The Federal Reserve’s widely anticipated decision to leave interest rates untouched following their latest two-day meeting is at odds with the topsy-turvy six weeks after the central bank’s last get-together.
Since the Fed raised its benchmark rate for the second time this year in mid-June, President Donald Trump tweeted his opposition to the Fed’s policy of gradually increasing interest rates and Chairman Jerome Powell fielded congressional questions on a range of topics, including lackluster wage growth and the president’s controversial trade policy, during two days of testimony.
Meanwhile, the economy kept humming along.
“The Fed gave a glowing review of the economy, using the words ‘strong’ or strongly’ regarding economic activity, job gains, household spending and business fixed investment,” says Greg McBride, CFA, Bankrate chief financial analyst. “This is why the Fed expects to raise rates twice more this year, and likely next month.”
The gross domestic product perked up in the second quarter of 2018, as did a key compensation gauge for workers. Inflation flirted with the Fed’s 2 percent target, while the labor market wrung out some of the remaining slack from the Great Recession.
Toss in the addition of Kansas City Fed President Esther George, who is regarded as a rate hawk, to the Fed committee that sets rates and consumers should expect policymakers to follow through on two more interest rate hikes this year, starting as soon as the Fed’s next gathering in September.
That means savers, especially those with high-yielding online accounts, will see better return for their cash, while borrowers may yet endure more pain.
An action-packed six weeks
Trump opposed recent Fed action to raise the federal funds rate, and the central bank’s plan to continue do so throughout the year.
“Tightening now hurts all that we have done,” Trump said on Twitter on July 20.
The tweet followed similar comments Trump made to CNBC a day earlier.
“I am not happy about it,” Trump told CNBC, referring to the Fed hiking rates as the economy expands. “But at the same time, I’m letting them do what they feel is best.”
While Powell was appointed by Trump, the Federal Reserve is an independent federal agency, separate and apart from the presidency. The president’s comments broke with traditional White House practice to the Fed’s monetary policy: silence.
The comments also followed two days of congressional hearings for the new chairman.
Lawmakers generally used Powell as a backdrop to make larger points about the strength of the economy, the efficacy of last year’s GOP $1.5 trillion tax cut, and the relatively weak wage gains in recent years.
Others asked for Powell’s take on cryptocurrency, while Senator Elizabeth Warren, D-Mass., sparred with the chairman over how closely the Fed is watching big banks that could pose a systemic risk to the nation’s financial system should they fail.
A look at the economy
The disorder in Washington is in stark contrast to the goings-on in the economy.
The unemployment rate rests at 4 percent, while the economy grew by 4.1 percent in the second quarter – thanks to impressive consumer and business spending. Inflation, according to the Fed’s preferred metric that strips out volatile food and energy prices, grew 1.9 percent in June compared with the year prior, putting it in line with the Fed’s target.
The central bank is on its way to fulfilling its mandate to maximize employment while keeping prices stable.
Your pay, though, represents a tougher challenge.
Back in June Powell said the lack of strong wage growth remains “a bit of a puzzle,” and recent economic data underline that sentiment.
Hourly earnings were unchanged year over year in June after adjusting for inflation, according to the Bureau of Labor Statistics, despite unprecedented deficit spending following the massive GOP tax cut.
The employment cost index, though, puts a slightly different spin. Total compensation, which includes wages and fringe benefits like health insurance, gained 3.6 percent over the past 12 months in the second quarter, the largest increase since the end of the recession.
If you look at just wages and salary, the metric rose 2.9 percent over the same time period, the largest jump since the middle of 2008.
What this means for you
Many Americans, despite the improving economy, remain in a precarious financial position. Four in 10 Americans don’t have enough savings to pay for an unexpected $1,000 expense in cash, while half of all working families are at risk of enduring a lower standard of living once they retire.
While the Fed punted on a rate hike until September, rates are only going in one direction: up.
“All signs still point to a September rate hike,” McBride says. “Continue paying down variable-rate debt such as credit cards and home equity lines, and refinance adjustable-rate debt into fixed-rate to insulate yourself from further rate hikes. Because there will be more.”
Find, and fund, a high-yielding savings account to house your emergency fund, comprising six months’ worth of emergency expenses. That’s a daunting task, so automate a portion of your paycheck into the account every two weeks to help make progress.
“Inflation has reached the Fed’s target of 2 percent, and this is the bogey that savers should be aiming for,” McBride says. “Seek out the top-yielding savings accounts and certificates of deposit that are paying above 2 percent in order to protect your buying power.”
You should also work to lower your credit card debt. Higher rates will make the burden of a revolving balance only more expensive. Transfer your IOU to a card with a long 0 percent introductory period, or at least ramp up payments well above the monthly minimum.
Position yourself to take advantage of the new normal.