federal reserve – Sendika12 http://sendika12.org/ Sat, 05 Mar 2022 20:33:17 +0000 en-US hourly 1 https://wordpress.org/?v=5.9.3 https://sendika12.org/wp-content/uploads/2021/10/profile-120x120.png federal reserve – Sendika12 http://sendika12.org/ 32 32 Can rising interest rates really control inflation? https://sendika12.org/can-rising-interest-rates-really-control-inflation/ Sat, 05 Mar 2022 18:00:00 +0000 https://sendika12.org/can-rising-interest-rates-really-control-inflation/ Sun, Mar 6, 2022 12:00 a.m. Last updated on: Sun, Mar 6, 2022, 12:00 a.m. Treating inflation with high interest rates is like treating cancer with chemotherapy. You have to kill swathes of the economy to slow things down. Illustration: Collected “> Treating inflation with high interest rates is like treating cancer with chemotherapy. You […]]]>

Treating inflation with high interest rates is like treating cancer with chemotherapy. You have to kill swathes of the economy to slow things down. Illustration: Collected

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Treating inflation with high interest rates is like treating cancer with chemotherapy. You have to kill swaths of the economy to slow things down. Illustration: Collected

Russia’s military attack on Ukraine has unquestionably unbalanced the global economy. The newspapers are full of stories about the long-term impact of this war. Obviously, I share many of the dire predictions being made, but for this article I have chosen to address another equally burning and long-term issue: the role of rising interest rates. In simple terms, it revolves around the question, “How high should the interest rate rise to curb inflation?”

We know that the rate of interest determines the price of holding or lending money. Banks pay an interest rate on savings to attract depositors. Banks also receive an interest rate for money lent from their deposits. When interest rates are low, individuals and businesses tend to borrow more from banks, thereby increasing the money supply. As a result, inflation rises. On the other hand, higher interest rates tend to lower inflation.

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Although this is a very simplified version of the relationship, it highlights why interest rates and inflation tend to be inversely correlated.

Economists are increasingly concerned that the interest rate borrowers are paying will soon skyrocket and short-circuit the post-pandemic economic recovery. So why is the interest rate going up? How does it affect other macroeconomic variables, notably the price level? Can rising interest rates really curb inflation? I cannot answer all of these questions here for lack of space, but I hope to pique the interest of readers so that they can delve deeper into the puzzle over time.

A central bank can use changes in interest rates as a tool to fight inflation. It does this by fixing the commercial banks’ short-term borrowing rate – known as the repo rate in Bangladesh – and then these banks pass it on to consumers and businesses. This rate influences everything from credit card interest to mortgages and auto loans, making borrowing more expensive. On the other hand, it also increases savings and certificate of deposit (CD) rates and encourages saving.

In times of inflation, a central bank aims to make borrowing more expensive so that consumers delay their purchases, which dampens demand and controls prices. The biggest challenge is finding the right level so as not to raise it too high, which will stifle investment and hurt the poor.

As we see now, interest rates in countries around the world are rising after a lull in recent years. The Bank of England has started raising interest rates from historic pandemic lows and is under increasing pressure to raise the bank rate again. The US Federal Reserve is expected to begin raising the benchmark rate, known as the funds rate, at the next Board of Governors meeting on March 15-16. The European Common Bank may selectively raise rates, and there is no doubt that Asian countries will follow, although there may be a slight lag.

The novelty of this upward trend is that many central banks in North America and Europe have cut their respective interest rates to near-zero levels in an effort to meet the maximum stability targets for the economy. employment and prices. Unfortunately, inflation has recently spiked due to rising demand and supply chain bottlenecks. Central banks have now decided to curb aggregate demand and money supply to ease inflationary pressures.

The crucial question here is whether the observed movement in the two variables – interest rate and inflation – exhibits causality, or is it just coincidence? The question is immediately relevant: will the simple increase in the interest rate bring down the rate of inflation? Also, how high and how fast must the interest rate rise to have an impact on inflation? For example, if necessary, can the Fed raise interest rates to 5%, 10% or, as in the 1980s, 20%? Is it even calculable or predictable in advance? The answer to these questions is no.

Raghuram Rajan, former chief economist of the IMF and governor of the Reserve Bank of India, called interest rates a “brutal” tool in a situation where the real culprit is the creaky supply chain. The interest rate is a blunt tool also because aggregate price indices do not tell us precisely what prices are changing, for what reasons or to what effect.

“The government should take steps to protect the poorest through tougher price caps and direct financial support, while increasing investment in green projects to end our exposure to fossil fuel price volatility. and curbing demand from those who can afford it through wealth taxes,” Rajan said. adds.

Of course, it will take some time before any action taken by a central bank will have an impact on the economy and curb inflation. That’s why policymaking groups need to watch economic data carefully to decide how much and how often to raise rates.

And the biggest challenge is finding the optimal level of interest rate increases without plunging the economy into a slump. Treating inflation is like treating cancer with chemotherapy, as one expert once said. “You have to kill chunks of the economy to slow things down. It’s not nice treatment.”

Dr Abdullah Shibli is a senior research fellow at the US-based International Institute for Sustainable Development (ISDI).

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War Rages On, SOTU, Markets, Oil, Interest Rates, Multiple Stock Trading https://sendika12.org/war-rages-on-sotu-markets-oil-interest-rates-multiple-stock-trading/ Wed, 02 Mar 2022 12:26:24 +0000 https://sendika12.org/war-rages-on-sotu-markets-oil-interest-rates-multiple-stock-trading/ “For to win a hundred victories in a hundred battles is not the pinnacle of skill. To subjugate the enemy without a fight is the pinnacle of skill.” -Sun Tzu Day 7 Wednesday, day 7 of the Russian invasion of Ukraine. Russian forces seem to increasingly rely on less-smart ammunition. This of course makes targeting […]]]>

“For to win a hundred victories in a hundred battles is not the pinnacle of skill. To subjugate the enemy without a fight is the pinnacle of skill.”

-Sun Tzu

Day 7

Wednesday, day 7 of the Russian invasion of Ukraine. Russian forces seem to increasingly rely on less-smart ammunition. This of course makes targeting less precise, because from thousands of miles away, Russia seems less and less concerned with avoiding civilian casualties or collateral damage. Besides the increased bombardment of major cities, this large convoy that we wrote about 24 hours ago that seemed to be trying to encircle the capital of Kiev has come to a standstill. The Rumor Mill has them stuck due to either a lack of gas, or food, or both. Maybe just to allow those kinds of supplies to catch up. Logistic support for the movement of large troops does not seem to be a Russian force a week after the start of this war.

While you slept, assuming you slept, commodities such as crude oil, natural gas, corn, and wheat continued to rise in dollars. From Wednesday, Russian financial markets will remain closed for a third consecutive day, Japan reportedly jammed fighter jets as a Russian military helicopter entered Japanese airspace, North Korea, to defend Russia, criticized US, EU and NATO policies, and Sberbank (Russia’s largest bank) withdrew from the European market after subsidiaries in Austria, Croatia, Slovenia, Czech Republic and Hungary have faced a wave of withdrawals.

SOTU

In his first “State of the Union” address, President Biden declared Russian President Vladimir isolated from the rest of the world and hailed Western unity in response to the crisis in Eastern Europe. Perhaps the most chilling thing President Biden said Tuesday night regarding the Russian/Ukrainian conflict was this… “This is a real test, it’s going to take time.” Take time, I think it’s negative. Russia can wear down Ukrainian forces over time, especially if it is uninterested in taking casualties while committed to the old Soviet-style military doctrine of “overkill”.

Perhaps this plays precisely into Putin’s hands, although I don’t really see an alternative to how the US, UK, EU and NATO have reacted. Perhaps what Putin wants is a sort of rekindled “cold war” with Western powers as a way to restore Russia’s place on the world stage. I’m not saying it makes sense, and it certainly isn’t warranted. What he did in just a few days was to unite Western democracies in a “Cold War” style posture that formed an identifiable “front line” where necessary. Now Putin knows how far we will go. If one thought of the “cold war” as the “glory days” of the Soviet Union, one could try something that at first might have seemed quick and less painful than it has already become like way to get there. Once there, even if it’s expensive, that person might see no benefit in failure.

The sounds of silence

Like a chime hanging in the wind a thousand yards down the road. A warning. Like the coyote hunting at night in search of food, we also hunt. In search of fact. In search of the truth. The good news is that US equities appeared to rally in the closing minutes of the day through the closing bell…for a fourth straight session. Selling during the regular 6:30 a.m. session was wide however, trading volume was heavy. Even heavier than Monday. Across the full range of US equity indices, The Dow Jones Industrials, Dow Jones Transportation, S&P 500, S&P Midcap 400, S&P Small-cap 600, Nasdaq Composite, Nasdaq 100 and Russell 2000 all fell at least 1.59% (S&P 500) for the day, but no more than 1.93% (R2K).

There was only one SPDR ETF from the S&P sector that turned green for the session. As you would expect, this sector was Energy (XLE) , up 1.01%. Defensive sectors outperformed cyclicals, as six of the 10 sector ETFs that closed in the red fell more than 1%. The Financials sector (XLF) trailed the market at -3.69% as investors bought across the spectrum of US Treasuries, putting significant pressure on the yield curve. Unsurprisingly, the Dow Jones US Defense Index (not to be confused with the Defensive Index) climbed a further 2.81%, again led by Lockheed Martin (LMT) and Northrop Grumman (NOC) .

creatures of darkness

As the VIX made its way higher…

… readers might be surprised to see that the CBOE’s total put/call ratio for options shows no activity at this crisis level…

… Yet the spread between the yields of the US ten-year note and the US three-month Treasury bill, which is the most accurate predictor (and more economically important than the 10/2 spread) of any Economic contraction coming into our arsenal, has virtually collapsed in recent days.

Is all of this because commodity prices are rising in line with US dollar valuations? It’s a scary thought. Take a look at the rolling contract for WTI Crude futures over the past three months…

…then let it sink in the sense that this is Tuesday’s closing price, WTI crude traded above $111 a barrel overnight.

Senator Blutarsky?

Zero point zero. The Institute for Supply Management released its February manufacturing survey on Monday. The Census Bureau released January construction spending data. With overall figures of 58.6 and 1.2% (m/m), both reports appeared positive. That’s until the Atlanta Fed releases its updated GDPNow model for a real-time snapshot of first-quarter 2021 US economic growth based on reported data points.

The GDPNow model’s estimate for the US first quarter was reduced on Tuesday from 0.6% to 0.0% (q/q SAAR). The model actually adjusted its estimate of real consumer spending upwards, but significantly reduced the contribution of net exports to the bottom line. The model won’t be updated for another week (March 8) when the full US Trade Balance and Wholesale Inventories report, both for January, becomes available. This brings us to the “big event” of this morning.

In a bad place

Fed Chairman Jerome Powell will testify before the House Financial Services Committee this morning. Now, I won’t throw a stone to be behind the turns, because I myself was one of the last holdouts of “Team Transitory”. I still believe that without the war in Eastern Europe, US consumer inflation would decline by March/April. That said, there is no “otherwise for war” because there is a war. What is, is… what isn’t, isn’t. Adapt. Overcome.

The president bragged about the US economy last night, and the US recovery from pandemic lows has been remarkable. What does the Fed Chairman do now, with the January CPI showing 7.5% growth, the February CPI, which will be printed next Thursday, is expected to be worse, and with energy prices and from the diet i see, no relief going on, unless for march. All this on top of an economy that the Atlanta Fed’s own model no longer sees as growth at all?

Chicago futures are now pricing near a 100% chance of a 25 basis point rate hike (federal funds rate) on March 16, and a roughly 71% chance of the FOMC getting 125 basis points. rate hikes for all of 2022. I stuck with my prediction that the Fed only gets 75 to 100 basis points of hikes, maybe less. Will this be enough to blunt demand, which seems to be the only tool in the “price stability” toolbox at present? Well, with the destruction of demand that naturally accompanies high prices, that may be the best we can do. Cold wars are expensive. More hot wars. The “peace dividend” of the 1990s seems so distant.

Trade

– At the company’s Investor Day on Tuesday, Chevron (CVX) announced increased investment in US production, along with an increased share buyback program. My favorite raw/nat gas name in the US remains APA Corp (APA), formerly Apache Oil. I stay long both as well as Hess Corp. (HES) and Civitas Resources (CIVI) in this space.

– Sarge fave Advanced Micro Devices (AMD) has been roasted lately. The shares were down 7.7% on Tuesday. I haven’t added yet, given that stocks are still trading well above net basis. I’d rather see if AMD can hold the 200-day SMA on Wednesday after closing within pennies of that line.

– Apple (AAPL) halted product sales in Russia after being told to do so by a Ukrainian government official. It doesn’t affect my decision to stick with the name for long. However, I would like to see some sort of statement from management indicating an expected material impact.

– SoFi Technologies (SOFI) rallied overnight after beating expectations for fourth quarter revenue and earnings. SoFi also took projected revenue for fiscal year 2022 above the Wall Street consensus opinion despite the first quarter reduction below that opinion after incorporating a $30-35 million negative impact due to the extension of the federal moratorium on the payment of student loans which is due to expire on May 1. position that I added to self-defense.

Economy (all Eastern times)

08:15 – ADP employment report (February): Expected 383K, last -301K.

10:30 a.m. – Oil inventories (weekly): Last +4.515M.

10:30 a.m. – Fuel stocks (weekly): Last -582K.

The Fed (all Eastern times)

09:30 – Speaker: Saint Louis Close. fed. James Bullard.

10:00 a.m. – Speaker: Federal Reserve Chairman Jerome Powell.

14:00 – Beige Book.

Today’s Earnings Highlights (BPA Consensus Expectations)

Before the Open: (ANF) (1.27), (DLTR) (1.27)

After the close: (AEO) (.35), (SNOW) (.03), (SPLK) (-.20), (VEEV) (.88)

(AMD and Apple are equity interests in the Member Club Action Alerts PLUS. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

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What are the interest rates? How do they work? https://sendika12.org/what-are-the-interest-rates-how-do-they-work/ Mon, 28 Feb 2022 20:29:13 +0000 https://sendika12.org/what-are-the-interest-rates-how-do-they-work/ Interest is the price you pay to borrow money. Stocksnap from Pixabay; Cloth What are the interest rates? Contents When people need to finance major purchases like a house or car, start a business, or pay school fees, they often turn to their bank for a loan. These loans can be short-term, lasting only a […]]]>

What are the interest rates?

When people need to finance major purchases like a house or car, start a business, or pay school fees, they often turn to their bank for a loan. These loans can be short-term, lasting only a few months, but they can also be longer-term, such as mortgages, which have terms of up to 30 years.

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Low real interest rates support asset prices, but rising risks https://sendika12.org/low-real-interest-rates-support-asset-prices-but-rising-risks/ Sun, 20 Feb 2022 04:18:08 +0000 https://sendika12.org/low-real-interest-rates-support-asset-prices-but-rising-risks/ Supply disruptions coupled with strong demand for goods, rising wages and rising commodity prices continue to challenge economies around the world, pushing inflation above central bank targets . To contain price pressures, many economies began to tighten monetary policy, causing nominal interest rates to rise sharply, with long-term bond yields, often an indicator of investor […]]]>

Supply disruptions coupled with strong demand for goods, rising wages and rising commodity prices continue to challenge economies around the world, pushing inflation above central bank targets .

To contain price pressures, many economies began to tighten monetary policy, causing nominal interest rates to rise sharply, with long-term bond yields, often an indicator of investor sentiment, returning to pre- pandemic in certain regions such as the United States. states.

Investors often look beyond nominal tariffs and base their decisions on real rates, i.e. inflation-adjusted rates, which help them determine the return on assets. Low real interest rates encourage investors to take more risk.

Despite somewhat tighter monetary conditions and the recent uptrend, longer-term real rates remain deeply negative in many regions, supporting higher prices for riskier assets. Further tightening may still be needed to bring inflation under control, but this puts asset prices at risk. More and more investors could decide to sell risky assets because these would become less attractive.

Different perspectives

While short-term market rates have risen since central banks’ hawkish turn in advanced economies and some emerging markets, there is still a clear difference between policy makers’ expectations about when their benchmark rates will rise and where investors expect the crunch to end.

This is particularly evident in the United States, where Federal Reserve officials expect their main interest rate to hit 2.5%. That’s more than half a point higher than 10-year Treasury yields indicate.

This divergence between the views of markets and policymakers on the most likely path for borrowing costs is important because it means that investors can adjust their expectations of upward Fed tightening at a time more far and faster.

In addition, central banks could tighten more than they currently expect due to the persistence of inflation. For the Fed, this means that the main interest rate at the end of the tightening cycle could exceed 2.5%.

Implications of Debit Path Splitting

The path of policy rates has important implications for financial markets and the economy. Due to high inflation, real rates are historically low, despite the recent rebound in nominal interest rates, and are expected to remain so. In the United States, long-term rates are hovering around zero while short-term yields are deeply negative. In Germany and the United Kingdom, real rates remain extremely negative on all maturities.

interest rate

These very low real interest rates reflect pessimism about economic growth in the years to come, the global glut of savings due to aging societies and the demand for safe assets in a context of heightened uncertainty exacerbated by the pandemic and recent geopolitical concerns.

Unprecedented low real interest rates continue to boost riskier assets, despite the recent uptrend. Low real long-term rates are associated with historically high price-to-earnings ratios in equity markets, as they are used to discount expected future growth in earnings and cash flow. All other things being equal, the tightening of monetary policy should trigger an adjustment in real interest rates and lead to a rise in the discount rate, leading to a decline in stock prices.

Despite the recent tightening of financial conditions and worries about the virus and inflation, global asset valuations remain stretched. In credit markets, spreads are also still below pre-pandemic levels despite a slight recent widening.

After a banner year supported by strong earnings, the US stock market entered 2022 with a steep decline amid high inflation, growth uncertainty and a weaker earnings outlook. Therefore, we anticipate that a sudden and substantial rise in real rates could lead to a significant decline in US equities, especially in highly valued sectors like technology.

Already this year, the real 10-year yield has risen by almost half a percentage point. Stock volatility soared on heightened investor jitters, with the S&P 500 falling more than 9% for the year and the Nasdaq Composite measure dropping 14%.

Impact on economic growth

Our growth at risk estimates, which link downside risks to future economic growth to macro-financial conditions, could rise significantly if real rates suddenly rise and financial conditions tighten. Easy conditions have helped governments, consumers and businesses around the world weather the pandemic, but that could reverse as monetary policy tightens to curb inflation, moderating economic expansions.

In addition, capital flows to emerging markets could be threatened. Equity and bond investments in these economies are generally considered less safe, and tighter global financial conditions may lead to capital outflows, particularly for countries with weaker fundamentals.

Going forward, with persistent inflation, central banks are faced with a balancing act. Meanwhile, real interest rates remain very low in many countries. The tightening of monetary policy must be accompanied by some tightening of financial conditions. But there could be unintended consequences if global financial conditions tighten significantly.

A larger and sudden increase in real interest rates could lead to a disruptive revaluation of prices and an even larger sell-off in equities. Given that financial vulnerabilities remain elevated in several sectors, monetary authorities should provide clear guidance on the future direction of policy to avoid unnecessary volatility and preserve financial stability.

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5 banks that pay “strong buy” dividends – 24/7 Wall St. https://sendika12.org/5-banks-that-pay-strong-buy-dividends-24-7-wall-st/ Fri, 11 Feb 2022 12:10:24 +0000 https://sendika12.org/5-banks-that-pay-strong-buy-dividends-24-7-wall-st/ Invest February 11, 2022 7:10 a.m. The stock market is on a roll as interest rates soar because a huge increase would be dangerous for certain sectors. The Federal Reserve will begin raising rates in March and accelerate the tapering of the quantitative easing program faster than expected. After a horrific Consumer Price Index report […]]]>

Invest

The stock market is on a roll as interest rates soar because a huge increase would be dangerous for certain sectors. The Federal Reserve will begin raising rates in March and accelerate the tapering of the quantitative easing program faster than expected. After a horrific Consumer Price Index report for January, the question will remain as to how much the initial rate hike will be, as well as how many will follow.

One industry that loves higher interest rates is banking. When interest rates are higher, banks make more money by profiting from the difference between the interest they pay to customers and the interest they earn by investing.

We scoured our 24/7 research database on Wall St. for Buy-rated bank stocks that also pay the highest dividends. When you combine the benefits of rising interest rates and an economy that opens up and improves, the banking sector could be on the verge of an outsized total return. It is important to remember that no single analyst report should be used as the sole basis for any buy or sell decision.

Citigroup

This top banking stock has rallied nicely from lows, but looks set to rise in 2022, and it’s still trading well below the 52-week high. Citigroup Inc. (NYSE: C) is a leading global diversified financial services company that provides consumers, businesses and governments with a broad range of financial products and services.

Citigroup offers services such as consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. It operates and does business in more than 160 countries and jurisdictions in North America, Latin America, Asia and elsewhere.

Trading at a still very cheap price of 8.98 times estimated 2022 earnings, the stock looks very reasonable in what remains a volatile stock market and in a sector that has lagged significantly behind.

Investors in Citigroup shares receive a dividend of 3.02%. Oppenheimer’s $114 price target is a Wall Street high. The consensus target price is $78.89 and the shares closed Thursday trading at $67.50.

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TransUnion: Auto loan terms lengthen as interest rates rise https://sendika12.org/transunion-auto-loan-terms-lengthen-as-interest-rates-rise/ Fri, 04 Feb 2022 11:38:16 +0000 https://sendika12.org/transunion-auto-loan-terms-lengthen-as-interest-rates-rise/ As the Federal Reserve raises interest rates this year, the trend of longer terms for new and used auto loans will likely accelerate, says Satyan Merchant, Senior Vice President and Chief Automobile Business at TransUnion. Borrowers seek to compensate for the rise in prices due to scarcity. “The term is really the only thing,” he […]]]>

As the Federal Reserve raises interest rates this year, the trend of longer terms for new and used auto loans will likely accelerate, says Satyan Merchant, Senior Vice President and Chief Automobile Business at TransUnion.

Borrowers seek to compensate for the rise in prices due to scarcity. “The term is really the only thing,” he said in a phone interview.

“That’s one of the few affordability levers that’s left is to extend the term. Going back to the end of last year, we know the Fed is going to raise interest rates, so the rate isn’t as effective a lever,” Merchant says. (photo below left).

Average interest rates had been a positive factor in affordability. In the third quarter of 2021, average car loan rates were down slightly for new and used, Merchant says: 8.2% for used compared to 8.5% a year ago; 4.1% for new, against 4.3% a year ago.

Meanwhile, as new and used vehicle inventories persist, prices and monthly payments are expected to remain high in 2022.

The good news is that delinquencies of 60 days or more accounted for 1.59% of the total for Q4 2021. That’s virtually flat, in fact down slightly, from 1.61% a year ago.

The average amount financed on new vehicle loans reached a record $38,344 for the third quarter of 2021, an increase of 8.4% over the previous year. “That’s a significant number, reflecting higher vehicle prices and costs,” Merchant says. The third quarter is the last period for which TransUnion has detailed origination results.

For used vehicles, the average amount financed was a record $25,876 for the third quarter, up 22.3% from a year ago, according to TransUnion.

Average monthly car loan payments also hit record highs in the third quarter: $625 for new, up 8.4%; $472 for used, up 17.7%, according to the Chicago-based credit bureau.

Monthly payments would have been even higher, but borrowers took out a higher proportion of loans at 72 and 84 months. In the third quarter of 2021, loans of 84 months or more represented 17% of new vehicle loans, compared to 15% a year ago, or 13% in the third quarter of 2019 pre-pandemic.

For used vehicles, loans of 84 months or longer were 8% in the third quarter, compared to 5% a year ago, similar to 2019. Most of them were loans of 84 months, says Merchant.

Loans of 72 months to 83 months, mainly 72-month loans, accounted for 52% of used vehicle loans in the third quarter of 2021, compared to 48% a year ago, or 46% two years ago, according to Trans Union.

It’s also a positive that demand remains high and credit is readily available, Merchant says. “It’s an indication that consumers are ready to buy and finance whatever is available,” he says. “The merit is there; lenders are comfortable granting these loans.

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It’s time to prepare for higher interest rates https://sendika12.org/its-time-to-prepare-for-higher-interest-rates/ Sat, 29 Jan 2022 08:01:09 +0000 https://sendika12.org/its-time-to-prepare-for-higher-interest-rates/ Opinion Do you have variable rate debt? If so, you got a reprieve this week when the Bank of Canada decided to leave its overnight rate at 0.25%, an all-time low that was hit shortly after the start of the pandemic. However, with the inflation rate for the past 12 months at 4.8% and around […]]]>

Opinion



Do you have variable rate debt?

If so, you got a reprieve this week when the Bank of Canada decided to leave its overnight rate at 0.25%, an all-time low that was hit shortly after the start of the pandemic.

However, with the inflation rate for the past 12 months at 4.8% and around 75% of economists calling for a rate hike, expect rates to rise over the next month unless there is there is a significant drop in the next inflation report. .

Anyone with variable rate loans might want to consider their options for securing the interest rate slightly higher for an extended term. This will lock in today’s rates and provide predictability for payments in the future.

The most common variable rate debt is a line of credit, where the interest rate is based on the prime rate or the stated lending rate of a bank or credit union. The interest rate you pay will change as official rates change.

The biggest debt most people carry is a mortgage. Mortgage payments are usually the largest monthly payment for anyone who has had to borrow to buy a home. With a variable rate mortgage, an increase in interest rates can mean an increase in monthly payments and a significant effect on the family budget.

On the other hand, some mortgage agreements maintain a fixed payment when rates rise, but less of the payment is allocated to principal and more to interest. This means that you repay less of the loan during the current term.

The challenge, of course, is deciding how much more you want to pay for certainty. Given that rates are generally expected to rise, interest rates offered on longer-term mortgages have already risen, although variable rates have remained low.

For example, variable mortgage rates are generally between 1.55% and 1.75% this week. Locking for five years will cost you around 2.75%, assuming you have good credit and negotiate a better rate than the one posted.

On a $200,000 mortgage, locking in for five years could increase monthly payments by about $120, but would provide certainty for those five years.

If variable rates rise more than 1% over the next few years, locking in would seem like a wise move.

So how much will rates increase over the next two years? Sorry, I can’t tell you (and, of course, you wouldn’t want me to tell you anyway, because that would make the decision too easy…).

But the Bank of Canada and the US Federal Reserve announced that they would start raising rates in March. In the United States, the markets anticipate four increases in 2022.

These indicators suggest that anyone with an adjustable rate loan should do a bit of deciphering and budgeting. Don’t ignore the problem.

If you’re shopping for a home now, get your mortgage pre-approved (which you’ve probably already done) and make sure the approval includes an interest rate guarantee for at least 90 days. You can decide the duration when your purchase is complete, but at today’s prices.

As with all financial (and life) decisions, there are always unknowns, but careful thought and planning almost always gets you ahead.

Dollars and Sense is intended as an introduction to this subject and should in no way be construed as a substitute for personalized professional advice.

David Christianson, BA, CFP, RFP, TEP, CIM is a Fellow FP Canada™ (FCFP) recipient and has been repeatedly named one of Canada’s Top 50 Financial Advisors. He is a Senior Wealth Advisor and Portfolio Manager at Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of Managing the Bull, A No-Nonsense Guide to Personal Finance.

David Christianson

David Christianson
personal finance columnist

David has been a financial planner and life advisor since 1982, specializing in helping clients identify and achieve their most important goals and then managing all of their financial affairs, including investments.

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Why the stock market hates the idea of ​​higher interest rates https://sendika12.org/why-the-stock-market-hates-the-idea-of-%e2%80%8b%e2%80%8bhigher-interest-rates/ Thu, 27 Jan 2022 20:02:39 +0000 https://sendika12.org/why-the-stock-market-hates-the-idea-of-%e2%80%8b%e2%80%8bhigher-interest-rates/ Traders work on the floor of the New York Stock Exchange at the opening bell on January 25, 2022. TIMOTHY A. CLARY | AFP | Getty Images The specter of rising interest rates frightens the stock market. The Federal Reserve, the US central bank, is expected to raise its benchmark rate several times this year […]]]>

Traders work on the floor of the New York Stock Exchange at the opening bell on January 25, 2022.

TIMOTHY A. CLARY | AFP | Getty Images

The specter of rising interest rates frightens the stock market.

The Federal Reserve, the US central bank, is expected to raise its benchmark rate several times this year to rein in stubbornly high inflation. Fed Chairman Jerome Powell confirmed that likelihood on Wednesday.

The move would raise borrowing costs to nearly zero – where they have been since the start of the Covid pandemic – for businesses and consumers.

Forecasts caused stocks to fall in January.

The S&P 500 index is down about 9% for the year. At one point this week, the basket of US stocks fell below 10% – the first time this has happened since the initial pandemic crisis in March 2020. The index closed down 0 .2% on Wednesday after Powell’s remarks, wiping out earlier gains.

cooler economy

Why does the stock market care?

Broadly, the reasons seem to be twofold: a slowdown in the US economy and the prospect that other investments like bonds will become more attractive relative to stocks.

When the Fed raises its benchmark interest rate, banks and lenders also tend to raise borrowing costs. Mortgages, credit cards and other debt become more expensive, reducing consumer spending and demand. Companies are also paying more to finance their operations.

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Overall, this dampens the outlook for corporate earnings and reduces investor enthusiasm for buying their stocks.

“Tighter monetary policy will put pressure on economic activity,” according to Blair duQuesnay, certified financial planner and investment adviser at New Orleans-based Ritholtz Wealth Management. “And that’s by design.”

Too far, too fast?

The “purpose” of the Fed is to cool inflation. Consumer prices jumped 7% in December from a year earlier, the fastest pace since 1982.

But the stock market is not just reacting to a likely rate hike; equity swings have as much to do with uncertainty about the speed of the Fed’s acceleration.

“What the market doesn’t like are rapid changes in the currency landscape,” said David Stubbs, global head of multi-asset thematic strategy at JP Morgan Private Bank.

When inflation began to pick up in early 2021, Fed officials signaled it was likely temporary, the short-term result of a hyperactive economy emerging from pandemic hibernation.

Now their tone has changed as inflation has held well above the Fed’s long-term 2% target. Much of this appears to be because consumer demand for physical goods is outstripping supply, as Covid continues to disrupt manufacturers.

“Since the December meeting, I would say the inflation picture is about the same but probably slightly worse,” Powell said Wednesday. “I think to the extent that the situation deteriorates further, our policy will have to address that,” he added.

Investors fear an aggressive Fed response could dampen the economy – although Powell sought reassurance that the policy response will be “agile”.

Anxiety over the outcome is the main reason for market jitters, according to CFP Lee Baker, founder of Apex Financial Services in Atlanta.

“What are the trickle-down effects if the Fed raises rates too far, too fast? If that slows the economy, what does that do for [company] earnings? You kind of follow that domino,” Baker said. “If you’re talking about earnings, you’re talking about stocks.”

(This discussion relates to a broad basket of US stocks. It’s not true that all companies necessarily suffer if rates rise. Some may do better – like a bank, for example, which charges more to lend.)

Stocks lose their luster

If rates rise, investors could see more value in bonds, certificates of deposit and other assets considered less risky than stocks.

Returns on these conservative assets have been relatively paltry since the 2008 financial crisis, which led to a prolonged period of rock bottom interest rates to stimulate the economy.

May be [stocks] should sell regardless.

Blair duQuesnay

CFP and Investment Advisor at Ritholtz Wealth Management

Investors looking for yield were essentially “forced” to invest in stocks, Baker said.

The value proposition may change, if bond yields and CD rates rise in tandem with the Fed’s benchmark rate.

Other factors

Although it seems to play the most important role, Fed policy isn’t the only thing unnerving investors.

On the one hand, there is the prospect of war between Ukraine and Russia. These geopolitical tensions fuel further uncertainty – for example, how might the energy sector be affected if fighting breaks out?

Selling stocks can be a good thing, regardless of what’s causing it, duQuesnay said. The Federal Reserve discusses higher interest rates because the economy and labor markets are strong; a decline in stock prices could also further tie high corporate valuations to reality, she said.

“If you strip out all the outside news and information on the stock market, it’s been up double digits for three straight years,” according to duQuesnay. “Maybe it should sell despite everything else.”

]]> Inflation is more of a concern than rising interest rates | Opinion https://sendika12.org/inflation-is-more-of-a-concern-than-rising-interest-rates-opinion/ Mon, 24 Jan 2022 12:30:00 +0000 https://sendika12.org/inflation-is-more-of-a-concern-than-rising-interest-rates-opinion/ On December 15, the Federal Open Market Committee of the Federal Reserve made a significant change in monetary policy in response to rising inflation. The Committee accelerated the reduction of its bond-buying program to tighten the money supply and forecast three hikes in the benchmark federal funds rate in 2022. Both measures were more aggressive […]]]>

On December 15, the Federal Open Market Committee of the Federal Reserve made a significant change in monetary policy in response to rising inflation.

The Committee accelerated the reduction of its bond-buying program to tighten the money supply and forecast three hikes in the benchmark federal funds rate in 2022. Both measures were more aggressive than previous FOMC actions or projections. . To understand how these steps could affect the US economy and your investment portfolio, it may be helpful to take a closer look at the tools and strategy of the FOMC.

As the nation’s central bank, the Federal Reserve operates under a dual mandate to promote price stability and maximum sustainable employment. This is a balancing act, as an economy without inflation is usually stagnant with a low employment climate, while a booming economy with lots of jobs is susceptible to high inflation.

The FOMC, which is responsible for setting monetary policy under the Fed’s mandate, has set an annual inflation target of 2% based on the personal consumption expenditure price index. The PCE index represents a wide range of spending on goods and services and tends to lag behind the most widely circulated consumer price index. The Committee’s policy is to allow PCE inflation to operate moderately above 2% for some time to balance out periods when it is below 2%.

PCE inflation was generally well below the Fed’s 2% target from May 2012 to February 2021. But it has been rising rapidly since then, hitting 5.7% for the 12 months ending November 2021. ( By comparison, CPI inflation was 6.8%). Fed officials originally thought the inflation was “transitional” due to supply chain issues related to the opening of the economy. But the persistence and level of inflation over the past few months have led them to take corrective measures. They still believe inflation will come down significantly in 2022 as supply chain issues are resolved, and project a PCE inflation rate of 2.6% by the end of the year.

The FOMC uses two main tools in its efforts to achieve the appropriate balance between employment and prices. The first is its power to set the federal funds rate, the interest rate that big banks use to lend money to each other overnight to maintain required deposits with the Federal Reserve. This rate serves as a benchmark for many other rates, including the prime rate that commercial banks charge their best customers. The prime rate serves as a benchmark for consumer loan rates such as credit cards and auto loans. The FOMC lowers the funds rate to stimulate the economy to create jobs and raises it to slow the economy to fight inflation.

The Fed’s second tool is to buy Treasury bills to increase the money supply or to allow bonds to mature without buying them back to reduce the money supply. The FOMC buys Treasury bills through banks within the Federal Reserve System. This provides the bank with more money to lend to consumers, businesses, or the government (by buying more treasury bills).

When the economy shut down in March 2020 in response to the COVID pandemic, the FOMC took extraordinary stimulus measures to avoid a deep recession. The Committee cut the federal funds rate to its lowest range of 0% to 0.25% and launched a bond-buying program that reached an all-time high of $75 billion a day in bonds. of the Treasury.

In June 2020, this amount was reduced to $80 billion per month and remained at this level until November 2021, when the FOMC decided to end the program at a rate that would have ended it by June. 2022.

The December decision accelerated the slowdown, so the bond-buying program will end in March 2022, when the FOMC will likely consider raising the federal funds rate. While it is uncertain when an increase will occur, the December projection is that the rate will be between 0.75% and 1.00% by the end of 2022 and between 1.50% and 1.00% by the end of 2022. 75% by the end of 2023.

The Fed’s current plan aims to slow inflation by returning to a more neutral monetary policy; it represents confidence that the economy is strong enough to grow without extreme stimulus. If these are the only actions required, the impact may be relatively mild. And the first rate hike will probably only come in the spring.

Still, rising interest rates are making borrowing more expensive, which could impact corporate profits and consumer spending. And rates have an inverse relationship with bond prices. As interest rates rise, the prices of existing bonds fall (and vice versa), because investors can buy new bonds by paying higher interest. On the other hand, higher rates on fixed income securities could help investors, especially retirees, who rely on fixed income investments.

As 2022 begins, inflation is a far bigger concern than rising interest rates, and it remains to be seen whether the Fed’s planned rate hikes will be enough to bring prices under control. For now, it may be best not to overreact to the change in policy and maintain an investment portfolio suited to your long-term goals.

]]> US equities jittery, it’s not just interest rates https://sendika12.org/us-equities-jittery-its-not-just-interest-rates/ Sat, 22 Jan 2022 18:04:54 +0000 https://sendika12.org/us-equities-jittery-its-not-just-interest-rates/ Is an Omicron slowdown spreading through the US economy? Hiring and spending were weak in November and December. Interest rates and inflation are significantly higher in the new year. Stock traders are worried. All three major US stock averages are down significantly this year and the Nasdaq has corrected from its November high. Concerns are […]]]>
  • Is an Omicron slowdown spreading through the US economy?
  • Hiring and spending were weak in November and December.
  • Interest rates and inflation are significantly higher in the new year.

Stock traders are worried. All three major US stock averages are down significantly this year and the Nasdaq has corrected from its November high.

Concerns are mounting. Economic growth is threatened. Supply chains are creaking, consumers are unhappy, interest rates, oil and consumer prices are rising, and a Russian invasion of Ukraine and subsequent sanctions could tip the global economy into the recession.

The Dow is down 5.86% this year and 6.89% since its January 4 high. The S&P 500 has lost 8.35% since the start of the year and 8.69% since its all-time high on January 3. The NASDAQ is down 12.53% in the new year and 14.25% from its high of November 19.

Treasury yields retreated from their two-year, Federal Reserve-inspired highs mid-week, but 2-, 10-, and 30-year Treasuries jumped 28, 26, and 18 basis points, respectively, over the course of the week. of the new year. Even Bitcoin (BTC), that child of utopia and speculation, comes to a banal conclusion from its bubble excess.

NASDAQ

CNBC

U.S. Treasury yields hit a two-year high this week, with the 10-year hitting 1.902% on Wednesday, but closed at 1.827%, then fell to 1.771% on Friday, down 13 basis points in two days. The 2-year traded at 1.059% on Tuesday to close at 1.038% and by Friday’s close at 1.016% was down just over four points. The yield on the long (30-year) bond peaked at 2.19% on Tuesday and ended the week at 2.085%, a loss of 10.5 basis points.

Bitcoin (BTC) has been falling since its close high of 67,529.05 on November 8. Since then, it has fallen 45.64% overall and 20.54% in the three weeks of January trading, including a loss of 9.83% on Friday.

BTC

US economic conditions

According to a Reuters poll of analysts, the U.S. economy grew at an annualized rate of 5.6% in the fourth quarter of 2021, more than double the 2.3% pace of the previous three months. The Atlanta Fed’s GDPNow model predicts the expansion was 5.1%. The Bureau of Labor Statistics’ first fourth quarter gross domestic product (GDP) estimate will be released on Thursday, January 27.

The question for traders and investors is not about growth in the last quarter or all of 2021, but the direction of the economy in the first half of 2022.

How the pervasive pandemic, inflation, labor and manufacturing component shortages, and supply chain misery, have hurt economic growth and consumers’ willingness to spend and sustain expansion afloat.

Omicron’s restrictions have been largely limited to mask-wearing and, in a few cities like New York, mandatory vaccination papers for restaurants, gyms and other indoor public spaces. There were no business closures and the economic effects were expected to be limited to lower levels of ridership.

Nevertheless, there are some signs that the US economy is slowing down.

Retail sales were dismal in December, falling 1.9% and the three-month holiday season was flat at 0.1%. The control group, which mimics the consumption component of the GDP calculation, was even worse, down 3.1% in December and 1.8% for the holiday season.

Consumer inflation hit a four-decade high of 7% in December. With the Producer Price Index (PPI) at 9.7%, US households are in even more trouble.

The consumer price index (CPI) has been above 5% since last May. Wages from Average Hourly Earnings (AHE) lost 2.3% to inflation in 2021. For many low-income American families, the growing pain of inflation is considerably worse than the headline rate of the CPI. Spending on many items, from gasoline to steaks and used cars, has risen much faster than the general inflation rate. A gallon of regular gasoline, an inflexible necessity for most Americans, is up 47% from January 2021 and 58% from November 2020. Inflation has outpaced wage gains for most people. With no end of price hikes in sight, the inevitable spending contraction may have already begun.

Hiring was much weaker at the end of the year than expected despite the record number of vacancies. Non-farm payrolls added only 488,000 workers in November and December, barely half of the 950,000 forecast.

Non-agricultural payroll

FXStreet

Initial unemployment insurance claims began to rise. Unemployment insurance claims were 286,000 in the week of Jan. 14, well above the previous 231,000 and the third straight increase. Jobless claims jumped 43% from 200,000 on Dec. 24. They are still low by historical standards, but the increases likely indicate that the Omicron wave was not without economic impact.

Consumer optimism has been mired in near-recessionary levels for six months. Michigan’s Consumer Confidence Index fell to 70.3 in August and has not recovered.

Michigan Consumer Sentiment

FXStreet

Fewer people working means less income generated for consumption. Disgruntled consumers quickly lose their incentive to bet on the future and spend. Inflation forces families to allocate more resources for the same goods or less. Real wages have fallen in 2021. If these trends continue much longer, the consumer base of the US economy is at risk.

The economic keys are in the hands of American households. If consumers begin to restrain their spending, the logic of the recovery fades quickly.

Conclusion

Much of the decline in equities so far has been driven by rising interest rates. The much steeper decline in NASDAQ is due to its predominant technology mix being heavily dependent on debt financing, the costs of which are suddenly much higher.

However, fears that the first signs of an economic slowdown have begun are growing rapidly.

Falling or halting US economic growth, continued weakness in job creation, rising inflation and layoffs, falling consumer spending, supply chain breakdown, product shortages, the list of current issues is long. Two of them are enough to undermine stocks, all together are a formula for a market-wide correction.

If the US economy weakens in the first half of the year, the equity sellers of the past two weeks will have been prescient.

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