
May 2022, Vol. 1
If this letter came with $100 dollars, would you toss the money like you might toss this letter?
Of course not! Why? Because smart people don’t waste money!
Time is money! So, I won’t waste yours. Instead of ME asking YOU for a moment of your time or asking you to do anything for that matter, I’m giving you time.
In the time it would take you to surf through several different sites and publications to get the economic news you want and need, you could have scanned at least a couple times, grabbed a coffee, filled three customer orders, replied to three emails, paid the bills and fed the hog. Well, if you don’t have a hog maybe the dog. You get the picture. This is the first quarterly publication of
,
.
is your pithy source for quick up-to-date economic trends and forecasts from a vast array of sources, crystallizing only the good stuff for your consumption.
is provided to you free of charge by PFS – a direct small business lender offering competitive rates, speedy funding and no big bank hurdles. Its main purpose is to provide you with a factual economic snapshot so you don’t have to spend hours researching this stuff. Thereby, helping you become an economically informed business owner and saving you time and money.
is fact-based, so if facts or truth offend you, this time-saving newsletter might not be for you. For those of you who prefer a brief and unvarnished, sometimes edgy, economic snapshot, please enjoy.
Interest Rates
There’s a lot of chatter and speculation around interest rates right now. How fast will they rise? How will they affect you and your business? Let’s take a look at what some of the insiders are saying.
April U.S. Economic Outlook substantially raises forecasts for interest rates in 2022 and 2023 in reaction to recent changes to the Federal Reserve’s guidance. At the Fed’s March 16 meeting, the Federal Open Market Committee (“FOMC”—the policymakers who set interest rates) signaled they are prepared to raise interest rates to a restrictive level, high enough to slow growth to below the economy’s long-run potential, to bring inflation back down.
In light of this, forecasts for the Fed to raise the federal funds target by a half percentage point (50 basis-points) at their next two decisions in May and June, and by a quarter percentage point at the July, September, and December decisions. The forecast anticipates two more quarter-percentage-point hikes in the first half of 2023. By the second half of 2023, that would put the federal funds target above its peak in the last expansion, when higher interest rates contributed to a drop in residential investment, industrial production, and job openings—in other words, restricted economic growth.
So, how would upwardly trending interest rates impact nationwide and regional economic environments? Let’s look at mortgage rates. The 12-year peak in mortgage rates comes as the Federal Reserve moved to raise interest rates, the central bank’s first increase since 2018. For borrowers, this run-up in rates marks an end of the historically low rates that characterized the period following the global financial crash of 2008 and 2009. With inflation raging and the U.S. economy running hot, the average rate on 30-year mortgages surged to 5.28 percent last week from 5.12 percent the week before, the highest level since April 2010, according to Bankrate’s national survey of large lenders. “It’s been a one-way street toward higher rates and the trend will persist until there is sustained evidence of inflation at least moderating,” says Greg McBride, Bankrate’s chief financial analyst.
As a business owner, you’re probably reasonably good at extrapolating. Extrapolate this… Mortgage interest rates are now trending significantly higher than they were this time last year and we’ve only recently had one hike. The hike before this came in 2018. So, what’s the problem? I have a fixed interest rate loan, you might say. But as the Sham Wow guy used to say, “But wait, there’s more”. Although the Fed doesn’t set mortgage interest rates, their actions have a rippling effect. Whenever the Fed hikes the interest rate, as it did recently, it adjusts the rate at which banks borrow and lend to each other. So, if the banks incur higher rates, they are all to giddy to share that love with their consumers.
As rising interest rates put downward pressure on mortgage originations, the music will slow down and the party of rising residential property values may soon be coming to an end. Considering that four more hikes are on the 2022 horizon, the most vulnerable residential borrowers will be those holding adjustable rate mortgages (ARM).
Inflation
We’ve all felt the pinch (more like a punch in the gut) of higher prices at the gas pump, grocery store, car lots and just about all the goods and services we depend on. Needless to say, our country cannot continue this trend indefinitely and still maintain any semblance of a healthy economy. Current U.S. monetary policies have taken consumer price inflation from 1.4% in January 2021 when President Biden was elected to 8.5% on an annualized basis at the end of March 2022. If you extrapolate the March monthly consumer inflation rate of 1.2% over 12 months, the yearly inflation rate would be 14.4%. Historically, inflation rates at this level have only been brought under control by economic recession or depression. A major factor to watch is the impact of higher short-term rates on bank lending and consumer borrowing. This double-edged sword could push the country toward a recession as banks pull back from lending due to lower yields on loans while pushing up short-term rates for consumers who need to use more of their discretionary income on debt service.
Fed Chair Jerome Powell said April 21 during a panel discussion hosted by the International Monetary Fund in Washington that the central bank isn’t “counting on” inflation having peaked in March. Wait, did I hear correctly?? We’re in for more inflating? According to Mr. Powell, the answer to that question is a big fat (Did you catch what I did there?). “It is appropriate in my view to be moving a little more quickly,” Powell said, putting a 50 basis-point rate hike “on the table” for the Fed’s meeting early next month and leaving the door open to more outsize moves in the months ahead.
In sum, it appears the patient will have to swallow some nasty medicine and refrain from engaging in risky behavior in the future. Rate hikes are one of the remedies in the Fed’s medicine cabinet and they’re going to use this medicine in an effort to curb inflation and it’s going to hurt a little, or a lot. Higher mortgage interest rates (likely accompanied by increasing defaults), higher short-term business purpose loan rates and banks are going to use stricter lending criteria, especially for long-term lending.
Smart Moves: If possible, refinance and get out of ARM or variable loan instruments. Any debt subject to interest rate fluctuations should be paid down or eliminated.
If your business anticipates inventory, expansion or upgrades, lock in your loan rate now! Interest rates will continue to rise and lending criteria will get stricter across the board.
I hope you found this snapshot enlightening. Remember to tell the ones you love that you love them.
Kindest Regards,
Lawrence M. Morales, CEO
Precision Financial Solutions, LLC