Personal Finance Blog By MoneyRates
December 18, 2014
The latest employment report from the Bureau of Labor Statistics (BLS) indicates that the U.S. job market is having its best year since 1999. That's good for workers and the economy as a whole. As for the impact on interest rates, it may lead to a reversal of the conditions consumers have experienced for some time.
While 2014 has been a good year for mortgage rates, it's been not so good for savings accounts and other deposits. If the employment trend has any influence though, next year might see things get tougher for home buying and refinance rates, but more rewarding for depositors.
A banner year for new jobs
On December 5, the BLS announced that 321,000 new jobs were created in November. As a bonus, the same report upgraded job creation for the prior two months by a total of 44,000, bringing the new tallies for September and October to 271,000 and 243,000, respectively.
All three of those monthly totals exceeds the average for the past 12 months of 224,000. November's 321,000 is the best single month in nearly three years, and brings the total for 2014 so far to 2,650,000 new jobs. That's the most for any year since 1999, with one month still to go.
Perhaps what is as striking as the raw total is the consistency that job creation has finally achieved. Prior to this year, the job market had failed to exceed 200,000 new jobs for more than three straight months in over a decade. Now, it has reeled off 10 such months in a row.
The best kind of inflation
Over the past year, steady job growth has brought the unemployment rate down by 1.2 percent, to 5.8 percent. There may be some slack in that number in the form of part-time workers and people who have dropped out of the job market, but if job creation continues to improve, the slack in the job market will gradually be taken up.
All of this is naturally good for the economy because it means putting people back to work, and if the unemployment rate gets down to around the 5 percent mark, employees should also start to see bigger wage increases as well. This will help repair some debt-laden balance sheets and put more dollars back into the economy.
That kind of wage pressure could also push inflation a little, but it comes at a time when inflation generally has been considered too low rather than too high. It would be perhaps the best kind of inflation -- one where the increases go straight into people's paychecks.
Impact on bank rates
Mortgage rates fell in 2014, while rates on savings accounts stayed near zero. With stronger demand and perhaps higher inflation, things could be very different in 2015.
Of the two, mortgage rates are likely to be first to react to any whiff of new inflation. However, if job growth continues to grow, 2015 could also be the year beaten-down savings accounts finally get up off the mat.
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December 8, 2014
Last month's Consumer Price Index release revealed that inflation has virtually disappeared in recent months. Not everyone welcomes this, but consumers should find plenty to like about near-zero inflation.
The CPI was essentially unchanged in October, meaning that prices generally neither rose nor fell. This brings inflation for the past year to just 1.7 percent, which is below the Federal Reserve's stated target of 2 percent.
If the recent trend holds, the year-over-year inflation rate could drop even further. Thanks partly to a decline in the CPI during August, prices for the second half of 2014 so far are more or less flat.
What could change the inflation trend
While August's deflation seems like an aberration, near-zero inflation seems to have firmly established itself. What could change this trend? Inflation is sensitive to a variety of shocks, but for now keep your eye on two chief suspects:
- Federal Reserve policy. The Fed's concern with the inflation environment is not just that the lack of price increases is a symptom of weak growth, but that it could further encourage consumers to defer their purchases, since they have nothing to lose by waiting if things are not getting more expensive. Persistently low inflation could spur even looser monetary policy in an attempt to boost prices.
- Oil prices. The recent low inflation trend is largely due to declining oil prices. This is not likely to be a sustainable trend, and history shows that when oil prices change, they can do so suddenly and drastically.
Despite these potential forces for change, inflation is very much momentum-driven. In the 1970s and early 1980s, high inflation seemed an insurmountable problem. Today, for better or worse, near-zero inflation seems to have settled in over the past few years. Though not everyone is thrilled about disinflation, most consumers will probably find a reason to cheer.
Impact on consumers
Bank deposit customers may cringe at the thought of interest rates on CDs, savings accounts and money market accounts remaining at current low levels for the foreseeable future. However, seeing inflation continuing to shrink has several positives for consumers:
- Current mortgage rates continue to make housing affordable for new home buyers.
- Low refinance rates are creating much-needed breathing room in the budgets of existing homeowners.
- Lower prices at the pump provide relief for millions of Americans who rely on their cars or trucks for their livelihood.
- Lower prices generally take some of the sting out of the anemic pay growth Americans have seen in recent years.
- Even those beleaguered deposit account customers have more of a fighting chance at finding rates that will beat inflation when price increases shrink to nearly nothing.
The Federal Reserve has consistently expressed concern about low inflation, as both a symptom and a cause of economic weakness. For consumers though, having prices ease just in time for the holiday season seems like a welcome gift.
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November 14, 2014
The latest figures from the Bureau of Labor Statistics (BLS) show that strong U.S. job growth continued through October. This is obviously good news for people looking for work, but it could also have much wider benefits -- including help for consumers with savings accounts and for mortgage shoppers.
The BLS report indicated that 214,000 new jobs were created in October, lowering the unemployment rate to 5.8 percent. However, perhaps the most significant aspect of this jobs report was beyond the headline numbers. The report also included an upward revision of August's job growth number, from 180,000 to 203,000.
That means that job growth has now exceeded 200,000 for nine straight months. That is the longest stretch of monthly job growth in excess of 200,000 since a run of 19 such months from late 1993 through early 1995.
The improving strength of the job market can also be seen in the changing characteristics of the labor force. Over the past year, the number of long-term unemployed (people out of work for 27 weeks or longer) has declined by 1.1 million (a drop of 27.5 percent). Over the same period, the number of people working part-time rather than full-time for economic reasons dropped by just less than a million (12.3 percent).
Two potential positives for bank customers
The direct benefit of job growth is clear -- putting people back to work helps those individuals and their families get by. However, there are broader, knock-on effects of employment growth that help a much wider swath of the population, including customers of savings accounts and mortgage products:
- Consumers with savings accounts could benefit from higher interest rates. It has been a long wait since rates on savings accounts dropped to nearly zero. The key behind that wait has been the fragile state of the economy. Increased economic activity would give banks more productive ways to deploy the deposits they have on hand, by making profitable loans and investments. Employment growth helps spur this activity by broadening the base of wage-earning consumers, and injecting more income into the economy.
- Mortgage shoppers may benefit from wider loan availability. Current mortgage rates may still be among the lowest in history, but lending standards have been so tight they have only been available to extremely well-qualified borrowers. While a stronger economy may come a a price to mortgage shoppers in the form of higher rates, it is better to pay a little more and be able to get a mortgage than to have low rates in theory but have loans unattainable to many would-be borrowers.
The prevailing skepticism that has surrounded the economy in recent years has muted the immediate impact of positive employment news. However, the defining characteristic of the recent employment trend is not just that it has been good, but that it has been consistent. It is this consistency that could ultimately put both the economy and the financial markets on firmer ground.
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October 31, 2014
Like Goldilocks looking for porridge that was "just right," financial markets struggle to accept large monthly fluctuations in inflation. However, the September figure released last week may represent the kind of happy medium investors want.
The Consumer Price Index (CPI) for September showed that inflation rose by a seasonally adjusted 0.1 percent during the month -- a figure that may fall into the "just right" zone, especially when compared to the swings in inflation in the months that led up to September.
A welcome calm
Earlier this year, inflation appeared to be on an upward track. March, April and May saw monthly inflation numbers of 0.2, 0.3, and 0.4 percent, respectively. That not only represented a troubling trajectory, but it left inflation running at an annual pace of nearly 5 percent.
Inflation eased back in June and July, and then in August reversed course altogether. The CPI declined by 0.2 percent, hinting at the kind of deflation that is symptomatic of a failing economy. In this context, seeing a positive but mild inflation number for September may have been the best outcome possible. The latest reading puts inflation at the easy-going pace that has made low-interest-rate policies possible, but without the deflation scare.
What investors want
These inflation developments are occurring during a tumultuous time for the stock market. At one point, the Dow Jones Industrial Average was down by more than 5 percent during October, but it has since recovered to about the breakeven point for the month.
Among other things, last week's inflation report seems to have had a positive effect. As news of global economic weakness grows, any repeat of August's deflation would have reinforced suspicions that global weakness had started to drag down the U.S. economy. That's why a rise in the CPI was actually welcome news to stock market investors.
Here is where the "just right" balance comes in. Deflation would almost certainly have spooked investors, but they also would not have welcomed a high inflation figure. Investors want solid economic growth, but they want interest rates to remain low -- something that would be virtually impossible if inflation flared up. That is why 0.1 inflation seems to have been just right.
The outlook for savings accounts
To some extent, people with savings accounts, CDs and money market accounts are seeking the same balance between steady growth and low inflation. The important difference is that they do not want artificially low interest rates to continue.
From the perspective of savings accounts, "just right" represents an economic growth rate that is strong enough to allow interest rates to rise to more normal levels, but not so strong as to stir up inflation.
What is clear so far is that on balance, inflation was virtually nonexistent during the quarter. Now, depositors just have to hope that economic growth did not disappear along with it.
October 17, 2014
In the first 12 trading days of October, the Dow Jones Industrial Average suffered six daily losses of 100 points or more. Given that the month started off with encouraging economic news, what could be plaguing the market?
It seems the market has slipped into a worst-of-both-worlds mentality. That could make stocks a volatile place to be, and could eventually impact consumer interest rates.
The worst-of-both-worlds outlook
Toward the end of September, the Bureau of Economic Analysis released an upward revision to their estimate of second-quarter GDP growth, pushing it to 4.6 percent. A week later, the Bureau of Labor Statistics released an report showing strong employment growth -- 248,000 new jobs -- in September. With such a positive lead-in to October, why has it been such an ugly month for the stock market?
There are a couple of factors at work. For one thing, the market has long been wary that signs of growth will bring higher interest rates, something that can have a suppressive effect on both economic growth and stock valuations. Meanwhile, the other factor is that a variety of developments have recently cast doubt over global economic growth rates.
As a result, the market seems to be suffering from a worst-of-both-worlds outlook, viewing the economy as just strong enough for interest rates to rise, but not strong enough to withstand a global slowdown.
Impact on bank rates
The worst-of-both-worlds scenario could result in the widening of two interest rate spreads that impact consumers:
- The spread between mortgage and savings account rates. Current mortgage rates may seem low, but according to the MoneyRates.com CLIP Index, they are actually unusually high compared to rates on savings accounts. This could actually get worse, as the Fed has already largely discontinued its active program to keep long-term rates low, but may keep short-term rates down a little longer if global growth concerns become pervasive.
- The spread between rates for bad and good credit customers. A slow economy often means lower interest rates, but it also raises credit concerns. So, people with shaky credit histories may actually see rates on things like credit cards and mortgages rise, while general market rates hold steady or decline. The message is, this is a very important time to keep your credit history in good shape.
After the Fed held interest rates at unnaturally low levels for such a long time, letting those rates rise always had the potential to be disruptive. Now, a variety of factors on the global scene threatens to further shake up the interest rate picture.
The message for consumers is to lock in borrowing rates, and be alert for changes in savings rates. At just over 4 percent, current mortgage rates are still historically low, meaning that people in the market should act soon to secure their mortgages, and favor fixed over adjustable-rate loans.
People with savings accounts, meanwhile, should closely watch both their own rate and the market for rates in general. A volatile environment tends to create both opportunities and risks.