While it’s always important to focus on your own personal finances, it’s also important to be aware of major economic trends that can affect your wallet. Right now, there is a lot of negative financial news around interest rates, inflation and even U.S. debt. But how does this impact you, and what can you do about it?
The economy’s future for finances looks bleak on the surface, but learning about the following trends can help you position yourself to be ready for what is coming. Here are six financial trends that might affect your bank account.
Rising Interest Rates
The Federal Funds Rate is the baseline for most loans in the U.S., and with inflation hitting a 40-year high in 2022, the Federal Reserve quickly increased rates. This has had a cascading effect on the economy at large, impacting jobs, debt obligations, mortgage prices and more.
With inflation still not down to the Fed’s target of 2% year-over-year, they are poised to continue increasing rates until inflation is tamed. And a statement from the last Federal Open Market Committee (FOMC) meeting showed that they expect a recession due to increased rates.
This means that more jobs will be lost in the coming months due to slowed consumer spending and the higher cost of debt. Housing will continue to decline as mortgages are much more expensive than they were just a year ago. And consumer and business loans will be more expensive while interest rates remain elevated.
Inflation Is Dropping
Inflation hit a 40-year high in 2022, topping out at 9.1% year-over-year (YoY) in June of 2022. This was felt especially hard at gas stations and grocery stores, and housing costs were up significantly as well.
The Fed quickly increased rates to combat rising inflation, with the Federal Funds Rate increasing from 0.5% up to 5% within a year. This has quelled price inflation a bit, and though prices are still increasing at a 5% rate, this is nearly half the rate of inflation that was seen less than a year ago.
With inflation slowing down, most economists anticipate the Fed to slow down rate hikes, and some even expect The Fed to stop hiking rates for the rest of 2023, and eventually lower rates. If the Fed achieves a 2% YoY inflation rate and begins to lower interest rates, this might cause markets to recover a bit. With the potential for lower rates on debt, businesses can prepare to borrow more and invest more in growth.
With all the economic turmoil and news stories of hundreds of thousands of job layoffs, you would think that unemployment is on the rise. But the latest data from March 2023 shows that unemployment is holding at a very low 3.5% nationally.
While this may sound like a good thing, on a macroeconomic level, this means that the interest rate hikes by the Federal Reserve aren’t having an effect on employment, and spending is still strong. While the Fed would never outright say that they want higher unemployment, the playbook to fight price inflation is to decrease demand, and thus lower price inflation.
With only 3.5% of America unemployed, it’s hard to decrease consumer demand. This means the Fed might continue to slowly increase interest rates, or at the very least, hold rates at a very high level until unemployment increases by a meaningful rate. This means more layoffs may be around the corner, and job security is an important thing to plan for right now.
Housing Affordability Is Bad
After Fed Funds rates dropped to 0% in 2020 to help stabilize the economy during the pandemic, and trillions of dollars of stimulus was injected into the marketplace, housing prices soared. According to Statista, the average home sale price in the U.S. was around $391,000 in 2020, and rose to $543,600 in 2022!
This massive increase in housing prices was exacerbated by the ability to work remotely, with many moving from high cost-of-living areas to lower cost-of-living areas. This migration has pushed up housing prices dramatically in some areas. And mortgage rates have doubled since 2020, making the cost to own a home much higher than before.
All of these factors have had a massive impact on housing affordability. According to the National Association of Realtors, housing accounts for nearly 15% of a household’s income, but in 2022, that rose to over 24% of a household’s take-home pay. While rising rates are bringing home prices down, it is still more expensive due to the near 7% mortgage rates.
Without a large housing market correction and lower rates, buying a home will continue to be unaffordable for many. Rachael Hernandez, a real estate investor, recommends considering alternatives to single family homes, and “options such as manufactured housing may be something worth looking into.”
The Debt Ceiling Could Impact Your Wallet
America hit the debt ceiling (again). And while this might seem like boring news that will get resolved without your input, you might want to know how this can impact your wallet.
The debt ceiling is a cap on how much America can borrow. This cap is in place to prevent the U.S. from defaulting on its debt obligations (meaning they miss payments to their creditors). But their creditors are the general public that invests in bills, notes, or bonds through the U.S. Treasury.
If Congress does not raise the debt ceiling or eliminate it altogether, here’s how it can hurt your wallet:
- Social Security checks might be delayed.
- Medicare payments might be delayed.
- The stock market might drop or become very volatile.
- U.S. Treasuries won’t pay out interest or be redeemable at maturity.
Student Loan Moratorium Is Ending
Federal student loan payments have been on hold since March 2020, but that could be ending soon. With the student loan forgiveness case in the Supreme court, if a decision isn’t made soon, federal student loan payments will resume 60 days after June 30, 2023.
With over 40 million borrowers and over $1 trillion in debt, this is going to have a massive impact on people’s budgets. If you don’t have a plan in place to make your student loan payments, you need to prepare right now.
Borrowers are still holding out hope that a big chunk of student loans might be forgiven, but the reality is that student loan payments will resume by the end of August (or sooner, depending on the Supreme court decision).
There is economic turmoil right now, with the Federal Reserve walking a tightrope to reduce inflation while avoiding a major recession. With student loan payments resuming and the debt ceiling crisis, it might seem like things are going to be bad for a while.
However, while much of these things are out of your control, you can focus on the things you can control, like your spending and savings rate. With economic headwinds slowing down economic growth, building a larger emergency fund and continuing to stay diligent about your financial choices can help you weather the storms ahead.
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