Tag Archives: Federal Interest Rates

Your Money: What another U.S. interest rate rise means for you

A woman shows U.S. dollar bills at her home in Buenos Aires, Argentina August 28, 2018. REUTERS/Marcos Brindicci

By Beth Pinsker

NEW YORK (Reuters) – If you have credit card debt, take the next U.S. Federal Reserve move to raise interest rates as a big, flashing warning sign.

Short-term rates are the most affected when the government nudges up the federal funds rate, which the Fed is expected to do on Wednesday, likely raising it a quarter point. That will be the third move in 2018 and the eighth since the Fed started inching rates up from effectively zero in December 2015. One more hike is expected before the end of the year.

“That means your 15 percent interest rate on a credit card is now a 17 percent rate,” said Greg McBride, chief economist for Bankrate.com. “If you haven’t already, it’s important to take steps to insulate yourself.”

The message to get out of debt is a hard sell to the American households holding nearly a trillion dollars in credit card debt, according to Nerdwallet.com’s 2017 survey.

Many pay only the monthly minimum payments, incurring interest charges that balloon their balances.

It is a “treadmill to nowhere,” McBride said.

On a card with a $10,000 balance, paying the minimum (interest plus 1 percent of the balance) will cost you $12,000 in interest and take 27 years to pay off at a 15 percent rate. Bump that up to a 17 percent interest rate, and you pay $13,600 in interest – plus, it would take an extra year to be out of debt, according to Bankrate.com’s calculator (https://bit.ly/2v4vaMm).

Experts say you should push your credit card debt to a zero-percent balance transfer card. You can still get offers for as long as 21 months, with fees, according to Nick Clements, co-founder of the money advice site MagnifyMoney.com. Then pay down as much money as you can to reduce the debt in that time period.

It is also a good idea to explore the personal loan market, where rates are rising but not as fast because of competition, Clements said. These loans have short repayment periods, typically under five years.

AVOID HOME EQUITY LOANS

If you are in debt and own a home, now is not necessarily the best time to be tempted with a home equity loan to pay off debt, said Tendayi Kapfidze, chief economist of housing site LendingTree.com.

The variable interest rates of a home equity loan are also affected by the Fed raising interest rates, although not as highly correlated.

The biggest risk? Cashing out home equity to pay down debt, but then as soon as you are even, digging another financial hole and not having anything left to tap.

“You need a broader plan to control your spending,” said Kapfidze.

For those looking to buy a house or refinance, the latest Fed move will have a slower impact. Other things influence mortgage rates along with the Fed funds rate, but those factors are heading in the same direction.

Kapfidze does not expect any large mortgage rate moves in the near term, but that, he said, is because there had already been a runup in recent weeks.

Savings rates are the last to move because of Fed actions. Banks raise rates on what they are selling before they raise rates on what they are buying, Kapfidze said.

But if savers turn into shoppers, they will find some better deals in the coming months. Online banks are being particularly aggressive about rates for certificates of deposit, with new players like Goldman Sachs’ Marcus, Clements said.

Investors should look at the yield on their fixed income investments, which might be around 3 percent and compare it to a 12-month CD for 2.5 percent.

“If you think about it, low rates mean people take more risk. As rates are rising, people should be able to take less risk,” Clements said.

(Editing by Lauren Young and Bernadette Baum)

U.S. private jobs, consumer spending data support Fed rate hike

People shop at The Grove mall in Los Angeles

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. private employers stepped up hiring in November and consumer spending increased last month, the latest signs of economic strength that could further cement the case for an interest rate hike from the Federal Reserve next month.

The data on Wednesday also showed income rising solidly and savings climbing to a seven-month high in October, positioning households to boost spending in the future.

“There is nothing in today’s reports that put a roadblock in front of a Fed rate hike in December. The economy continues to move ahead powered by the American consumer who has got the income to both spend and save for a rainy day,” said Chris Rupkey, chief economist at MUFG Union Bank in New York.

The ADP National Employment Report showed that private payrolls increased by 216,000 jobs this month, well above economists’ expectations for a gain of 165,000 jobs. The report is jointly developed with Moody’s Analytics.

The ADP figures come ahead of the Labor Department’s more comprehensive employment report on Friday, which includes both public and private sector payrolls. Economists polled by Reuters are looking for nonfarm employment to have risen by 175,000 jobs in November after increasing by 161,000 jobs in October.

In a separate report, the Commerce Department said consumer spending, which accounts for about 70 percent of U.S. economic activity, increased 0.3 percent after an upwardly revised 0.7 percent gain in September. Spending in September was previously reported to have risen 0.5 percent.

A third report showing a marginal increase in contracts to buy previously owned homes last month, however, put a wrinkle in an otherwise brightening economic outlook.

The consumer spending and private hiring reports added to data on residential construction, home sales, inflation and manufacturing that have suggested the economy sustained its momentum early in the fourth quarter after growing at its quickest pace in two years in the July-September period.

The government reported on Tuesday that gross domestic product increased at a 3.2 percent annual rate in the third quarter, driven by strong consumer spending and a surge in soybean exports.

A strengthening economy, together with a labor market that is near full employment could make the Fed comfortable to hike rates at its Dec. 13-14 policy meeting. The U.S. central bank raised its overnight benchmark interest rate last December for the first time in nearly a decade.

The dollar was trading higher against a basket of currencies, while prices for U.S. government bonds fell. Stocks on Wall Street generally rose, with both the Dow Jones industrial average and the S&P 500 index hitting record intraday highs.

INFLATION GAINING

Consumer spending could get further support next year if U.S. President-elect Donald Trump’s proposals to cut taxes and boost spending are approved by Congress.

With consumer spending firming, inflation continued to gain in October. The personal consumption expenditures (PCE) price index rose 0.2 percent after similar increases in both August and September. In the 12 months through October the PCE price index rose 1.4 percent, the biggest advance since October 2014, after increasing 1.2 percent in September.

Excluding food and energy, the so-called core PCE price index gained 0.1 percent after rising by the same margin in September. That left the year-on-year increase in the core PCE at 1.7 percent in October. The core PCE has increased by that same margin for three straight months.

The core PCE is the Fed’s preferred inflation measure and is running below its 2 percent target.

“The bottoming out in energy prices earlier this year has contributed to stronger overall inflation,” said Gus Faucher, deputy chief economist at PNC Financial in Pittsburgh.

“Inflation will continue to pick up over the next couple of years. Stronger wage growth as the labor market continues to tighten will lead firms to raise prices, as will the pass-through of higher energy prices throughout the broader economy.”

The sustained uptick in price pressures, however, curbed the gain in inflation-adjusted consumer spending, which increased 0.1 percent last month after rising 0.5 percent in September. That suggests some moderation in consumer spending this quarter from the third quarter’s solid 2.8 percent pace.

Overall consumer spending in October was supported by a 1.0 percent increase in purchases of long-lasting manufactured goods such as automobiles. Spending on services fell 0.2 percent.

Personal income rose 0.6 percent last month after increasing 0.4 percent in September. Wages and salaries advanced 0.5 percent for a second straight month.

Savings increased to $860.2 billion, the highest level since March of this year, from $814.1 billion in September.

(Reporting by Lucia Mutikani; Additional reporting by Dan Burns and David Lawder; Editing by Paul Simao)

Feds can be ‘gentle’ in hiking rates, New York FED President says

William Dudley, President of the New York Federal Reserve Bank, speaks at Brooklyn College in the Brooklyn borough of New York,

By Jonathan Spicer

ALBANY, N.Y. (Reuters) – The Federal Reserve can be “gentle” in removing monetary stimulus since U.S. inflation remains low and the economic expansion could last five or more years, one of the most influential Fed policymakers said on Wednesday.

“We’re at a point where the economic expansion has plenty of room to run,” said New York Fed President William Dudley, echoing Fed Chair Janet Yellen’s message last month after the central bank decided to leave interest rates unchanged at near a record low of 0.25-0.5 percent.

“Inflation is a little below our target, rather than above our target, so I think we can be quite gentle as we go in terms of gradually removing monetary policy accommodation,” said Dudley, a close ally of Yellen and a permanent voter on policy.

The U.S. central bank lifted rates in December for the first time in nearly a decade and has stood pat since, as market volatility and overseas events were seen to threaten the U.S. economy, which slowed in the first half of the year. Still, most Fed officials still expect to raise rates again before year end.

“I think this economic expansion can last a good while longer,” Dudley told a business council gathering, adding one reason the Fed has been patient in mulling a rate hike this year is that “slack,” or underutilized workers, remain in the U.S. labor market.

The Fed, he said, is aiming for a best-case scenario in which the economy grows at a “moderate rate over the next five to 10 years” while unemployment remains around 5 percent or a bit lower “and just have a very long-lived economic expansion.”

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)