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It's All About The Benjamins

U.S. inflation reached 7.9% this month (the worst in 4 decades) and soaring interest and mortgage rates seem to be percolating into a recession.

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The Federal Reserve launched a high-risk effort this week to tame the worst inflation since the early 1980s, raising its benchmark short-term interest rate by a ¼ point and signaling up to six additional rate hikes this year. The Fed’s policymakers collectively signaled they expect to boost their key rate to 2% by year’s end.

Further, the officials expect an additional four interest hikes in 2023, which would leave the benchmark rate near 3%.

Era of Ultralow Mortgage Rates Ends

The average rate for a 30-year fixed mortgage topped 4% for the first time since May 2019, Freddie Mac said Thursday. In January 2021, the average rate on America’s most popular home loan was 2.65%. By January 2022 it was 3.22%.

While an average rate around 4% is still historically low, it’s sharply higher than the sub-3% rates that were available much of last year and here’s why. The last time a 30-year mortgage rate topped 4% was in May 2019, when the median home price was 26% lower than it is now. The rising interest rates announced by the feds’ this week will soon collide with the housing bubble, producing inflated real estate prices with inflated interest rates. Fannie Mae’s Economic and Strategic Research group said it expects single-family home sales to decline 2.4% in 2022.

Moreover, rising interest rates will complicate mortgage refinancing. The pool of borrowers who were eligible to lower their monthly payments by refinancing fell to about 4 million in February 2022, down from nearly 18 million in February 2021, according to mortgage-data firm Black Knight. “This steep, sudden decline in mortgage refinancing,” says Fannie Mae, “is expected to drag total single-family mortgage originations down by almost 38% in the first quarter compared with the same period last year.”

Mortgages are the first place Americans are feeling the effects of the Fed’s decision to start raising rates to curb inflation, but they won’t be the last.

Credit Conundrum

The Annual Percentage Rate (APR) for new and existing credit cards are also likely to become more expensive as lenders respond to higher base rates. *Lenders aren’t required to match federal interest rate changes when they set APRs for existing and unopened cards. However, most do.

As the interest benchmark rises to 1.5% by year’s end, the average new credit card APR will climb to 19.92% or more. “It’s the highest APR average we’ve ever recorded” says, who began tracking rates in 2007.

Their survey of 100 of the most popular credit cards in the country sets the national average for credit card APR today is 16.17%. The lowest APR is 12.96%. The highest APR is 25.80%

Lenders may not revise new card APRs right away, but they’ll likely do so soon. Shoppers searching for a new credit cards this spring will see unprecedented APR’s.

COVID-19 / Economic Recession

A recession is commonly defined as at least two consecutive quarters of declining GDP following a period of growth. More formally, The National Bureau of Economic Research (NBER) defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales."

Past recessions have occurred for many reasons, but typically are the result of imbalances that build up in the economy and ultimately need to be corrected. For example, the 2008 recession was caused by excess debt in the housing market, whereas the 2001 contraction was caused by an asset bubble in technology stocks.

An unexpected shock — such as the 2019 Coronavirus Pandemic — widespread enough to shutter businesses and raise unemployment can cause a recession, too. In fact, 3.3 million people filed unemployment in the United States during the week ending March 21, 2020. The U.S. government’s decision to inject 4 Trillion into the economy — via mortgage relief and unprecedented unemployment benefits — created a sudden demand for goods and services for which rising prices and inflation was the result. “Raising the benchmark interest rate will discourage the American consumer from spending,” says Jerome Powell, Chairman of the Federal Reserve. “Sadly, it probably won’t dissuade the U.S. Congress.”

Historically, an inverted yield curve is the standard indicator of an impending economic recession. *A yield curve is when a short-term U.S. treasury is paying a higher interest rate than long-term U.S. treasury.

“The yield curve is currently flattening and expected to invert sometime in 2023,” says Jim Reid, global head of credit strategy at Deutsche Bank. “We expect the United States to fall into recession during the Fall of 2023.”

Common Interest, Common Sense

While public interest is considered the core of democratic theories of government, it’s often mistaken for the public good: something that is beneficial to all of society.

In early 2022, the National Debt of the United States exceeded $30 Trillion. Many believe that much or all of that debt is owned by foreign countries like Japan ($1.3 Trillion), China ($1.03 Trillion) and the UK ($647 Billion). In truth, most of the U.S. National Debt was borrowed from its own Social Security and pension funds. In fact, Americans own — and will ultimately have to pay — the national debt.

The national debt and deficit are directly related. When the U.S. government spends more than it receives in tax revenues it has a budget deficit, which must be met by borrowing more money. In fact, the United States government pays itself each fiscal quarter by borrowing money from other countries, the Federal Reserve, and its own mutual and pension funds including; Social Security, Military Retirement Fund, and Medicare.

Thomas Paine, the English-born American political activist, penned two pamphlets at the start of the American Revolution. Common Sense begins “Our common sense tells us, that the power which endeavors to subdue and in-debt us, is the least qualified to govern us.” In The American Crisis he warns, “In a democratic society, it is not only permissible to question our leaders. It is our duty.”

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