Interest rates are going up, but not your pay
The economy enjoys all the hallmarks of vivacity.
Expansion continues even nine years since the end of the Great Recession. Homeownership rates are up, as is the stock market and consumer sentiment. Jobless claims and the unemployment rate hover near recent lows. Inflation is climbing at a clip policymakers desire.
Hence the Federal Reserve, helmed by Chairman Jerome Powell, is gradually raising short-term interest rates and lowering the balance sheet of bonds and mortgage assets the central bank accumulated to prop up the economy in the aftermath of the recession.
Everything is going to plan. Well, almost everything. Your paycheck isn’t rising that much, if at all.
While yields on accounts like CDs and money market accounts are on the rise, you may not enjoy the disposable income to take advantage.
The Fed muddles on
Powell talked up the economy during a recent two-day hearing before both chambers of Congress.
“Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently anticipate,” Powell said in prepared remarks.
Which is why the Fed has already raised rates two times in 2018 and is likely to do so another two times this year. The central bank is also reducing its historic balance sheet, with total assets dropping to $4.29 trillion from $4.47 trillion this time last year. The Fed plans to only increase its historic de-accumulation in the future.
The wage issue
Savers are enjoying the benefits of higher yields, and yet pay has failed to keep up.
Average weekly earnings in June, for instance, were exactly where they were the year before, once you count for inflation. In fact, wage gains, once adjusted for inflation, haven’t risen by 1 percent year over year since October 2016.
This is surprising to a lot of people.
Not only is the gross domestic product rising, but the $1.5 trillion GOP tax cut signed in December was supposed to lead to employers giving their employees more money.
Economists, meanwhile, struggle for a definitive answer to explain what’s going on. But there are a lot of theories. In his testimony to Congress, Powell mentioned one: low productivity growth, which is a gauge of how efficiently a company makes its products.
Others have pointed to the older well-paid workers retiring and being replaced by cheaper younger ones, a worse employment situation than meets the eye, or the increasing cost of fringe benefits, like health insurance.
Some say businesses have too much power, while others say wages are rising just as they should.
What this means for you
After holding interest rates near zero for a decade, the Fed is finally rewarding savers.
Borrowers, on the other hand, are getting hit. Credit card APRs have risen from 16.93 percent in early May to 17.21 percent as of July 25.
Unfortunately, low inflation-adjusted income gains mean you may not be able to take advantage.
About 4 in 10 Americans don’t have the cash to pay off a $1,000 unexpected expense, and middle-income Americans’ savings haven’t budged in 15 years, while credit card debt and delinquencies are on the rise.
With average pay and inflation joined at the hip, you need to bank any extra cash that comes your way. Your next bonus or tax refund should go directly into a high-yielding savings account to buttress your emergency fund or to pay down debt.
Automatically dedicate a small percentage of your pay to savings, and use a balance transfer card to give yourself time to pay down debt without interest if you carry a balance.
Move your savings from your low-yielding traditional brick-and-mortar bank to an online institution that offers better rates.