Personal Finance

High inflation to delay rate cuts, uncertain economy

Published

8 months ago

April 11, 2024

The economy still isn’t behaving the way anyone expected.

The job market is growing at a blockbuster pace, even though high interest rates usually slow hiring or cause layoffs. Consumers are spending on essentials and extravagances alike, suggesting people don’t fear trouble ahead. The stock market is up, and worries of a recession have largely faded.

But inflation, after easing remarkably in 2023, has stayed unexpectedly hot since the start of the year. And that’s confounding economists and Federal Reserve officials who are still struggling to understand the post-pandemic world.

Higher borrowing costs were widely expected to tackle inflation with full force, to bring the roaring economy crashing down — or both. Instead, things seem to be settling in a confusing spot, with price increases still above normal, but other parts of the economy holding strong, too. The result is more uncertainty for experts, consumers and businesses alike about what might happen next in an economy that is still resisting the usual rules.

“We got through some of that ‘transitory’ part,” said Diane Swonk, chief economist at KPMG, referring to more temporary sources of inflation that drove price increases in 2021 and 2022, such as supply chain problems and energy prices. “We haven’t gotten to the fundamental part — and the hard part.”

When the year started, it appeared the Fed and White House had pulled off the unthinkable: no recession, easing inflation and a still-booming job market. That momentum led Fed leaders in December to pencil in three interest rate cuts this year, projections they repeated last month.

But then January and February price data came in unexpectedly high. For a while, policymakers hoped those were bumps in the road, not a more worrisome trend. But March data, released this week by the Bureau of Labor Statistics, cemented any lingering doubts.

Officials have long said they need a bit more assurance that inflation is trending down before they can cut rates. But after March’s disappointing report, central bankers might be losing the confidence they already had. So long as other strengths like the job market hold up, the Fed won’t have a compelling reason to cut rates and take pressure off the economy while inflation keeps festering.

As a result, financial markets and Fed watchers are no longer banking on June for an initial rate cut. The farther the timeline gets pushed back — possibly to Fed meetings in July, September or November — the closer the central bank bumps up against the presidential election, despite concerted attempts to avoid politics at all costs. On the flip side, the longer the Fed leaves rates high, the more it risks softening a generally strong economy just as President Biden and former president Donald Trump duel over who can best manage it.

“The Fed doesn’t want to be influenced by the political calendar,” said Eswar Prasad, an economist at Cornell University and a senior fellow at the Brookings Institution. “The closer we get to November for that interest rate pivot, the more uncomfortable that is going to be.”

Part of the reason officials would otherwise want to cut rates is because too much pressure on the economy can cause other problems, even if inflation ebbs. Rates that stay high for a long time can eventually wear on the job market, persuading employers to stop adding jobs or lay off the staff they already have.

That leaves the Fed to balance its precarious inflation fight against daunting risks. The central bank is charged with keeping inflation in check and maximizing employment at the same time, even though those goals can conflict.

“If we ease too much or too soon, we could see inflation come back,” Fed Chair Jerome H. Powell said at a news conference last month. “And if we ease too late, we could do unnecessary harm to employment and people’s working lives.”

When the Fed raced to hoist interest rates two years ago, the underlying picture was different. Broken supply chains sent prices up for all kinds of goods as people rushed to buy used cars, at-home office equipment and backyard furniture. A jolt of government stimulus also injected fresh demand into the economy, sending checks into peoples’ pockets as they filled restaurants, concert venues and hotels that were hobbling back from the pandemic.

The Fed was late to respond. To catch up, officials doled out whopping interest rate hikes to get borrowing costs high enough to slow the economy. The overwhelming expectation was that those moves would cause a recession. Powell warned of pain ahead.

Not only did the Fed avoid a downturn, but inflation came down significantly, too: After peaking at an annual rate of 7.1 percent in mid-2022, the Fed’s preferred inflation gauge clocked in at 2.5 percent in February. (Another inflation measure released this week peaked at 9.1 percent in June 2022 and now sits at 3.5 percent.)

Yet it isn’t entirely clear how much of that progress came from interest rate hikes alone. Econ 101 teaches that high rates cool demand by making it more expensive to get a mortgage, buy a car or grow a business. But surprises came there, too. The housing market, for example, went through a brief downturn but rebounded quickly . Home prices are still inching up, and many buyers haven’t shied from mortgage rates around 6 or 7 percent.

Much of the relief on inflation came from supply chains getting back into gear. Gas and energy costs also fell dramatically, a welcome pivot after they surged following Russia’s 2022 invasion of Ukraine.

The stickiest inflation category — which includes services like housing, hospitality, leisure and health care — still hasn’t had a major breakthrough.

“We’re probably in a much better place than many of us thought we’d be, in terms of a year ago,” said Jason Furman, a former Obama administration economist now at Harvard University. “We’re in a much worse place than we were hoping three months ago.”

At his news conference last month, Powell outlined what it would take to get inflation to hit the Fed’s 2 percent target — and put the economy on a path to rate cuts. Goods prices would need to keep simmering down. Housing costs would need to fall in line. Services inflation would need to cool, too.

But he also acknowledged what’s still unknown.

“Some combination of those three things” will be necessary, Powell said, “and it may be different from the combination we had before the pandemic.”

Personal Finance

Student loan transfer led to credit reporting errors: Lawmakers

Published

1 hour ago

December 19, 2024

Business Finance News

Chair Elizabeth Warren, D-Mass., conducts the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth hearing titled Promoting Competition, Growth, and Privacy Protection in the Technology Sector, in Dirksen Building on Tuesday, December 7, 2021.

Tom Williams | CQ-Roll Call, Inc. | Getty Images

A “faulty” transfer of student loan accounts from NelNet to Mohela in 2023 led to “millions of consumer credit reporting errors,” lawmakers say in a new letter to government agencies reviewed by CNBC.

The change in loan servicers caused nearly 2 million duplicate student loan records to appear on borrowers’ credit reports, while hundreds of thousands of borrowers’ credit scores were reported incorrectly for up to a year and a half, according to the letter. Sen. Elizabeth Warren, D-Mass., Ron Wyden, D-Oregon, and other lawmakers sent the letter on Wednesday evening to Consumer Financial Protection Bureau Director Rohit Chopra and U.S. Department of Education Secretary Miguel Cardona.

As part of their investigation, the lawmakers sent inquiries to NelNet, Mohela and three credit reporting companies: Equifax, Experian and Transunion. They asked the companies about what had gone wrong and how many borrowers were impacted.

In their letter, the lawmakers urged the government agencies to investigate the problems.

“We respectfully request that the CFPB and ED use their supervisory and enforcement authority to ensure that the appropriate parties are held accountable for these errors,” the lawmakers wrote.

Mohela appears to have failed to inform the credit reporting companies of each loan transfer from NelNet, the lawmakers said they found in their investigation. As a result, many borrowers had their single loan balance reported twice, once by each servicer.

Duplicate student loan balances on a borrowers’ credit report can reduce their credit scores and make it more difficult for them to obtain mortgages, car loans and other credit, the lawmakers note in the letter.

Mohela and Nelnet did not immediately respond to requests for comment.

The credit reporting companies identified “over 100,000 cases” in which the reporting errors led borrowers to have an incorrect credit score, according to the lawmakers’ investigation. Thousands of borrowers had their credit scores drop by more than 20 points, they said.

They added that borrowers submitted around 7,500 complaints and disputes to Mohela and the credit reporting companies in attempts to fix the errors.

The credit reporting companies told the lawmakers the duplicate balances “have been resolved now,” the letter said.

An Equifax spokesperson said they were aware that some student loan servicers “did not report loans in adherence to the consumer reporting guidelines.”

“We are working with the Department of Education and the servicers to correct misreported accounts and ensure that student loans are being appropriately reflected on consumer credit reports,” the spokesperson said.

Experian and TransUnion did not immediately respond to requests for comment.

Personal Finance

CFPB takes aim at credit card issuers over ‘bait-and-switch’ rewards

Published

2 hours ago

December 19, 2024

Business Finance News

CFPB cracks down on rewards tactics

About 90% of all credit card spending is on rewards cards. But according to the CFPB, an increasing number of consumers have reported that some rewards are hard to redeem or are not worth as much as they thought. In 2023 alone, complaints involving credit card rewards jumped 70% over pre-pandemic levels.

“Large credit card issuers too often play a shell game to lure people into high-cost cards, boosting their own profits while denying consumers the rewards they’ve earned,” CFPB Director Rohit Chopra said in a statement. “When credit card issuers promise cashback bonuses or free round-trip airfares, they should actually deliver them.”

According to the Consumer Bankers Association, only a small share of credit card users report problems with rewards: Complaints regarding rewards made up just 2% of all credit card complaints reported to the CFPB since January 2020.

“The only bait-and-switch that’s happening here is from the CFPB once again misrepresenting its own data,” CBA President and CEO Lindsey Johnson said in a statement.

“As the CFPB’s own research shows, credit cards are — by far — the best tool for the one-fifth of Americans that lack access to credit to begin building their financial lives,” Johnson said.

Consumer complaints about credit card rewards are exceedingly rare, the American Bankers Association also noted.

“Despite widespread evidence that credit card rewards programs are highly popular and deliver tremendous value to tens of millions of U.S. cardholders from all walks of life, Director Chopra has once again chosen not to let facts get in the way of his decision to tarnish a hugely popular consumer product,” Rob Nichols, the ABA’s president and CEO, said in a statement.

Consumers like reward cards

Even with credit card interest rates near an all-time high, when deciding on a new credit card, 83% of cardholders said their final decision comes down to perks, according to a separate report by CardRates.com.

The majority, or 58%, of credit card users polled by CardRates said they preferred cash back over miles or points. But still, not all cardholders used the credit card rewards available to them.

Travel rewards can be more lucrative but are notoriously harder to redeem, Bankrate also found. Only 11% of rewards cardholders redeemed for a free hotel stay, while just 10% redeemed for a free flight, according to Bankrate.

“Failing to redeem your rewards is a major missed opportunity,” said Bankrate’s senior industry analyst Ted Rossman. “While the best rewards can be subjective, the worst reward is getting nothing at all.”

How to make the most of rewards

In the best-case scenario, credit card rewards are “almost like free money,” said Bill Hardekopf, a credit card expert and CEO of BillSaver.com.

But that’s only if you pay your credit card off on time and in full every month. With credit card rates over 20%, on average, the benefits of cash back or other perks are quickly eroded if you carry a balance.

“If you miss a payment or are late on a payment, you get socked with a huge penalty — that interest rate will far outweigh the rewards you are going to get,” Hardekopf said.

When it comes to which reward card to choose, Hardekopf recommends a cash-back card with a low, or no, annual fee. “The best reward you can get is cash back because cash talks — it’s easy to understand and there’s no problem redeeming.”

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Personal Finance

Some shoppers prefer retail credit cards over buy now, pay later plans

Published

5 hours ago

December 19, 2024

Business Finance News

Filadendron | E+ | Getty Images

High interest rates aren’t deterring many shoppers from store credit cards.

When asked to choose between a store card or a buy now, pay later plan, 58% of surveyed shoppers prefer store cards, according to a new report by LendingTree. The remaining 42% picked BNPL loans.

The site polled 2,040 U.S. adults in September.

That choice “speaks to the fact people may be looking for a little bit longer-term help with their financial situation,” said Matt Schulz, chief credit analyst at LendingTree.

In December, new cards offered by the top 100 retailers had an average annual percentage rate of 32.66%, up from 27.7% in 2022, according to the Consumer Financial Protection Bureau. Many short-term BNPLs do not charge interest, but longer-term loans do, and on the higher end, those rates can be comparable to a store card.

Younger shoppers have been early adopters of BNPL, and that shows in their payment preferences.

About 59% of Gen Zers and 51% of millennials prefer BNPL over retail store credit cards, Lending Tree found. To compare, 38% of Gen Xers and 22% of baby boomers prefer BNPL.

“Buy now, pay later really started off as a millennial, Gen Z phenomenon,” Schulz said. “Younger Americans really drove a lot of the growth.”

Whichever payment option you plan to use to finance holiday purchases this year, keep in mind the cost of carrying the debt, experts say.

How store cards and BNPL work

Retail store credit cards and BNPL loans operate differently.

A retail store credit card is a long-term, revolving line of credit that a store offers in conjunction with a bank partner. To entice new users, stores generally offer applicants a discount on their first card purchase, or financing deals. The card may also be tied into the retailer’s loyalty program, sometimes with bonus rewards for cardholders.

A buy-now, pay later loan — issued through a provider the merchant works with — typically breaks up the total cost of a purchase into installment payments over a set period of time. Some providers offer longer repayment periods, too, and charge interest. Users can have multiple purchases with the same BNPL provider at once, but those may be treated as individual loans with their own repayment terms.

With either payment method, make sure to pay off the balance on time — you might face penalties like fees and interest if you don’t stay on track.

Gen X most likely to max out their credit cards, survey finds

A retail credit card can affect your credit history, as the account is reported to the three major credit bureaus: Equifax, Experian and TransUnion.

BNPL has been somewhat “invisible” to credit bureaus in the past, meaning the loan did not show up on users’ credit reports. But AfterPay, Affirm and Klarna are among the providers reporting some BNPL loans to the credit bureaus.

Both payment forms can be attractive for shoppers. Retail store credit cards tend to be easier to qualify for compared to other credit cards, especially as banks have been tightening credit card approval requirements in recent months, Schulz said.

Over the third quarter of 2024, some banks have tightened their lending standards for credit card loans, lowered their credit limits and increased minimum credit score requirements, according to the Federal Reserve.

“It’s a reaction from the banks to rising delinquencies, rising debt and overall economic uncertainty,” Schulz said.

BNPL can also be relatively easy to apply for and qualify.

“The rise of buy now, pay later is the biggest reason why Americans are opening fewer store cards,” according to Ted Rossman, an industry analyst at Bankrate.

‘Consider the total cost of ownership’

The holiday season is here, a busy time to buy gifts for family and friends. If you find yourself in a situation where a retail store credit card or a BNPL can help stretch your budget, consider the “total cost of ownership,” Rossman said.

“Both of these payment methods can be advantageous depending on how you use them, but could also be a pretty slippery slope into debt and overspending,” he said.

BNPL can be tricky because you can have multiple loans running at the same time, and the costs “can add up,” Rossman said. Make sure to keep track of the pay-later loans you have and are able to withstand the automatic deductions.

If you can’t pay a retail card purchase off at the end of the statement period, any discount, reward or perk that you may get is going to be washed over by the interest you’ll owe on top of the outstanding balance, Schulz said.