For the Federal Reserve, slowing inflation may mean slashing job growth. Will we trade high inflation for high unemployment? Berkshire Money Management CEO and Founder Allen Harris explores how employment is impacted by interest rates, and why the Federal Reserve might want you to lose your job. TRANSCRIPT: The Federal Reserve is an independent government body. So they’re not supposed to listen to the White House or Congress or House of Representatives. They’re supposed to do whatever they need to, to fulfill their two goals, or mandates. One is stable growth (employment) and the other is to keep…
Insights & Advice
Tag: interest rates
Interest-only mortgages are risky in a rising interest rate environment
Over the past decade, as interest rates declined, some homebuyers gravitated towards interest-only loans. However, times are changing, and borrowers should be careful in considering this kind of mortgage loan. During the past two years, many financial lenders have tightened credit standards across most loan types. The combination of the Coronavirus pandemic, supply shortages, inflation and the impact of the Ukraine war has created a drag on the U.S. economy. A slowing economy increases the risks of lending, thus tighter standards emerge. Fannie Mae and Freddie Mac, the two government-sponsored enterprises that back most mortgages, exclude interest-only mortgages. And while…
Make up your mind, already!
Hey, stock market. Are you going up, or are you going down? Pick one side of the 200-day moving average and stick with it, would ya? What is the 200-day moving average? The 200-day moving average (DMA) is a key indicator that investors (traders?) use to gauge whether an investment is in an uptrend or a downtrend. The 200-DMA is typically represented by a line chart and represents the average price of the past 200 days. When the price of an investment is above the 200-DMA, it’s considered in an uptrend. And, when it’s below the 200-DMA, it’s considered…
Can the Federal Reserve engineer a soft landing?
Can we talk about how crazy the first quarter of 2022 was? From Volodymyr Zelensky to Will Smith. The so-called “Don’t say gay” bill and the woefully mislabeled “Billionaires’ tax.” From the vetting of Ketanji Brown Jackson to the Olympics (well, maybe not the Olympics), the world was buzzing about serious news and outright nutso news. Perhaps that’s why many people didn’t realize that the S&P 500 fell more than 10% from a closing high during that quarter. Later, the index traded 10% higher than its intra-quarter closing low. But it did. Since World War II, there have only been…
The Fed tightens further
It is called “Quantitative Tightening,” or QT, a term used to describe how momentary authorities are planning to shrink an $8.9 trillion balance sheet. The U.S. Federal Reserve is the only central bank in the world (and in history) that has attempted to implement a reduction in assets. The first time they tried, things did not go so well. “Quantitative Easing,” or QE, may be a more familiar concept to readers since we have been experiencing some form of QE (monetary stimulus) since the Financial Crisis of 2008. QT is the opposite. The Fed first tried to reduce its balance…
Housing headwinds
The red-hot housing market is cooling off. A combination of higher interest rates and supply chain shortages are squeezing homebuyers. If these trends continue, the spring selling season may find buyers between a rock and a hard place. The total value of the private residential real estate in the U.S. increased by a record $6.9 trillion to $43.4 trillion in 2021. Since the lows of the post-recession market, the value of housing has more than doubled. By this time in 2023, Zillow expects the typical U.S. home will be worth more than $400,000. This year, demand for housing will remain…
Markets liked the Fed’s message
The first interest rate rise in years was officially triggered in this week’s Federal Open Market Committee Meeting. Since then, stocks gained more than 5 % on the news, which was contrary to many investors’ expectations. The reaction was even more confusing when you consider how hawkish Chair Jerome Powell and his FOMC members were, both in the minute meetings and in Powell’s Q&A session after the meeting. The Fed is officially planning for seven rate rises this year after the 25-basis point move on Wednesday. The next hike could come as early as the central bank’s next meeting in…
A whiff of stagflation
The economy is slowing. Inflation is climbing. Investors are worried that these trends appear to be a recipe for the “S” word. The economic concept of stagflation where the witches’ brew of a faltering economy, aided and abetted by skyrocketing inflation, harkens back to the malaise of the late 1970s. At that time, interest rates rose to nearly 20%. Inflation, as measured by the Consumer Price Index (CPI), reached an annual average of 13.5% by 1980. Oil prices (like today) surpassed $100/barrel. Blame for this period of stagflation fell squarely on OPEC, a newly formed energy cartel of oil producers,…
Do not chase stocks
Commodities are soaring. Interest rates are falling. Stocks can’t get out of their own way. All of this is occurring while the first war in decades continues to rage in Ukraine. Seems to me that any gains in the market averages next week will remain dead cat bounces in this bear market. Yes, I hate to be a squeaky wheel, but I’ve got to call it like I see it. We have a much greater chance of sliding lower from here than higher. Here’s why. Investors received a new lease on life this week when Fed Chairman Jerome Powell, testifying…
Inflation is costing you an extra $276 a month
Inflation jumped 7.5 percent from last year, according to the Bureau of Labor Statistics’ Consumer Price Index. Moody’s Analytics compared that rate to inflation in 2018 and 2019, which was around 2.1 percent. They concluded that the excessive inflation costs the average U.S. household $276 per month, or $3,312 per year. And here (among other things) is the problem with that – it pushes the U.S. toward a recession. Now, if you’re a sane person, you should think that comment is crazy. I’m not yet calling for a recession. It is my job to look for these sort of things. In late…
Stocks bouncing in a box
Over the next three weeks, equities will likely trade in a wide range. The caveat to that forecast: if the Fed suddenly changes policy, or if a shooting war erupts in Ukraine. Those are two big ifs. Unfortunately, I can neither forecast when or what the next Fed head will say, nor predict Vladimir Putin’s next move. The next Federal Open Market Committee (FOMC) meeting occurs in mid-March. The latest CPI and PPI inflation data show inflation accelerating at a rate much higher than economists and the Fed expected. It is all but certain, according to the bond market vigilantes,…
The biggest problem for small businesses is no longer the labor shortage
The biggest problem facing small business owners is no longer the labor shortage — it’s inflation. That is according to a December 2021 survey release by the NFIB Research Foundation. Shortly after the release of this survey, inflation clocked in at 7 percent over the past year, the highest measure of the Consumer Price Index (CPI) since 1982. In reaction to this problem, I suspect that the Federal Reserve will combat higher prices of goods and services. Up until now, the Fed has been comfortable letting inflation run above its target of two percent. A month ago, I predicted “at least…
Beware the hikes of March
There is a more than an even chance that the Federal Reserve Bank hikes interest rates at least 25 basis points by the end of March 2022. Several analysts expect another three hikes by the end of the year. As an equity investor, this should concern you. This week, both the Consumer Price Index (CPI), and the Producer Price Index (PPI) came in as expected. But “expected” does not mean anything like good on the inflation front. On a year-over-year basis, CPI was up 7%, while PPI hit 9.7% for all of 2021. And while economists debate whether inflation and…
A two-thirds chance the stock market will go up in 2022
Are you familiar with the hot hand fallacy? Gamblers fall victim to it when they convince themselves that wins or losses come in streaks, and those streaks stay that way because, well, just because they believe past performance is indicative of future results. In most cases, it isn’t. Admittedly, sometimes past performance is indicative of future results. I’ve hired people who have shown a track record of progressive responsibilities — and with the proper support, they continue to do so. A good boxer often beats her next opponent because she has developed skills and knows how to put together a fight…
Markets keep churning
As most investors expected, the Federal Open Market Committee (FOMC) announced the start of their tapering effort but doubled the pace of the monthly taper to $30 billion/month until March 2022, when the effort will conclude. In addition, FOMC members see three, 25-basis-point increases in the Fed Funds interest rate next year, and more in 2023. Faced with the end of a decades-long era of loose monetary policy, historical behavior would indicate interest rates up, equities down. That still seems a good bet despite the market’s immediate reaction to the Fed announcement. Some participants may still be scratching their heads…
Good earnings support markets
Third quarter earnings have cheered investors, sending markets to new highs. The bullish wave of buying was so strong that investors ignored the disappointing third quarter read on the nation’s Gross Domestic Product (GDP). Economists were looking for the economy to grow by 2.6%, but instead, GDP gained a mere 2%, which was the slowest rate in over a year. Economic activity was damaged by the Delta variant as well as continuing supply-side constraints. The market’s reaction indicates that investors are looking through the weak number and expecting the economy to continue to grow. It seems to be a question…