings,” wrote Nationwide chief economist Kathy Bostjancic. “Given the low savings rate and increasing credit card defaults, households will reduce their spending.”
The PCE price index remains unchanged for December
12 hours 42 minutes ago
The personal consumption expenditure (PCE) price index remained unchanged in December, showing that prices rose 2.6% year-on-year.
PCE is the Federal Reserve's preferred measure of inflation and shows how much the prices of household goods have risen. Excluding volatile food and energy prices, the index fell and stood at 2.9% in December after rising 3.2% in November.
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