The economy has made progress, but inflation is still too high. Federal Reserve Chairman Jerome Powell said on April 3 that while inflation has cooled, it has not met the Fed’s goal of 2 percent. Never-the-less, Powell said the Fed has shifted its focus from raising interest rates to lowering them.
How does the Fed’s monetary policy impact various sectors including banking, mortgages, and auto financing? In the April 30 episode of the Market Pulse podcast, our panel of experts from the Equifax Risk Advisory Group dissect the intricacies of the Federal Reserve's monetary policy, and its sweeping impacts on the U.S. economy.
Economic Indicators to Watch
Jesse Hardin, Senior Risk Advisor at Equifax, emphasized the importance of monitoring key economic indicators that the Fed considers when making rate decisions. He explained, "It’s probably good to mirror what the Fed's looking at or even what the market's looking at. So, looking at things like inflation, labor spending whether it’s retail, goods and services, homes, autos, etc. All of those really have a role to play in the Fed's analysis."
Hardin also clarified the difference between the Personal Consumption Expenditures index (PCE) and the Consumer Price Index (CPI), noting that PCE is the Fed's preferred gauge and includes different weights on goods and services, which recently has put a greater emphasis on shelter costs.
Banking and Interest Rates
Tom O’Neill, Risk Consultant at Equifax, discussed the direct impact of changing interest rates on the banking sector. He highlighted the nuanced reality that while rising interest rates can increase profit margins by allowing banks to charge more on loans, they can also lead to decreased borrowing and increased delinquencies.
“To be able to say rising interest rates are good and lowering interest rates are bad for banks. It's usually a mixed bag,” O’Neill said.
Mortgage Rates and Housing Affordability
Addressing the mortgage environment, Equifax Risk Advisor Dave Sojka remarked on the high current mortgage rates and their implications on housing affordability. He noted, "The current situation right now... rent is too high. Current rates as of April 1st of this year, 30-year rate's at 7.46, the 15 years at 6.68, and the 30-year jumbos at 7.49."1 He stressed how high interest rates have doubled mortgage rates from what most were paying during 2020 and 2021, impacting mortgage origination volumes and overall housing affordability.
Auto Industry: Payments and Pricing
Equifax Risk Advisors Leader Thomas Aliff, focusing on the auto industry, discussed how interest rates affect vehicle pricing and financing. He explained the high inflation within the automotive space significantly impacts the monthly payment to income ratios, stressing consumers' budgets. Aliff highlighted the potential benefits of rate decreases, "A hundred basis point drop... it does create a massive opportunity for refinance as well as new origination."
Fed's Cautious Approach to Rate Cuts
Closing the discussion, Hardin reiterated the Fed's cautious approach towards rate adjustments, emphasizing the need for sustained evidence that inflation is moving towards the 2-percent target. He cited recent remarks from Jerome Powell: "We do not expect that it'll be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably towards 2 percent."1
Conclusion: Looking Ahead
The episode encapsulated a broad yet detailed analysis of how the Federal Reserve's rate decisions ripple across the economy, affecting everything from personal loans to major sectoral investments. The panel's expert insights provided a clearer understanding of the current economic landscape and what future movements in interest rates might mean for consumers and businesses alike.
Check out other episodes of the Market Pulse podcast or sign up for the upcoming Market Pulse webinar.
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