It came against the backdrop of the United States Federal Reserve aggressively tightening its monetary policy six times in 2022 alone. The domestic inflation crossed the 8% mark, before cooling down to 7.7% in November.

Not only the US, central banks from Argentina, India, the Philippines, Brazil, Indonesia, South Africa, UAE, Sweden, Switzerland, Saudi Arabia, Britain, and Norway too have been following similar steps recently.

While fed rate hikes have strengthened the dollar, the impact hasn’t been a kind one. Since 40% of global transactions are done in dollar, African, Latin American, and Southeast Asian countries are spending more on imports and debt payments.

Emerging markets are facing the heat as well, as investors are flocking back to the US markets, with expectations of getting better returns, amid a strong dollar. Euro is the only currency maintaining some parity with the dollar till now.

Understanding Rationale Of Fed Interest Rate Hikes
Monetary policy adjustments from the Federal Reserve cater to two conditions set by the United States Congress, keeping domestic consumer prices stable and bringing down the unemployment ratio.

So, they raise interest rates in case the inflation rate goes up too high. If it’s a high joblessness kind of scenario, they simply cut the policy rates. Other factors which the central bank keeps in mind, while forming policies, are GDP figures, consumer and industrial behaviors, financial crises, and extraordinary situations like pandemics, war, terrorist attacks, etc.

Since the United States possesses the world’s largest economy, its monetary policy changes affect global markets as well, especially the small, emerging, and developing ones.

Post-2008, while the fed rates were mostly eased to aid economic recovery, they were kept like that till 2014, in order to boost investments and consumer spending. After 2015, fed rate hikes became prominent again. And every time, policy rates were raised, the dollar got stronger, affecting credit markets, commodities, stocks, and bonds.

Another important factor to look at here is the US Treasury Bond values, which are directly connected with the monetary policy changes. As per the movement of bond rates/Treasury yield curves, interest rates within US and global markets get set. If the interest rates go up, investors put their money in the US market, putting pressure on emerging and developing economies to stay attractive. If they fail, unemployment rates go up in those parts of the world.

As per Investopedia, dollar-denominated global debt currently stands at USD 9 trillion, and emerging markets have some USD 3.3 trillion in that. For example, countries like Turkey, Brazil, and South Africa have trade deficits, and they finance their Current Account Deficits (CAD) by building up dollar-denominated debt. With a stronger dollar, the exchange rate between these nations and the US widens, leading to the ballooning of debts.

With global credit markets following US Treasury Bonds, an increasing interest rate means a hike in credit costs as well. From bank loans to mortgages, everything gets expensive, affecting consumer behavior adversely.

As mentioned in the article already, 40% of global trade happens through dollars. A stronger dollar means oil, gold, and cotton getting expensive, hurting the economies which have huge reserves of natural resources and rely on the commodity. With the value of their principal industry products declining, their available credits shrink.

However, growth in interest rates boosts the US demand for global products, aiding foreign trade and corporate profits.

Decoding 2022 Scenario
As the US economy was recovering from the aftershocks of the COVID pandemic, the Fed continued to hold the funds’ rate at around zero till the first quarter of 2022. It was also buying billions of dollars of bonds to boost the economy.

All these were happening despite the Consumer Price Index (CPI) steadily rising since 2021. It reached its record high of 8.2%, before cooling down too. So, yes, inflation has been there in the United States and it has been at its highest since 2021.

Also worth mentioning is Joe Biden’s USD 2.5 trillion stimulus program, which succeeded his predecessor Donald Trump’s USD 900 billion initiatives to deal with COVID fallouts. Both programmes have driven the upward growth of CPI indexes.

Now, as the Fed stepped in, they went for an aggressive series of rate hikes, coinciding with the global supply chain disruption due to the Russia-Ukraine war, thereby contributing more to the pre-recession build-up. Once the Fed decided it was time to do something about inflation, it moved forcefully and raised the fed funds rate by three percentage points in about six months.

The latest hike has been by 75 basis points, taking the interest rate to 3.75-4.0%. This is the highest one since the 2008 financial crisis, affecting sectors like mortgage, pension, and student loans, amid volatile job and manufacturing markets.

Can Rate Cut Be An Option?
Although the Fed officials have hinted about things possibly improving in 2023, the latest World Bank warning means the protectionist approach from the Joe Biden government needs a relook.

Professor Michael Parkin, member of the University of Western Ontario’s Economics Department, during an interaction with International Finance, said, “The US Federal Reserve interest rate increases of 2022 look too small compared with those of the 1970s that successfully lowered inflation. Over the six months from February to August 1973, the federal funds rate rose from 6% to 10.5%, and over the seven months from August 1979 to April 1980, it almost doubled from 11% to 19%.”

Talking about the Fed’s Monetary Policy stance, professor Michael Parkin remarked, “The tightening of 2022 looks small in two dimensions. First, the overall increase is smaller at 3.75 percentage points compared to 4.5 and 8 percentage points. Second, the level is a long way below those of the 1970s at 3.75% compared to 10.4 and 19.4%.”

Can Fed’s Latest Steps Be Enough To Conquer Ongoing Bout Of Inflation?
“No one knows the answer to this question. But we can get some clues to the answer by looking at the outcomes of the earlier monetary tightening in the 1970s. In February 1973, when Fed Chairman Arthur Burns started tightening, the inflation rate was 3.9% and the federal funds rate was 6.6%. Over the next six months, inflation climbed to 7.4% and the funds rate rose to 10.5%,” professor Michael Parkin added, while giving a case study of a similar situation in the 1970s.

“Despite the rising interest rate, inflation soared and by 1974 end, it had reached 12.2%. After raising the federal funds rate again to 13% in mid-1974, inflation fell to 5% but not until the end of 1976. On the road to lower inflation, the unemployment rate increased to peak at 9% in May 1975,” he said.

Drawing a parallel between the situation then and now, professor Michael Parkin remarked, “If the time lags in the 1970s repeat in the 2020s, we can expect it to take many months before inflation falls. And through the period of falling inflation, we can expect the unemployment rate to keep rising. While there are many differences between then and now, there is one striking difference that may turn out to be crucial. In the 1970s, when interest rate increases eventually lowered inflation, the interest rate exceeded the inflation rate. In 2022, the gap is reversed.”

Professor Michael Parkin also believes that if history repeats this time around, inflation will not fall until the interest rate is raised to a level that exceeds the inflation rate.

So given his prediction, the road ahead of the fed is a tough one. Not only the US, but the same situation also applies to other central banks across the world as well. Recession is looming large and despite multiple warnings from the World Bank, the phenomenon of rate hikes will continue.

However, with the latest US figures suggesting the cooling down of inflation, all the other central banks will be hoping for things to improve in the coming months so that monetary policy easing from the Fed lessens the pressure on the global economy.

The post US’ inflation fight: What lies ahead? appeared first on International Finance.

The report states that mortgage debt had grown to USD 11.39 trillion. The origination of purchase mortgages increased by 7% in the second quarter as a result of increased borrowing limits. The US central bank started raising interest rates in March as it ended the easy money policies it had maintained during the worst of the COVID-19 pandemic to safeguard an economy that had been severely harmed by lockdowns and other protective measures.

Since then, the Fed’s benchmark overnight lending rate has been increased by 225 basis points as a result of persistently high inflation that has reached four-decade highs. The goal range for that rate is now between 2.25% and 2.50%. The central bank is expected to continue raising interest rates for the rest of the year in an effort to stop the inflation that is draining Americans’ wallets. Over the past two and a half years, prices for expensive commodities like homes and cars have risen sharply as demand has outpaced supply. As a result, the average new purchase origination dollar amount for both of those goods has increased by 36% since 2019.

The invasion of Ukraine by Russia led to an increase in global food and energy prices. According to the New York Fed, total household debt in the United States has increased by more than USD 2 trillion since the fourth quarter of 2019, right before the pandemic started. In the second quarter, credit card balances rose by USD 46 billion, ranking among the highest the Fed has seen since 1999, while auto loan originations increased by USD 33 billion to USD 199 billion. According to the research, this was mostly due to higher origination rates per loan as opposed to a bigger number of loans.

“All debt types saw sizable increases, with the exception of student loans. In part, the growth in each debt type reflects increased borrowing due to higher prices,” the regional Fed bank’s researchers said. The average contract rate on a 30-year fixed-rate mortgage has shot up by more than 240 basis points since the turn of the year to levels not seen since 2008, according to the Mortgage Bankers Association. It now stands at 5.74%.

New York Fed researchers said on a call that delinquency rates were increasing to more typical pre-pandemic levels seen in 2019 that are still historically low. “But we have to keep an eye on that because if they rise above that we’ll be a little more concerned about the state of household balance sheets. The concern is where we are heading,” New York Fed researchers said.

Consumers’ credit soaring?

Americans have racked up record-high credit card debt. According to the doomsayers, this demonstrates unequivocally how difficult it is for households to make ends meet in the face of the highest inflation rates since the early 1980s. The truth is not quite so bad. Consumers have a long runway until mounting debt commitments become an issue because their finances are actually in some of the greatest shapes they have ever been in. It is simple to comprehend anxiety. According to data from the Federal Reserve, there have been four of the largest monthly increases in consumer credit on the record. Over the last six months, outstanding balances have increased by an average of USD 33.1 billion each month. To put that into perspective, the monthly average for all of 2019 was USD 15.4 billion, or slightly less than half that sum. Although the figures are indeed startling, there are signs that they are largely healthy and normal.

First, think about revolving credit, such as credit cards. Early in the COVID-19 pandemic, this type of financing rapidly declined as customers used extra savings and stimulus money to settle bills rather than spending since they had fewer options. As long as the quantity of revolving credit outstanding stays below the pre-pandemic trend line, consumers will primarily just be playing catch-up. The financial system as a whole isn’t even close to that degree now, but if it bursts past the trend that would suggest wider inflation-induced trouble. Of course, many households with lesser incomes are impacted by the sharp increase in costs and are being compelled to use their credit cards. But there are no indications that a widespread debt issue is developing that could harm the economy.

The situation with non-revolving credit is a little different. That includes financing for other expensive items like boats and trailers, which saw an increase in popularity during the pandemic. The majority of those loans are for education and cars. Automobiles, which make up 39% of non-revolving credit and 30% of consumer credit, appear to be the main culprit for the category’s pandemic-era expansion that outpaces the trend. Put that down to the startling rise in car prices in 2021 and, possibly to some extent, the increased interest in car ownership brought on by concerns about public health. Many people who earlier used public transportation now choose to drive because it offers better social isolation.

Although considerably smaller than the auto sector, the “other” category of non-revolving loans, which includes the aforementioned maritime toys, was the true driving force behind the loan increase. Early in the COVID-19 pandemic, boating interest skyrocketed in coastal areas as a result of social distance rules. However, that category is too small to have a significant effect. Additionally, boat owners often don’t live paycheck to paycheck, so exclude that possibility from the list of potential causes of a structural leverage crisis. The non-revolving credit segment would contain any cause for concern in the consumer credit data. However, that segment’s growth reached its apex earlier in the year and began to moderate in the most recent report.

Finally, the household debt service ratio, which measures how much of a household’s income is used to pay off debt, is at or near historic lows. That’s because there will be opportunities to refinance debt at cheap rates in 2020 and 2021, as well as because the government poured in trillions of dollars during the COVID-19 outbreak. Even if inflation is terrible, homeowners with fixed-rate mortgages—which make up the vast majority of home loans—might have benefited from pay raises while their greatest liabilities stayed the same or were renegotiated at lower rates. Even when you combine credit card debt with mortgage debt, the overall load is still incredibly low.

Household debt history

Historical data might shed light on the current condition. Since the middle of the 1980s, the ratio of household debt to total disposable income has increased significantly. By the turn of the century, the percentage had risen from 60% to 130%. This excessive family debt was a major cause of the financial catastrophe in 2008.

After fast declining from its 2008 peak, household debt stood at around 92% by the time of the pandemic. In a report for Barons, economist J.W. Mason makes the case that this growth in debt was actually caused by high-interest rates set by Fed Chairman Paul Volker in the 1980s rather than an increase in borrowing. Mason claims, “With higher rates, a level of spending on houses, cars, education and other debt-financed assets that would previously have been consistent with a constant debt-income ratio, now led to a rising one.”

After the 2008 financial crisis, interest rates were low. Household debts decreased as a result of this, along with decreased borrowing and defaults. Contrary to common assumption, higher interest rates combined with excessive borrowing appear to be the main contributors to today’s rising debt burden rather than excessive borrowing alone. Mason comes to the conclusion that a decrease in borrowing and low-interest rates is both necessary for a decrease in household debt. The Fed’s evident commitment to continuing rate hikes suggests that household debt will increase in the near- to medium-term.

The post US households sinking in debt appeared first on International Finance.

In mid-September, the average interest rate for a 30-year mortgage reached 6.02%, which is significantly higher than it was a year ago.

The relocations make housing affordability issues worse for families wanting to purchase a home.

The increase coincides with the aggressive rate hikes made by the US central bank in an effort to ease the pressures that are driving up inflation throughout the economy.

The Labor Department reported in mid-September that United States consumer prices increased by 8.3% in the year ending in August, the quickest rate in almost 40 years.

Since the result was greater than anticipated, more people now anticipate that the Federal Reserve will keep aggressively hiking interest rates. Mortgage rates have increased as a result of the changes.

Freddie Mac chief economist Sam Khater, “Rates continued to rise alongside hotter-than-expected inflation numbers this week, exceeding 6% for the first time since late 2008.”

By increasing borrowing costs, officials hope to reduce demand from consumers and businesses, easing pressure on prices.

However, even though increased interest rates have slowed sales in the housing market, home values are still rising.

In July, the average United States home cost over USD 400,000, an increase of almost 10% from the previous year.

Sam Khater said, “Although the increase in rates will continue to dampen demand and put downward pressure on home prices, inventory remains inadequate.”

For the United States housing market, which has benefited from relatively cheap borrowing costs since 2008 when the US central bank reduced rates during the financial crisis to support the economy, the rise in mortgage rates represents a striking change.

When the COVID pandemic struck in 2020, the Federal Reserve again lowered interest rates, which helped to spark a wave of irrational property buying that saw unprecedented price hikes.

When the bank began to quickly hike rates in March in response to indications that rapid price increases were becoming entrenched throughout the economy, that era came to an end.

In reaction to the slowdown, some mortgage brokers and realtors have already announced job cuts.

The post Home mortgage rates skyrocket in United States as inflation soars appeared first on International Finance.

The article pointed out that “after months of gloom, Americans are finally starting to feel better about the economy and more resigned to inflation. Americans are making small changes — buying meat in bulk, for example, or shifting more of their shopping to discount chains — suggesting that many families are learning to deal with higher prices.”

The report emphasised gas prices dropping from a record high of USD 5 and used similar talking points as the White House, stating that the “25 percent cut in expenses has been meaningful for many Americans.”

“Overall inflation, meanwhile, has eased slightly — prices remained flat in July, though they’re still up 8.5 percent from a year ago — as a result of aggressive interest rate hikes by the Federal Reserve,” the Washington Post piece stated.

Omaha native Nils Haaland said, “Soaring prices for fuel and food this summer forced him and his wife to stop dining out, postpone summer travel and buy less meat. Although prices are still relatively high, he says he feels less worried that inflation will continue to spiral out of control.”

It was reported that although Americans still rank inflation as their top issue in the run-up to the midterm elections, this percentage has decreased.

The Fed’s latest “beige book” report revealed that many households have switched to less expensive goods and are allocating more of their spending toward necessities like food. That has undoubtedly been the case at Walmart, where management claim to have noticed an increase in the number of middle- and high-income customers.

The post Americans finally learn to deal with Inflation appeared first on International Finance.

In the second quarter, credit card balances climbed by USD 46 billion, or 5.5% from the first quarter, and the number of new credit card accounts also increased.

The highest such surge in more than 20 years was the 13% increase between the second quarters of 2021 and 2022.

Researchers for the New York Fed said that although Americans are borrowing more, increasing prices are mostly to blame for the rise in borrowing.

The figures give new context to the recent Bureau of Economic Analysis’ consumer spending data, which showed that spending increased by 1.1% in June.

Gas costs, which rose beyond USD 5 per gallon in many areas of the nation in the second quarter, and inflation, which reached 9.1% year over year in June, were likely the causes of the increasing debt, which is in line with the conclusions of the New York Fed.

The second quarter saw a rise in new credit card accounts of 233 million, which was a high not seen since 2008. However, researchers for the New York Fed noted that credit card debt delinquency rates are still quite low.

Although it has increased slightly, it is still below pre-pandemic levels. The overall amount of outstanding credit card debt increased by USD 100 billion from the same period last year to USD 890 billion in the second quarter.

According to a recent study, household debt rose by USD 312 billion, or 2%, in the second quarter compared to the first. Balances are now USD 2 trillion higher overall than they were prior to the outbreak.

The largest increase in mortgage amounts was observed, which is consistent with the central bank’s rising interest rates to temper the scorching hot housing market. Auto loan balances increased as well, rising by USD 33 billion in the second quarter, keeping pace with gains seen since 2011, as per the report.

The post Rising inflation: Credit cards come to the rescue of Americans appeared first on International Finance.

He made it clear that a similar rate hike would be expected at the next meeting in July unless price rises softened. “We at the Fed understand the hardship inflation is causing. Inflation can’t go down until it flattens out. That’s what we’re looking to see”, Powell said.

The raise will bring the Federal Reserve’s benchmark federal-funds rate to a range between 1.5% and 1.75%, with officials predicting that rates will rise to at least 3% in 2022.

The move will put more pressure on central bankers all over the world to keep up with the Fed’s all-powerful policies.

The Hong Kong Monetary Authority, which automatically follows the Fed, lifted its base rate to 2% on June 16, while the Bank of England is expected to raise its base rate for the fifth time, with forecasters predicting a 0.25 percentage point boost to 1.25%.

Powell admitted that the Fed’s efforts to curb spending are likely to result in job losses. The Fed forecasts unemployment to climb to 4.1% from the current rate of 3.6% as it strives to bring inflation back down to its goal rate of 2%.

The post US Fed raises interest rate by 0.75 percentage-point, highest since 1994 appeared first on International Finance.

A recession seems inevitable, considering food and fuel prices are surging. April’s consumer prices were 8.3% higher than in 2021. Annual inflation is 6.2%, excluding food and fuel prices. War in Europe and China’s rampant lockdowns have disrupted global supply chains and created scarcity and price rises. Meanwhile, the American labour market is better than before, with two new jobs opening for every unemployed individual. It hasn’t been this good since the 1950s. Goldman Sachs’ reported annual wage growth of 5.5% is also alarming companies that can’t afford it unless they pass those prices onto their consumers.

The Fed is trying to douse the fire by aggressively hiking interest rates to more than 2.5% by 2023. They hope this will bring inflation down by 2%. However, economists speculate that hiking interest rates will more often shrink the economy. The Fed has raised interests seven times since 1955, and after six of them, a recession followed. The only exception was the 1990s, as the labour market was balanced and inflation was low.

The coming recession is likely mild because consumers are still flush with cash from the pandemic stimulus, and companies are faring well. The housing prices are not skyrocketing as in the 2000s, and banks look healthy. And inflation hasn’t run wild for years like in the 80s. It is only a year above target.

However, American markets have fallen by 15%, and Wall Street is distressed. It is difficult to say how it will react to a Fed-induced recession. To make things worse, the Fed had printed trillions of dollars during the pandemic, which is partly driving inflation now.

Wall Street was bailed out once in 2009. It will be difficult for America to offer another bail-out package without hurting the rest of the economy.

All this, combined with hyper-partisan politics, creates a recipe for disaster. A recession would arrive sometime around 2024 and would be the talking point of the next election. It may ignite the fires of populism and protectionism, ensuring the return of Donald Trump.

The last three recessions aligned with US elections and saw the ruling party lose power.

The post Recession may hit America by 2024 appeared first on International Finance.

There was a 0.5 percentage point increase in interest rates. It is a follow-up to the .25 percentage hike in March, the first hike in rates since December 2018. The Fed has increased the interest rate to a target rate range between .75% and 1%.

The Economist Intelligence Unit predicts interest rates to touch 2.9% by 2023, through seven gradual hikes this year. Officials are also planning to cut down their $9trillion asset portfolio which will further aggravate borrowing costs.

The Federal Reserve pointed out that the war in Ukraine and recent lockdowns in Chinese cities created an atmosphere of uncertainty and a disruption in supply chains.

The US was ill-prepared for these levels of inflation as the rates were nearly zero in March 2020 and interest rates were low for years prior. The Federal Reserve’s claims that the inflation was ‘transitory’ and would correct itself as economies recovered from the pandemic have lost steam.

The Fed Chair Jerome Powell said, “Inflation is much too high, and we understand the hardship it is causing. We are moving expeditiously to bring it back down.”

Inflation is at a 40-year high in The United States and is now 8.5% higher than in 2021. Prices are rising higher than wages, and the average American is facing the brunt.

Jamie Dimon, JP Morgan Chase’s chief executive officer, commented ahead of Powell’s announcement that the Federal Reserve might be too late to act. The Fed’s policy has impacted the housing markets with the fastest rising mortgage rates in two decades (over 2 percentage points). The strict monetary policy has also triggered many stock market selloffs.

Jerome Powell assured us that the US will not go through a recession but will have to tackle inflation aggressively.

“We need to do everything we can to restore stable prices,” he said. “We will do it as quickly and effectively as we can. We think we have a good chance to do it without a significant increase in unemployment or a sharp slowdown. But ultimately, we think about the medium and longer-term, and everyone will be better off if we can get this job done – the sooner, the better.”

The post US Fed announces biggest interest rate hike in two decades appeared first on International Finance.