Market Update in Charts
Federal Reserve Chairman Jerome Powell spoke this morning at the annual Jackson Hole Economic Symposium. It took all of a few minutes for the audience, and Wall Street, to understand that the Fed is wildly serious about whipping inflation. Rates are going up and markets, which were hoping for different news, sold off. The index gains of August are all but erased.
The benchmark 10-year U.S. Treasury note and the 2-year note yields have been rising again this month. When yields go up, prices drop and this move reflects increased confidence about the near-term economic outlook, despite the recent comments from Fed Chair Powell.
Traders had been divided on whether the Federal Reserve would increase rates by another 0.75% next month. Inflation is coming down and other data has shown signs of a slowing economy. However, Fed officials' comments have stayed aggressive. Odds have risen to 62% for a 0.75% hike. This would bring the rate to 3.25%.
Our national debt has risen over 40% since August 2018. Conventional wisdom says that the Federal Reserve would be resistant to raising interest rates for fear of adding to the government’s interest rate burden. While that might have been the case in the past, clearly controlling inflation and raising rates is the Fed’s priority now.
The 30-year fixed-rate mortgage rose to 5.5% this week, down from June highs but still 2% higher than in January.
In Canada rising rates will have a huge impact on the housing market. Mortgage rates are not fixed as they are in the U.S., increasing mortgage payments when they rise. This causes an immediate impact on sales and home prices Economists forecast prices will fall 20-25% from peak to trough across Canada.
Economics of War
As the Russian invasion of Ukraine entered its seventh month, Russian President Vladimir Putin said “by and large, we have not started anything seriously yet.” Pithy words given that Russia is advertising heavily for more soldiers after having lost thousands already. Well, Russia officially claims to have lost only 1,351; the number of dead is as many as 80,000 says the Pentagon. To show for its efforts and lives, Russia has wrestled control of a good part of the east, including critically important Black Sea ports, but much of Ukraine still lies outside of its forces.
Russia may need soldiers but economically speaking, it seems to be holding on. The efforts to choke off Russia's financial income have not, at least yet, completely decimated it. While roughly half of Russia’s $580 billion in currency reserves has been frozen and most of its banking has been cut off from the world, it has continued plugging along. For now Europe is still purchasing energy, but that will end in February. China has been importing oil that America and other countries will no longer purchase. Although other restrictions on Russia’s ability to buy supplies from computer chips to military supplies are in place, Russia has found other countries in Asia and the Middle East willing to trade with them. As the Economist points out, globalization has helped Russia adapt to the “shocks and opportunities, particularly as most countries have no desire to enforce Western policy.”
Other than Ukraine, Europe has suffered the most collateral damage so far. The continent is reckoning with a massive energy shortage, even if headlines are suggesting that rationing this winter might not be necessary for all. As Russia burns about $10 million worth of natural gas each day, possibly out of spite, and closes pipelines for “unexpected maintenance,” Europeans are already taking cold showers and turning off the lights to preserve resources and stockpile energy reserves.
The five largest countries, United Kingdom, Germany, France, Italy and Spain, have seen their growth forecasts downgraded. Inflation is an issue; it is as much as 10% in the U.K. and may not have even peaked. Germany is dealing with a severe drought and a slowdown in manufacturing, the heart of their economy. Each is struggling with supply chain hang-ups and worker shortages. While recession in the U.S. is still a question of whether and how severe one may be, it is not a question for Europe. Recession is certain to arrive this winter and analysts grimly forecast “high inflation and sluggish growth until at least 2024.”
On Personal Finance - Student Loans
On Wednesday the Biden Administration announced additional relief for student debtors. Up to $10,000 will be forgiven for individuals making less than $125,000 or married couples making less than $250,000. A more generous package for borrowers who also received Pell Grants, reserved for the exceptionally needy, was also announced. Almost 8 million borrowers are eligible.
While this conversation started in the early days of President Biden’s term, it picked up speed at the same time as inflation did. Thus economists from former Treasury Secretary Larry Summers and on, have warned that removing debt obligations now will just exacerbate inflation, already one of the Administration’s most pressing concerns. But the government says that restarting loan payments for everyone else, which has been postponed again until January, will offset the “forgiveness-inspired inflation”.
Already these policies have wiped out $32 billion of federal student loans from the $1.6 trillion outstanding. The relief is just a tiny fraction of the total but has been championed for the lift it has given to public-sector workers, the disabled and notably, those who were defrauded by for-profit schools. Others have pointed out that in absolute terms, those who have benefited the most from all of the Covid-era loan policies, like federal loan repayment delays, are actually those who have borrowed the most and stand to earn the greatest in their lifetimes - our doctors, lawyers and other highly compensated professionals.