Personal Finance

High inflation and interest rates are coming at a bad time for Biden

Published

6 months ago

April 13, 2024

The booming economy is exacerbating a key vulnerability for President Biden heading into the height of campaign season, as inflation and interest rates could remain higher until deep into the final weeks of the presidential election.

Fresh data this week shows inflation picked up again in March, in the latest sign that the economy is overheating. Unexpectedly strong job growth, wages and consumer spending are a plus for most Americans but bad for inflation. The higher inflation reading makes it more likely that the Federal Reserve will keep interest rates — and mortgage rates — elevated until late in the year, possibly until days after the election, eluding much political gain for Biden.

“It’s really a case of bad luck,” said Karen Dynan, a professor at Harvard University and former Treasury Department chief economist. “The Biden administration has made some big strides but it’s up against one of the most disruptive economies in decades. Rate cuts would be a welcome development for a lot of people, but the prospects for cuts have really changed given what’s happening with inflation.”

Gasoline prices, in particular, have always played an outsize role in how Americans feel about the economy. The average gallon of gas has been creeping up in the past two months to $3.63 a gallon on Friday, according to AAA. Fears of rising prices could already be weighing on Americans anew, as consumer sentiment fell unexpectedly in April, according to a University of Michigan survey released Friday.

A booming economy can fuel inflation if spending is so robust that consumers are willing to pay ever-higher prices for goods and services. Consumer spending makes up two-thirds of the U.S. economy, and so far Americans have been more than happy to splurge on services like dining out, travel and hotel stays, despite inflation. That’s forced businesses to ramp up hiring — and raise wages — which in turn pushes prices even higher.

Biden aides point out that the current inflation reading, at 3.5 percent, is below what it was at similar points in President Bill Clinton’s and President Ronald Reagan’s tenures, when year-on-year inflation was at 3.6 percent and 4.8 percent, respectively. Both went on to win reelection.

“Our agenda to lower costs on behalf of working families is as urgent today as it was yesterday,” said Jared Bernstein, chair of Biden’s Council of Economic Advisers. “We’re just going to keep our heads down and continue fighting to lower costs from prescription drugs to junk fees to housing and child care.”

For much of his presidency, Biden has struggled with his message on the economy. When inflation first started to beset the country in the months after the pandemic, the president and his team settled on describing it as “transitory,” trying to signal to voters that the spike was temporary and would subside. When Russia invaded Ukraine, the White House started using the phrase “Putin’s price hike,” blaming the war for rising gas prices.

As inflation dropped, Biden try to rebrand “Bidenomics,” originally used derisively by conservative media, in an attempt to gain credit from voters for a booming job market and growing economy. But as economists have struggled to explain the topsy-turvy economy after covid, Biden has struggled, too.

The president and his aides have been frustrated that they have not received more credit for avoiding a recession and passing massive legislation, specifically the infrastructure law and the CHIPS Act, which will transform the United States’ roads and bridges and turbocharge a domestic semiconductor industry. Aides have been divided over how to sell Biden’s legislative accomplishments while many Americans say they are having trouble affording groceries and other household items.

That dispute spilled into public view this week after Politico published audio of former White House chief of staff Ron Klain, who remains close to Biden, criticizing the White House’s economic messaging. During a conference, Klain said Biden spends too much time touting new bridges and not enough on rising prices.

The White House says Biden can, and must, do both.

“He understands what the Americans are facing,” White House press secretary Karine Jean-Pierre told reporters this week when asked about Klain’s comments. “And he’s talked at almost every — every event that he’s had — crisscrossing the country after the State of the Union — about lowering costs, how important it is, and how there’s more work to do. You hear that.”

On Saturday, the White House put out a new memo on the economy, debuting a message centered on Trump, warning that if he’s reelected inflation would climb higher.

“While President Biden’s vision for economic growth is based on strengthening the middle class, lowering prices, and defeating inflation, MAGAnomics is the opposite – a recipe for supercharging inflation and costs for the middle-class with policies that put the wealthy above everyone else,” Andrew Bates, a White House spokesman, wrote in the memo.

But, as inflation heats back up, the White House is under renewed pressure to quell Americans’ economic anxieties. Stock markets tumbled this week as investors realized a rate-cut was no longer imminent.

Bank of America this week said it does not expect the Fed to begin scaling back on interest rates until December, six months later than its original forecast. “We no longer think policymakers will gain the confidence they need to start cutting in June,” Michael Gapen, the bank’s U.S. economist said in an analyst note. It also expects the Fed to cut less than it had previously thought.

The president this week took the unusual step of commenting on the Fed’s next move, saying he stands by his prediction that the central bank will cut rates by the end of the year. Biden has generally been careful to keep his distance from the Fed, saying he respects the central bank’s independence.

In a twist, the election itself could delay the Fed’s plans. Investors generally expect the central bank to steer clear of policy changes in the lead-up to the presidential race, out of concern that it could be seen favoring one candidate over another.

“It’s hard to imagine the Fed cutting rates aggressively before November,” said Glenn Hubbard, a professor at Columbia Business School who served as an economic adviser to President George W. Bush. “I just don’t see it happening — that’s not a political judgment, it’s just arithmetic.”

Inflation, which peaked at 9.1 percent in June 2022, has come down dramatically since then, with meaningful drops in just about every category of goods and services. In some cases, big-ticket items like cars, furniture and appliances, have actually gotten cheaper in the past year.

But in recent months, progress has petered out. Inflation picked up in March — with prices up 3.5 percent from a year earlier, compared with a 3.2 percent increase the month before. A range of basics — including car insurance, women’s coats, pork chops and visits to the vet — were about 3 percent more expensive than they were in February.

Chad Barrett, 36, who owns a solar-panel business in West Palm Beach, Fla., says inflation and high borrowing costs have forced him to reconsider his vote for Biden. Barrett, a lifelong Democrat who once campaigned for Sen. Bernie Sanders (I-Vt.), plans to cast a “protest vote,” either for a third-party candidate or a write-in.

Until this week, Barrett had been hopeful that the Fed would start lowering interest rates in the next couple of months, offering some relief. But that seems unlikely now — which means he’s already getting notices from lenders that his borrowing costs will go up soon.

“All I hear is, ‘This economy is great, it’s amazing,’ but I’m a millennial who doesn’t own a home and everything is going up in cost,” he said. “It’s a mix of disappointment and frustration.”

In his rematch against former president Donald Trump, Biden has increasingly tried to contrast his economic record with Trump’s.

“We’re in a situation where we’re better situated than we were when we took office where we — inflation was skyrocketing,” Biden said at a news conference Wednesday. “And we have a plan to deal with it, whereas the opposition — my opposition talks about two things. They just want to cut taxes for the wealthy and raise taxes on other people. And so, I think they’re — they have no plan. Our plan is one I think is still sustainable.”

As the president struggles to connect on the economy, though, his campaign is eager to focus on the issue of abortion. Democrats have found electoral success since the Supreme Court overturned Roe v. Wade in 2022, and they are spending millions of dollars to remind voters that Trump was the architect of that decision. As states around the country institute even more restrictive abortion bans, Democrats are optimistic the issue will outweigh the economy for core Democratic base voters, but also potentially disaffected Republicans.

In Fultonville, N.Y., Pam Marshall and her community have been hit hard by rising prices. But the single mom, who left the Republican Party after the Jan. 6 attack, says abortion rights take precedence over economic issues. She plans to vote for Biden in November.

“Everyone here is struggling — I’m giving money to my son and his family, I see folks standing in line at the food bank,” said Marshall, an IT project manager. “But we need a functional government.”

Personal Finance

Buying a home? Here are key steps to consider from top-ranked advisors

Published

14 hours ago

October 15, 2024

Business Finance News

Buying a home is often the biggest financial decision you’ll ever make.

It’s not just about choosing a place to live; it’s about making a long-term investment that will impact your financial future for years to come.

Therefore, if you are looking to buy a home, there are certain steps you should take to prepare for the purchase, according to several advisors ranked in CNBC’s 2024 Financial Advisor 100 List.

“Number one is doing that initial homework and financial planning,” said Brian Brady, vice president at Obermeyer Wood Investment Counsel in Aspen, Colorado. The firm ranks No. 23 on the 2024 CNBC FA 100 list.

Most important, it has to be a “smart financial decision” that makes the most sense for you, explained Stephen Cohn, co-founder and co-president of Sage Financial Group in West Conshohocken, Pennsylvania. The firm ranks No. 61 on the 2024 CNBC FA 100 list.

More from FA 100:

Here’s a look at more coverage of CNBC’s FA 100 list of top financial advisory firms for 2024:

“I run into a lot of first-time homebuyers, friends, kids, acquaintances. They fall in love with the house, and it may not make sense for them financially,” said Ron Brock, managing director and chief financial officer at Sheaff Brock Investment Advisors in Indianapolis, Indiana. The firm ranks No. 7 on the 2024 CNBC FA 100 list.

He tells them: “Just be smart. Don’t be house poor.”

Here are some key steps to consider if you plan to buy a home:

1. Have a strong credit score

Make sure you have strong credit, said Shaun Williams, private wealth advisor and partner at Paragon Capital Management in Denver, Colorado. The firm ranks No. 38 on the 2024 CNBC FA 100 list.

“The higher the credit score, the better the terms you’re going to get on the loan, and the lower the interest rate will be,” said Ryan D. Dennehy, a financial advisor at California Financial Advisors in San Ramon, California. The firm ranks No. 13 on the 2024 CNBC FA 100 list.

For example, a FICO score ranging 760 to 850 might qualify for a 6.226% annual percentage rate, according to Bankate.com. That can translate to a $1,842 monthly payment, Bankrate found.

On the other hand, a FICO score of 620-639 might get a 7.815% APR, roughly amounting to a $2,163 monthly mortgage payment, per Bankrate examples. They are based on national averages for a 30-year fixed mortgage loan of $300,000.

You can start the process by paying down any existing debts that you have on time and in full, and avoid new loans as you get closer to buying a home, experts say.

2. Start saving for the down payment

While a 20% down payment is not required to buy a house, buyers try to put more money upfront to avoid mortgage insurance costs and potentially lower monthly payments.

In the third quarter of the year, the average down payment was 14.5%, and a median of $30,300, Realtor.com told CNBC.

In order to start saving for a down payment, you need to figure out your cash flow, or how much money is coming in versus going out every month, said Steven LaRosa, director and senior portfolio manager at Edgemoor Investment Advisors based in Bethesda, Maryland. The firm ranks No. 14 on the 2024 CNBC FA 100 list.

Also, try to maximize how much money you can save or put away towards the down payment, said LaRosa.

3. Boost your emergency savings

It’s not just the down payment that needs to be built up, said Williams.

“You should have six months of your spending needs, including the house spending needs, in an emergency fund,” he said.

You don’t want to be in a situation where you use up all of your savings for the upfront costs of buying a house and end up with no cash left.

Home emergency spending was $1,667 across 1.5 projects per household in 2023, according to a report by Angi, an online marketplace for home improvement professionals.

3. Think about the lifestyle you want

Ask yourself what kind of lifestyle you look forward to, said Brady.

“Are you looking for a condo? Do you want a single-family home?” he said.

Then you can focus on factors like location and price, said Brady.

Meanwhile, some of the additional costs that come with owning a house are driven by where you live, like property taxes, utility and insurance costs, he said.

In some areas, “it’s next to impossible” to get home insurance, said Brady. “And if you can [get home insurance] you’re paying quite a bit.“

Nearly three-quarters, or 70.3%, of Florida homeowners and 51% of California homeowners say they or the area they live in has been affected by rising home insurance costs or changes in coverage in the past year, according to Redfin, an online real estate brokerage firm.

5. Factor in other homeownership costs

Owning a home goes far beyond the monthly mortgage payment.

You need to factor in additional costs, experts say.

To that point, the costs of homeownership adds up to an average $18,118 annually, or $1,510 a month, according to a report by Bankrate.com. The national figure includes the average costs of property taxes, homeowner’s insurance, and electricity, internet and cable bills. Maintenance was estimated at 2% a year of the home value.

“Those are very significant additions that sometimes people glance over and don’t put enough weight on,” said Cohn.

As such costs are unlikely to decline as time goes on, it’s important to have an emergency fund for homeownership costs, experts say.

6. How long you plan to stay in the house

“We like to use a five to seven year minimum,” said Cohn. The longer you’re in a house, the more likely the fixed costs will amortize, or pay off, over time, he said.

Additionally, in the early years of the loan, you’re mostly paying the interest rate, and not the loan itself, experts say.

“You’re not accumulating any equity from putting money into the mortgage in the first 5 to 7 years,” said Cohn.

“If you start looking at how much goes to principal and how much goes to interest in the first several years, it’s probably all interest,” said Brock.

Personal Finance

What to do if you can’t pay taxes on Oct. 15 tax extension deadline

Published

17 hours ago

October 15, 2024

Business Finance News

Urbazon | E+ | Getty Images

The tax extension deadline has arrived and there are options if you still can’t pay your balance, tax experts say.

About 19 million U.S. taxpayers filed for an extension by the April 15 tax deadline, which bumped the filing due date to Oct. 15. But taxpayers affected by natural disasters may have even more time, with new deadlines ranging between Nov. 1 and as late as May 1, 2025, depending on location.

However, for federally declared disasters after April 15, filers were not granted more time to pay their tax bill. Penalties and interest on unpaid balances started accruing after the April 15 deadline.

Many taxpayers wrongly assume that a tax extension provides more time to pay, experts say.

“That’s a surprise to a lot of people,” said Josh Youngblood, an enrolled agent and owner of The Youngblood Group, a Dallas-based tax firm.

If you missed the tax deadline, the late payment penalty is 0.5% of your unpaid balance per month or partial month, capped at 25%. You will also incur interest on unpaid taxes.

By comparison, the failure-to-file penalty is 5% of unpaid taxes per month or partial month, up to 25%.

You have ‘various payment options’

The IRS has options if you can’t pay your taxes, “but you have to be current on your filing requirement,” said Tom O’Saben, an enrolled agent and director of tax content and government relations at the National Association of Tax Professionals.

After filing, there are “various payment options” online, and many filers will receive an immediate acceptance or rejection of payment plan requests without calling the IRS, according to the agency.

“If you owe less than $50,000, establishing a payment plan with the IRS is almost going to be automatic,” O’Saben said.

IRS online payment plans, or “installment agreements,” include:

Short-term payment plan: This may be an option if you owe less than $100,000, including tax, penalties and interest. You have up to 180 days to pay in full.
Long-term payment plan: This may be available if your balance is less than $50,000, including tax, penalties and interest. You must pay monthly, and you have up to 72 months to pay off the balance.

Although the late-payment penalty and interest will continue to accrue, an IRS payment plan could cut your late-payment fee in half while the agreement is in effect, according to the IRS.

One downside of IRS payment plans is future tax refunds could be used to offset your unpaid balance, O’Saben said.

‘Don’t ignore it because it won’t go away’

If you have unpaid taxes, you can expect notices from the IRS, and communication with the agency is key, experts say.

“Don’t ignore it because it won’t go away,” Youngblood said. “I’ve had clients come in, and they have a whole pile of unopened IRS letters.”

“The IRS is not as bad as they think,” he added. “They actually want to work with people.”

Don’t miss these insights from CNBC PRO

Taxpayers in federally declared disaster areas in 25 states granted extended tax deadlines

Personal Finance

More colleges set to close in 2025, while ‘Ivy Plus’ schools thrive

Published

19 hours ago

October 15, 2024

Business Finance News

Is it best to go to college or dive straight into the working world?

Many colleges are under financial pressure, and the cracks are starting to show.

At least 20 colleges closed in 2024, and more are set to shut down after the current academic year, according to the latest tally by Implan, an economic software and analysis company.

Altogether, more than 40 colleges have closed since 2020, according to a separate report by Best Colleges.

As the sticker price at some private colleges nears six figures a year, students have increasingly opted for less expensive public schools or alternatives to a four-year degree altogether, such as trade programs or apprenticeships.

At the same time, the population of college-age students is also shrinking, a trend referred to as the “enrollment cliff.”

Experts have continuously warned that ongoing problems with the new Free Application for Federal Student Aid form have resulted in fewer students applying for financial aid, which could also contribute to declining enrollment.

That has left some colleges and universities in a bind, especially “small private — often liberal arts — schools,” said Candi Clouse, a vice president at Implan.

Meanwhile, the country’s most elite institutions are thriving.

College applications jump

Coming out of the pandemic, a small group of universities, including many in the Ivy League, experienced a record-breaking increase in applications, reports show.

Last year, Yale University, for example, accepted 3.73% of the record-high 57,465 students who applied to the Class of 2028.

Overall, the number of college applicants jumped 11% in the 2023-24 school year, even as enrollment flatlined, the latest data from the Common Application found, suggesting more students are applying to the same schools.

If you are not a big brand, you have a real problem on your hands.

Hafeez Lakhani

founder and president of Lakhani Coaching

“There’s been a paradox in higher education for five-plus years,” said Hafeez Lakhani, founder and president of Lakhani Coaching in New York.

“At the very same time you have an enrollment crisis building, you have record application volume at the most selective schools,” he said. “The consensus is, it’s only worth going to college if it’s a life-changing college.”

Meanwhile, private colleges that are less prestigious but equally expensive are struggling to attract applicants, he added.

For a majority of students, “the costs are nowhere near reasonable,” Lakhani said.

“If you are not a big brand, you have a real problem on your hands,” he said.

College is becoming a path for only those with the means to pay for it, other reports show.

Children from families in the top 1% are more than twice as likely to attend a so-called Ivy Plus school as those from middle-class families with comparable SAT or ACT scores, according to the National Bureau of Economic Research.

Though opinions on which schools should be considered Ivy Plus vary, the group generally includes the eight private colleges that comprise the Ivy League — Brown, Columbia, Cornell, Dartmouth, Harvard, University of Pennsylvania, Princeton and Yale — plus the University of Chicago, Duke, Massachusetts Institute of Technology, and Stanford.

Most Americans still agree a college education is worthwhile when it comes to career goals and advancement. However, only half believe the economic benefits outweigh the costs, according to a separate report by Public Agenda, USA Today and Hidden Common Ground.

The rising cost of college and ballooning student loan balances have played a big role in changing views about the higher education system, which many think is rigged to benefit the wealthy, the report found.

And costs are still rising.

Tuition and fees plus room and board for a four-year private college averaged $56,190 in the 2023-24 school year. At four-year, in-state public colleges, it was $24,030, according to the College Board, which tracks trends in college pricing and student aid.

Already, the majority of applicants hail from the wealthiest zip codes, the Common Application found.

Subscribe to CNBC on YouTube.