Finance
What do higher-for-longer interest rates mean for your money?
BNY Mellon Wealth Management head of investment strategy Alicia Levine discusses what it will take for the Fed to hike interest rates on ‘Making Money.’
The Federal Reserve signaled at the conclusion of its two-day meeting on Wednesday that interest rates will remain elevated for some time, bringing to an end the era of ultra-cheap money.
Americans will be forced to adapt to a new normal where savers benefit from higher rates, but borrowers face steeper debt payments on everything from credit cards to mortgages to student loans.
“The timing of when the Federal Reserve begins to cut interest rates is up in the air – and in an indefinite holding pattern,” said Greg McBride, chief financial analyst at Bankrate.
Policymakers voted during their policy-setting meeting to leave interest rates unchanged at a range of 5.25% to 5.5%, the highest level since 2001. But officials also indicated they are unlikely to cut rates anytime soon amid signs of sticky inflation, meaning that borrowing money will remain far more expensive than it was just four years ago.
FED HOLDS INTEREST RATES STEADY AS INFLATION CASTS DOUBT ON FUTURE CUTS
Federal Reserve Chair Jerome Powell holds a press conference at the end of the two-day Federal Open Market Committee (FOMC) meeting at the Federal Reserve in Washington, D.C. on March 20, 2024. (Photo by Mandel Ngan/ AFP via Getty Images / Getty Images)
For Americans who carry a balance from one month to the next, the new era of persistently high interest rates could be costing them hundreds – even thousands – of dollars.
While the federal funds rate is not what consumers pay directly, it affects borrowing costs for home equity lines of credit, auto loans and credit cards. Higher rates have helped push the average rate on 30-year mortgages above 7% for the first time in years. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked.
In fact, housing affordability is as bad today as it was during the peak of the 2008 housing bubble thanks to the astronomical rise in mortgage rates.
The Atlanta Fed’s Housing Affordability Monitor, which compares median home prices and other housing costs with median household income, indicates the median U.S. household would have to spend about 39.8% of their income to afford the median-priced house as of February, according to the index. While that marks an improvement from the end of 2023, it is still far lower than the typical pre-pandemic level.
Americans with credit card debt are also feeling the pinch from higher rates.
Average interest rates on credit cards have already surged from 16% in February 2022, before the Fed began hiking rates, to 20.66% as of Wednesday, according to a Bankrate database.
Even just a minor change in credit card rates can affect how much Americans owe.
STAGFLATION FEARS COME BACK WITH A VENGEANCE
For instance, if you owe $5,000 – which the average American does – current APR levels would mean it would take about 277 months and $7,723 in interest to pay off the debt making the minimum payments. By comparison, that same amount of debt would have taken 269 months and $6,126 to pay off when interest rates were lower.
Those rates are unlikely to fall substantially anytime soon, thanks to the Fed’s higher-for-longer policy stance.
“The mantra of ‘higher for longer’ interest rates is music to the ears of savers who will continue to enjoy inflation-beating returns on safe-haven savings accounts, money markets, and CDs for the foreseeable future,” McBride said. “For borrowers, however, it dashes the hopes that interest rates will come down in a meaningful way any time soon.”
A pedestrian passes the Federal Reserve building in Washington, D.C., on June 3, 2023. (Nathan Howard/Bloomberg / Getty Images)
But there is also a silver lining to higher rates for many consumers.
Most banks and credit unions will raise their savings rates during periods of higher interest rates, making it a good chance for some Americans, particularly retirees living off of their savings, to earn more.
The national average banking savings rate hit 0.58% as of May 1, according to Bankrate, although rates are as measly as 0.01% at some of the biggest banks in the U.S.
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There’s another far more lucrative option: High-yield savings accounts, many of which are now paying between 4.2% and 5.27%, providing an option for consumers who are seeking a lower-risk return. Savers can open an online high-yield savings account, but they should make sure the bank is insured by the Federal Deposit Insurance Corporation.
There are now more than two dozen nationally available savings and money market deposit accounts from FDIC-insured banks paying a rate of 3.75% or higher, according to Bankrate.
Finance
Warren Buffett says Greg Abel will make Berkshire Hathaway investing decisions when he’s gone
OMAHA, Nebraska — Warren Buffett said Saturday his designated successor Greg Abel will have the final say on Berkshire Hathaway’s investing decisions when the Oracle of Omaha is no longer at the helm.
“I would leave the capital allocation to Greg and he understands businesses extremely well,” Buffett told an arena full of shareholders at Berkshire’s annual meeting. “If you understand businesses, you’ll understand common stocks.”
Abel, 61, became known as Buffett’s heir apparent in 2021 after Charlie Munger inadvertently made the revelation at the shareholder meeting. Abel has been overseeing a major portion of Berkshire’s sprawling empire, including energy, railroad and retail.
Buffett offered the clearest insight into his succession plan to date after years of speculation about the exact roles of Berkshire’s top executives after the eventual transition. The investing icon, who’s turning 94 in August, said his decision is influenced by how much Berkshire’s assets have grown.
“I used to think differently about how that would be handled, but I think that responsibility should be that of the CEO and whatever that CEO decides may be helpful,” Buffett said. “The sums have grown so large at Berkshire, and we do not want to try and have 200 people around that are managing a billion each. It just doesn’t work.”
Berkshire’s cash pile ballooned to nearly $189 billion at the end of March, while its gigantic equity portfolio has stocks worth a whopping $362 billion based on current market prices.
“I think what you’re handling the sums that we will have, you’ve got to think very strategically about how to do very big things,” Buffett added. “I think the responsibility ought to be entirely with Greg.”
While Buffett has made clear that Abel would be taking over the CEO job, there were still questions about who would control the Berkshire public stock portfolio, where Buffett has garnered a huge following by racking up huge returns through investments in the likes of Coca-Cola and Apple.
Berkshire investing managers, Todd Combs and Ted Weschler, both former hedge fund managers, have helped Buffett manage a small portion of the stock portfolio (about 10%) for about the last decade. There was speculation that they may take over that portion of the Berkshire CEO role when he is no longer able.
But it seems, based on Buffett’s latest comments, that Abel will have final decisions on all capital allocation — including stock picks.
“I think the chief executive should be somebody that can weigh buying businesses, buying stocks, doing all kinds of things that might come up at a time when nobody else is willing to move,” Buffett said.
Abel is known for his strong expertise in the energy industry. Berkshire acquired MidAmerican Energy in 1999 and Abel became CEO of the company in 2008, six years before it was renamed Berkshire Hathaway Energy in 2014.
Correction: Berkshire’s equity portfolio is worth $362 billion. A previous version misstated the figure.
Warren Buffett walks the floor ahead of the Berkshire Hathaway Annual Shareholders Meeting in Omaha, Nebraska on May 3, 2024.
David A. Grogen | CNBC
OMAHA, Neb. — Warren Buffett revealed that he dumped Berkshire Hathaway’s entire Paramount stake at a loss.
“I was 100% responsible for the Paramount decision,” Buffett said at Berkshire’s annual shareholder meeting. “It was 100% my decision, and we’ve sold it all and we lost quite a bit of money.”
Berkshire owned 63.3 million shares of Paramount as of the end of 2023, after cutting the position by about a third in the fourth quarter of last year, according to latest filings.
The Omaha-based conglomerate first bought a nonvoting stake in Paramount’s class B shares in the first quarter of 2022. Since then the media company has had a tough ride, experiencing a dividend cut, earnings miss and a CEO exit. The stock declined 44% in 2022 and another 12% in 2023.
Paramount
Just this week, Sony Pictures and private equity firm Apollo Global Management sent a letter to the Paramount board expressing interest in acquiring the company for about $26 billion. The firm has also been having takeover talks with David Ellison’s Skydance Media.
Paramount has struggled in recent years, suffering from declining revenue as more consumers abandon traditional pay-TV, and as its streaming services continue to lose money. The stock is in the red again this year, down nearly 13%.
Buffett said the unfruitful Paramount bet made him think more deeply about what people prioritize in their leisure time. He previously said the streaming industry has too many players seeking viewer dollars, causing a stiff price war.
OMAHA, Neb. — Warren Buffett said that Berkshire Hathaway is looking into an investment in Canada.
“We do not feel uncomfortable in any shape or form putting our money into Canada,” he told an arena full of investors Saturday. “In fact, we’re actually looking at one thing now.”
The billionaire investor has placed bets in the country in the past. He’s previously taken a roughly $300 million position in Home Capital Group that investors took as a vote of confidence in the troubled Canadian mortgage underwriter.
The “Oracle of Omaha” said during the annual shareholder meeting that he does not expect to make significant bets outside the U.S., saying his recent investments in Japanese trading houses were a compelling exception. But Buffett noted the similarity in operations between the Canada and the U.S.
“There’s a lot of countries we don’t understand at all,” Buffett said. “So, Canada, it’s terrific when you’ve got a major economy, not the size of the U.S., but a major economy that you feel confident about operating there.”
Warren Buffett walks the floor and meets with Berkshire Hathaway shareholders ahead of their annual meeting in Omaha, Nebraska on May 3rd, 2024.
David A. Grogen | CNBC
Buffett did not reveal the specific company he’s looking at north of the border or whether it was public or private.
“Obviously, there aren’t as many big companies up there as there are in the United States,” Buffett said. “There are things we actually can do fairly well that Canada could benefit from Berkshire’s participation.”
Canada’s S&P/TSX Composite Index is up about 5% this year. The economy has large financial and commodity industries.
The Berkshire Hathaway shareholder meeting is exclusively broadcast on CNBC and livestreamed on CNBC.com.
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