MONEY inflation

What Today’s Inflation Report Means for Fed Rate Hikes

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Getty Images—(c) Brand New Images

While slightly improved, inflation remains below the Fed's target. What does that mean for interest rates?

U.S. consumer prices rebounded slightly from last month’s precipitous drop-off, while prices were flat over the past 12 months.

The Consumer Price Index increased 0.2% last month as oil stopped its dramatic fall, and was unchanged compared to this time last year, according the the Labor Department. So-called core inflation, which strips out volatile energy and food prices, rose by 1.7%, still well below the Federal Reserve’s 2% target.

Prices had fallen the three previous months.

While firmer than previous months, these low inflation rates come at a critical time for the Federal Reserve.

Investors have received mixed messages from central bank officials and economic data recently. For months, the Fed had reassured Wall Street that it would be patient when it comes to removing its accommodative monetary policy. Last week, though, the Fed dropped the word “patient” from its statement, implying that interest rates could rise soon—perhaps as early as June.

Yet in the same breath, the Fed lowered its growth and inflation expectations in the near term and signaled that even if rates are lifted soon, they won’t climb as rapidly as previously thought. That caused the stock market to soar.

“Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient,” Yellen said in a press conference after the statement was released. “Moreover, even after the initial increase in the target funds rate, our policy is likely to remain highly accommodative to support continued progress toward our objectives of maximum employment and 2% inflation.”

Fed Vice Chair Stanley Fischer said yesterday that rates would likely rise this year. The federal funds rate, Fischer said, will be determined by economic conditions, rather than by a predictable path.

Competing economic indicators and measurements are complicating the Fed’s dual-mandate of price stability and maximum employment. Employers hired nearly 300,000 workers last month, and the unemployment rate dipped to a post-recession low of 5.5%.

Yet wages aren’t growing strongly and the strong dollar, while a boon for U.S. tourists traveling abroad, has made U.S. exporters less competitive globally. Low oil prices save hundreds, if not thousands, of dollars for drivers annually, but have weighed heavily on the bottom line of energy companies.

The Fed seems to be inclined to raise rates given the improving labor market, but has been hamstrung by a lack of meaningful inflation and consistent wage acceleration. By increasing the cost of borrowing, the Fed runs the risk of slowing down economic activity in the midst of a burgeoning recovery. Will interest rates really rise before economists can see the whites of inflation’s eyes?

MONEY interest rates

Higher Interest Rates Are Coming. Here’s Who Wins and Who Loses

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Getty Images

The Fed says rate hikes will be gradual, but they'll affect everything in the economy, from your mortgage to your job to your 401(k).

Federal Reserve chair Janet Yellen has signaled, by omitting the word “patient” from her latest statement, that the central bank could begin raising interest rates as early as this summer. On Monday, Stanley Fischer also suggested in a speech that rate hikes are likely before the end of the year.

The rise is likely to be slow and bumpy. Still, the Federal Reserve’s benchmark short-term interest rate has been near zero since the financial crisis in 2008, and it’s been a long time since investors, borrowers and consumers have dealt with a rising-rate environment. The Fed’s decision to move rates in the other direction, when it comes, is something you’re sure to feel in your wallet.

So here’s a primer on who is helped and who is hurt when the Fed makes borrowing more expensive.

Helped: Anyone looking a safe place to stash money

Savings and money market accounts today offer an average interest rate of only 0.44%, according to Bankrate, but the good news for savers is that rising interest rates should buoy yields across the board. One caution is that if the Fed moves slowly, that means the interest earned on your accounts probably won’t bump up very quickly either. So if saving more this year is a big priority for you, take matters into your own hands with these moves, geared toward powering up your savings.

Hurt: New borrowers, and anyone with an adjustable loan

Rising interest rates push up borrowing costs for home and auto loans. If you already locked in a 30-year mortgage at the ultra-low rates that have prevailed over the past several years, you were probably smart. According to Freddie Mac, 30-year mortgage rates are 3.7% on average today, compared with nearly 6% a decade ago.

But the millions of Americans who hold adjustable-rate mortgages could end up paying more. Mortgages are typically pegged to the 10-year Treasury bill. While the Federal Reserve doesn’t control this rate directly, long-term rates typically rise in response to the short-term rates the central bank sets. The good news? Since Treasuries are a safe haven for global investors, yields are generally being held down by high demand—which rises every time there’s bad news in, for example, Europe. So mortgage rates might rise comparatively slowly even after the Fed takes action.

Not so clear: Anyone looking for a job or a raise

One of the Federal Reserve’s mandates is is to maintain full employment. When unemployment rises, it can try to stimulate growth by cutting rates. The idea is that cheaper borrowing makes it easier for consumers to spend and for businesses to expand and hire new workers. The flipside is that higher interest rates and tighter money supply can make hiring less likely. That’s one of the reasons the Fed has been so hesitant to raise rates in recent years, and there’s a risk that a too-early rate hike will cut off job growth.

Of course, keeping interest rates low for too long can come with its own danger: inflation. If there’s no “slack” left in the labor market—meaning that basically everyone who wants to work and can work already has a job—the easy availability of money will stop creating jobs and instead show up in the economy as higher prices. Ideally, the Fed would wait to raise rates until the precise moment when employment tops out and before inflation takes off. But where exactly that point is can be a contentious issue. At the moment inflation is very low and wages have yet to take off (suggesting some slack is left.) But a series of strong jobs reports seems to have some on the Fed wanting to get ahead of the curve.

Hurt: Owners of bonds and bond funds

You likely have a portion of your money, in a retirement portfolio such as a 401(k), invested in bonds.

Rising interest rates mean falling bond prices. Bonds typically pay a fixed coupon, so when prevailing rates rise, the value of your bond portfolio falls until its yield matches what’s available elsewhere on the market. The size of your losses depend on how steeply rates rise and the maturity, yield and other characteristics of the bonds you own. Wall Street sums up a bond’s interest rate sensitive with a figure called duration. You can look a bond fund’s average portfolio duration at sites like Morningstar. In general, duration tells you how large a capital loss you can expect for each 1% increase in rates. So Vanguard Total Bond Fund, with an average duration of 5.6, would fall about 5.6% with a 1% increase in rates.

There’s good news though: If you own a bond fund, the decline in your fund’s value will be made up with higher payouts as your fund acquires new bonds with higher yields. You’re likely to be made whole in a few years. Future bond investors benefit, too.

Not so clear: Stock investors

Whether rising interest rates will help or hurt U.S. stocks is a more complicated question.

All else being equal, a hike should hurt. One big reason is many investors choose whether to put money into either stocks or bonds, as bond yields pay more stocks become comparatively less attractive. But there are lots of other things to consider. For instance, stocks typically reflect investors’ attitudes about the overall health of the economy. And the if the Fed is signaling that it might raise rates, then it also thinks the economy is healthy enough to handle it. Other investors might view this as a bullish signal.

What does history say? The record is mixed. Stock researcher S&P Capital IQ recently examined 16 previous rate tightening cycles since World War II and found that the Fed’s moves led to stock market declines of 5% or more about four-fifths of the time. However, a separate study by T. Rowe Price looked at the question slightly differently: T. Rowe examined nine instances since 1954 that the Fed has raised rates following a recession. It found an average market gain of 14% a year later. In other words, it’s hard to know exactly how the market will react—except to say that it could be bumpy ride.

Helped: Banks

Banks make money by borrowing at low short-term interest rates (think checking and savings deposits) and lending it out at higher, longer-term rates. In an ideal world, they’d love short-term rates to remain at rock bottom, as long as longer term rates are high too. So you might not think they’d be cheering for a short-term interest rate increase.

Their problem has been that long-term rates aren’t high, but low. Meanwhile short-term interest rates can’t really go below the zero they’re stuck at. That’s left them little room in the middle. A rate hike will could give banks a window of opportunity to earn more attractive “spreads” once the Fed moves.

Helped: Anyone looking to spend U.S. dollars abroad

When interest rates rise, it pushes the value of U.S. currency up. That’s good for American consumers who want to buy foreign goods (and go on European vacations) cheaply.

Hurt: Anyone looking to sell things to foreigners.

But there are dangers in a too-strong dollar. If our currency is too strong, it means it willll be harder to sell U.S.-made products globally—which would be bad for economic growth.

Not so clear: Foreign stock funds

Most international-stock mutual funds hold assets denominated in other currencies, like the euro. The strong dollar means those assets they are worth less, all else being equal. (Some funds “hedge” their currency exposure.)

Over the past year, the MSCI All-Cap World EX-USA index is up 14.6% in local currency terms through Feb. 28. But according to Morningstar, the average foreign stock mutual fund—with roughly half its assets in Europe —has falled 0.06%.

On the other hand, the a strong buck isn’t all bad for foreign stocks. Companies in countries with weaker currencies will be able to export more goods to the U.S, boosting their earnings. And while it’s no fun to see your market winning vanish, investors are usually better off riding out such currency swings. When the dollar next weakens, your foreign stocks will have a tail wind.

One special case is emerging markets stocks. Razor-thin U.S. interest rates have been a boon for them, as U.S. investors, frustrated by dismal yields at home, have shifted money abroad. Once that changes, much of that money could rush back home.

MONEY inflation

Why You Should Hate Low Inflation

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Robert Warren—Getty Images

The Federal Reserve hates near-deflation inflation too. Which is why the Fed hinted that the pace of interest rate hikes will be more gradual than expected.

You may think that you like abnormally low, bottom-of-the-barrel, near-non-existent inflation, but you don’t. Or at least you shouldn’t.

The first thing you have to understand is that inflation—or the general rise in the price of basic goods and services—has been historically low since the financial crisis. Some folks may have a tough time believing that, since the cost of some goods like meat and education, seem to only increase.

Nevertheless, over the last 24 months overall consumer prices have rested at or well below the Federal Reserve’s 2% target. Last month inflation dropped on a year-over-year basis thanks to very cheap oil. If you strip out volatile food and energy prices, inflation only rose at a rate of 1.6%.

So inflation is low. But why is that bad, exactly? Isn’t it a good thing for consumers that prices in general are growing only slightly? Who wants to pay more for things?

In a word: wages. There has been no sustained accelerated income growth for American workers since the Great Recession.

Despite an unprecedented fiscal stimulus effort, despite years of near-zero interest rates, despite three massive rounds of unconventional bond buying to lower long-term interest rates that many economists and politicians wrongly predicted would cause soaring prices, despite a year in which the economy has been adding 200,000 or more jobs a month, there just hasn’t been any meaningful wage growth.

A good metric that illustrates this point is the “employment cost index,” which measures fringe benefits and bonuses in addition to wages. In the last three months of 2014, total compensation grew at rate of 2.3%, or about a full percentage point lower than before the recession. If you look at median hourly wages, you see a similar picture. Workers just haven’t seen meaningful raises in a long time.

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This has a harmful effect on the economy. My spending is your income, so if I don’t see more money in my paycheck, chances are neither will you.

The Federal Reserve is clearly concerned about this problem.

The central bank’s most recent economic projections lowered the outlook for core inflation and economic growth in 2015, while simultaneously predicting that the unemployment rate will decline as well.

Which means that the labor market has some more to tighten.

And these worrisome economic indicators are allowing the Fed to be extra cautious about raising rates. “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run,” the Federal Open Market Committee said in a statement.

If we are in a prolonged period of low-growth, as economists like Paul Krugman and Larry Summers have written, then the Fed should wait until the threat of inflation becomes real before pulling away the punchbowl.

Of course there is a real fear that if you let inflation run, it could quickly get out of hands. Inflation soared by more than 14% in the spring of 1980, while unemployment ran high and the economy ping-ponged between recessions. Then-Fed Chair Paul Volcker dramatically hiked interest rates to tame inflation, which pushed the U.S. into another painful recession just as Janet Yellen was beginning her career as an economist.

The Fed has certainly not rushed to raise interest rates this time, even when the economy blew past certain benchmarks. But there has been a tone that the time is nigh for an interest rate increase despite the lack of inflation. Rates have been very low for a very long time.

Whether it’s this summer or fall or next year, interest rates will eventually rise. (Although as MONEY’s Pat Regnier points out, they won’t rise as much as fast as the Fed originally thought.)

When they do, you should hope that inflation has moved much closer to, or even slightly beyond, the 2% target. The quality of your paycheck may depend on it.

TIME Economy

Don’t Trust the Markets: A Correction Is Coming

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Getty Images

The Fed, despite its recent pronouncements, will trigger a fall in stock prices later this year

Up until yesterday’s Fed meeting, America’s central bankers said they were going to be “patient” about the timing of an interest rate hike, which most experts believe will ultimately result in a significant stock market correction (see my recent column about why). So why did that make markets go up so dramatically yesterday?

Because everything else about the Fed’s communication said “we’re going to be more patient than ever” about when and how to raise rates. The central bank downgraded its forecast on the US economic recovery, saying that the pace of the recovery had “moderated somewhat,” in large part because of the strong dollar.

Why is the dollar strong? Mainly because everyone knows that the easy money monetary policy in the US is coming to an end. (QE is over, and most economists are now predicting a rate hike by September.) Meanwhile, pretty much every other central bank is now easing monetary policy—witness the ECB’s new money dump, which has sent European markets soaring.

What does all this tell us? That markets and the real economy are disconnected in a way that is terrifying. Central banks are, as chief economic advisor to Allianz and former PIMCO CEO Mohamed El-Erian put it to me recently, “the only game in town.” Every time the Fed says it will keep rates low a little longer, the market party goes on. All that means is that there will be more pain, eventually, when the punch bowl gets pulled away.

MONEY Economy

The Gloomy Economic Message Hidden in the Fed Statement

Despite hints of a rate hike, stocks and bonds rallied on the Fed's latest announcement. Here's the kinda depressing reason why.

For the uninitiated, here’s a primer on Fed-ology 101: When the economy looks stronger, the Federal Reserve will want to raise interest rates to curb inflation. And once the Fed’s benchmark rates go up, that’s generally bad for the price of bonds — and (indirectly) for stocks too.

But we aren’t in a 101 class right now.

On Wednesday, Fed chair Janet Yellen announced the latest Federal Open Market Committee decision on rates, and dropped the word “patient” from her statement. That’s a signal that the Fed could raise rates as early as June. In other words, it thinks the economy is healing from the Great Recession.

So what happened next? The stock and bond markets rallied. That’s partly because the market already expected the language change. But it may also be because traders hear the Fed suggesting something a bit unnerving about the economy.

Along with the statement on current rates, the Federal Reserve also releases a survey of where FOMC members expect rates to go in the future. They brought down their estimates for where short-term interest rates are headed next year, from a median of 2.5% to 1.875%. In other words, even if the economy is getting better, the definition of “better” is looking a little slower than previously thought.

This at least rhymes with, even if it does not confirm, a worry among some economists that the global economy could be at risk of something called “secular stagnation,” or a pokey “new normal.” In a new normal world, interest rates and inflation tend to be lower for longer, but long-term growth is subdued too.

Factors that might contribute to a long-run slowdown range from inequality (which dampens demand) to demographics (slowing the growth of the workforce) to technology (which could mean companies need fewer workers and less capital investment.) Economist Lawrence Summers, who put the phrase “secular stagnation” on the map, says that this is a risk to be guarded against, not a sure thing or even the most likely one. And “new normal” has been a bit of a fad among bullish bond investors, who of course may be overconfident in their prediction that rates will stay low.

That said, the Fed’s latest statement is a reminder that the global economy is still very wobbly.

MONEY Federal Reserve

Is the Federal Reserve Talking Too Much?

Janet Yellen, chair of the U.S. Federal Reserve
Andrew Harrer—Bloomberg via Getty Images Janet Yellen, chair of the U.S. Federal Reserve

The Federal Reserve has become a model of transparency. Not everyone likes that.

The paradox of Wednesday’s Federal Reserve release is that good economic news has actually made Janet Yellen’s job harder than ever.

Since the housing crash, the U.S. economy has steadily climbed back (if frustratingly slowly) under the central bank’s policy of ultra low interest rates. The stock market and bond markets have surged and employers are finally hiring in large numbers again.

But eventually a strong economy means rates will have to come up in order to avoid inflation. And although inflation is very low now, most observers are betting that Yellen at least wants “lift off” from today’s near-zero short rates. So now the Fed faces the tricky task of telling Wall Street and businesses how and when it will “take away the punch bowl”—that is, bring monetary policy back to normal.

So far the market has reacted positively to the Fed’s latest signal, which dropped the all-important “patience,” but tempered that move by indicating any rate increase would be slower than previously expected. That said, interest rates will have to rise sometime, and when they do, Yellen and company will have to deliver a less-friendly message.

For the people who benefit from low interest rates—and that’s quite a large group, including investors who have bet on rates staying low—such a message will be hard to hear. When Ben Bernanke signaled that he would taper off another Fed stimulus, the bond-buying program called quantitative easing, would be scaled back, the market flew into a tizzy. The “taper tantrum” caused a big spike in long-term bond rates, which meant bond holders lost money. As The New Yorker‘s John Cassidy notes, the market’s overreaction even created international turmoil when investors, believing the Fed was radically changing course (it wasn’t) pulled their money out of emerging markets.

Events like this have led commentators like Cassidy to ask whether there’s such thing as too much transparency from the Fed, especially when unpopular decisions—like rate hikes—must be made. There’s certainly precedent for this line of thought. Paul Volcker, the Federal Reserve chair who famously fought choked off inflation in the early 1980s, essentially operated in secret while putting the economy through a series of painful interest rate increases. Wouldn’t it be easier if Janet Yellen could do the same, and avoid any unnecessary confusion?

James Paulsen, chief investment strategist at Wells Capital, certainly thinks so. “I would long for those days,” he says, referring to the pre-Bernanke era of a less open central bank.

Paulsen says the Fed’s primary method of influence is making people feel confident, and transparency has undercut that mission.

“They’ve gone overboard with all this mumbo-jumbo communications that is allowing everyone to see how the sausage is made,” Paulsen explains.

Ed Yardeni, president of Yardeni research, won’t go as far as endorsing complete secrecy, but agrees the Fed’s transparency efforts have gone too far. “I think there’s got to be some happy medium between no information and too much information, and right now we’ve got too much information and too much focus on the Fed,” says Yardeni.

He’s particularly concerned with the propensity for members of the Federal Open Market Committee to undercut the Fed’s official line. That kind of uncertainty can occasionally move markets, and Yardeni specifically referenced the so-called “Bullard Bounce”; a market rally that resulted from James Bullard, President of the St. Louis Federal Reserve, telling Bloomberg Business that he supported a delay in ending the Fed’s bond buying program.

“I’d be in favor of putting a gag order on members of the FOMC,” said Yardeni.

But while some experts decry an open Fed for creating chaos, others see transparency as the only way to avoid uncertainty and turmoil during a policy shift.

“They [the Fed] don’t want to shock the market,” says James Hamilton, a professor of economics at the University of California, San Diego. “People can over-react to a change and the Fed doesn’t really want that.” He believes Bernanke’s “taper tantrum” was not the result of too much openness, but rather proves the Fed needs to indicate its intentions even farther in advance.

And while the economist acknowledges that Volcker’s lack of transparency may have been beneficial when the situation required extreme measures, he maintains current rate hikes are minor by comparison, and don’t require such a dramatic lowering of the boom.

Tim Duy, an economics professor at the University of Oregon, goes even further, arguing a more transparent Fed is better in all cases. “I am at a loss to think that the Fed would ever find itself better off being opaque,” Duy told MONEY in an email. “Volcker, in fact, may have been better able to convince the public of his intentions, and thus speed the inflation adjustment, with greater transparency.”

But if there’s one thing everyone agrees on, it’s that the Fed’s penchant for publicity provides some decent entertainment value—at least for the people who follow it for a living.

“It’s great reality television,” says Paulsen.

MONEY

This One (Missing) Word From Yellen Could Change Your Finances

Federal Reserve Board Chair Janet Yellen
Alex Wong—Getty Images Federal Reserve Board Chair Janet Yellen

How less "patience" could change everything.

The news is in: The Fed dropped “patient” from its most recent statement, and that’s got financial pundits talking. Why is that one word so important?

Well, contrary to the impression you might be getting from the headlines, the Federal Reserve didn’t actually do much of anything today. Instead, the world is excited because the word “patient”—or in this case, the lack thereof—is being read as a coded signal about what the Fed will do some months down the road.

Specifically, everyone wants to know how patient Janet Yellen and her Fed colleagues will be before raising interest rates in the face of mounting positive economic reports. The conventional wisdom said that if the Fed dropped that word from today’s statement, it would mean that a rate hike could come as soon as June. And, indeed, “patient” was conspicuously absent from today’s statement.

Why does that matter to the average Joe? Because an interest rate hike is likely to have wide-reaching effects on your finances—some good, some bad. And even though the Fed won’t raise rates today, the market is likely to respond if it thinks an increase is incoming. So far the market has reacted positively because, while the Fed did remove the patient language, it also appeared more dovish about the economy, and signalled any rate change would be more gradual than previously expected. That said, higher rates are still really a matter of time, and it’s worth thinking about effect that would have.

Here’s what higher rates could mean for you:

  • Bond prices will go down and yields will go up. Higher interest rates mean higher bond yields, and a corresponding drop in bond prices. That’s good for anyone who is about to buy bonds and for those living on savings, who want their investments start throwing off more income. On the other hand, higher interest rates will decrease the value of current bond holdings.
  • The stock market may take a hit. Interest rates near zero have meant easy money for investors, and some argue this has inflated the stock market beyond justifiable levels. A rate hike would signal loose monetary policy is coming to a close, and that could put a chill on equities.
  • Savings and CDs will look better. If more risky investments are hurt by higher rates, the opposite is true with the really safe stuff. Savings accounts and CDs should start giving higher returns, and the difference between a checking and savings account may start to actually matter again.
  • Mortgage rates. Because the federal funds rate affects the price banks can borrow at, higher rates mean it’s more expensive for you to borrow as well. With interest rates near zero, mortgage rates are currently close to a historic low. If the Fed decides it’s feeling less patient, expect buying a home to get more expensive. And if you have an adjustable rate mortgage, you could see the size of your monthly payments start to increase.

One could be forgiven for wondering why the Fed would ever raise rates if it could cause this much turbulence. The truth is the Fed can’t let things run hot forever without causing even more problems. Low interest rates combined with a strong economy is a recipe for inflation.

The Fed also wants to make build up some ammunition to fight future economic battles: If interest rates remain are close to zero, they can’t be easily be lowered to spur a recovery if another crisis comes along. That’s why, ultimately, rates will have to go up at some point, and that will certainly require some getting used to. And when that does happen, patience will be a virtue.

MONEY Economy

Why This Fed Meeting Could Be a Game Changer

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Dado Ruvic—Reuters

On Wednesday, the Fed may hint at raising interest rates for the first time in almost a decade. These three major issues will affect their decision.

Employment is up and economic growth is stronger, but that hasn’t made Janet Yellen’s job any easier. The Federal Reserve chair now has to decide how she’ll shift monetary policy out of crisis mode—the Fed has kept short-term interest rates near zero since 2008—and into something more like normal. All without breaking anything in the process.

That problem is the backdrop to the Federal Reserve’s Open Market Committee meeting on Tuesday and Wednesday. If early predictions are correct, the big news from the meeting may be that Yellen removes her pledge to be “patient” about possible interest rate hikes. If so, based on what Yellen has said about how she’ll signal a coming policy shift, the Fed could start raising its benchmark interest rate as early as June. That would ripple through the economy as lenders raise their own interest rates on loans.

But even before the Fed actually raises rates, any hint that it could raise rates will itself have an effect on markets, as investors and businesses try to get ahead of the trend.

In making this decision, the Fed faces three tough questions:

  • We have stronger economy—but is it strong enough to withstand higher rates? By many measures, the U.S. economy is doing quite well. Job growth has topped 200,000 per month for 13 straight months, and the unemployment rate has now fallen to 5.5%—four and a half points lower than at the height of the financial crisis. Yellen has previously promised to keep interest rates low until unemployment improved. Will she finally decide her job is done?
  • Does the rallying dollar change the game?. While a strong economy might make Yellen more comfortable about raising rates, an increasingly valuable dollar might push her in the opposite direction. America’s (relative) prosperity combined with Europe’s stagnation—and now looser money from the European Central Bank—has caused the euro to crash in value against the greenback. The EU’s currency recently fell to a 12-year low versus the dollar, making U.S. exports more expensive and potentially hampering future growth. Will the Fed decide to keep interest rates low for longer in the hopes of keeping the dollar competitive with the euro, or will the desire to normalize monetary policy win out?
  • Where’s the inflation? The reason to raise rates is to prevent a hot economy from igniting higher inflation. It might seem silly to worry about inflation when the dollar is the strongest it’s been in years and wage growth is all but nonexistent. That’s what economists like Paul Krugman and Lawrence Summers are arguing. On the other hand, lower unemployment suggests wages could rise in the near future, eventually pushing up prices. Although there is very little inflation right now, so-called inflation “hawks,” including some Federal Reserve regional bank presidents and members of the Fed’s rate-setting committee, think the central bank should act early to nip it in the bud.

We’ll know more about how the Fed is answering these questions on Wednesday, when the Fed announces it rate decision. Until then, “patience.”

TIME

It’s Unbelievable We Still Haven’t Learned This Lesson

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Roy Hsu—Getty Images

At $57 billion, it's an expensive one

You’d think the Great Recession would still be fresh enough in everybody’s minds that we’d be going out of our way to avoid putting ourselves through the financial wringer once again.

Nope.

We’re piling on credit card debt at a dizzying pace and experts warn we’re barreling towards a tipping point. The website CardHub.com’s annual study of credit card debt just came out last week, and the numbers are sobering.

In 2014, we piled on $57.1 billion in new credit card debt — a record number that’s 47% higher than the debt we added in 2013. After pulling back in 2009 and 2010, Americans have added a total of almost $180 billion in credit card debt in just a few short years.

Typically, the first quarter of each year sees a big pay down in credit card debt, as we leave the indulgence of the holidays behind (and probably make a few New Year’s resolutions about being more financially disciplined.) We started of 2014 behind the eight-ball by not paying off as much as we had in previous years, and just kept racking up those balances.

On average, every American household carries nearly $7,200 in credit card debt. That figure hasn’t been this high in five years, and it’s still climbing. “The average household’s credit card balance… is growing dangerously close to the $8,300 tipping point previously identified by CardHub as being unsustainable.,” the study warns.

That’s bad, but there’s another factor it’s likely all of these charge-happy American consumers aren’t taking into account: When lawmakers passed the CARD Act in the recession’s wake and prohibited credit card issuers from hiking rates for any old reason, the card companies pretty much en masse switched their customers from fixed-rate to variable-rate cards so they’d be able to raise rates when the prime rate increased.

In all fairness, it’s been pretty easy to overlook the prime rate of late, because nothing’s happening. It’s been sitting at a rock-bottom, near-zero level for years now, with any increase contingent on the Federal Reserve raising its benchmark rate, a move they’ve been reluctant to make — until recently.

With the unemployment rate improving and other signs of renewed economic vigor trickling in, economists expect the central bank to start raising rates sometime this year. And when that happens, the cost of servicing all that credit card debt is going to rise. Households who are just treading water making minimum payments are going to have to pinch pennies from somewhere else just to stay afloat.

How much rates will go up is the $64,000 question. Some think it will be a fraction of a percentage point, but others predict it could go up 1% or 2% this year. “I expect short term rates to rise during 2015, and hence credit card interest rates to rise,” Brigham Young University finance professor Hal Heaton tells CardHub.

In relative terms, that’s still a low rate, but if we’re adding rather than subtracting debt at the same time — which CardHub also predicts we’ll do — this could spell trouble for a lot of borrowers.

Read next: 5 Bad Money Habits You Can Break Today

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MONEY inflation

3 Signs Inflation May Be Lurking Just Around the Corner

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Kutay Tanir—Getty Images

While consumer prices haven't been rising yet, several signs point to higher wages in the future. Here's what you should do.

After fits and starts and ups and downs, the American economy is finally looking strong — especially compared to Europe. U.S. gross domestic product grew 2.2% and 5% in the last two quarters of 2014, while the unemployment rate dropped in February to 5.5.%.

Yet inflation and wage growth, which are natural outgrowths of an accelerating economy, haven’t seemed to materialize.

At least not yet.

Despite years of unconventional bond buying and warnings from politicians and economists, consumer prices have actually risen less than the desired rate of the Federal Reserve.

The Consumer Price Index declined 0.7% in January, the steepest drop since 2008, thanks to cheap oil. If you strip out volatile energy and food prices, so-called core inflation only rose 1.6% in January over the past year, well below the Fed’s 2% target.

In fact, prices haven’t hit that Fed target in almost two years. Your paycheck has hardly fared any better.

But lately, there have been signs that show America’s workforce might at long last receive an overdue raise. About 70% of companies have said that wages are beginning to outpace inflation, according to the latest Duke University/CFO Magazine Global Business Outlook Survey. Industries like technology, manufacturing and health care should see wages grow by 3%.

A small business report points to a tighter labor force, as 26% of companies raised compensation (although that includes benefits like health care), and almost half said finding a qualified employee proved difficult.

What’s more, the 10-year break-even inflation rate, which is a gauge of how much prices are expected to rise annually over the next decade based in part on the yield of 10-year Treasury inflation protected securities — has been ticking up lately to about 1.8%, after touching a recent floor of 1.5% in the beginning of the year. The rate, to be fair, is still well below levels seen before oil’s drop.

So is inflation and wage growth finally set to take off?

That’s a question for Federal Reserve Chair Janet Yellen, who has said the Fed will remain “patient” when raising short term interest rates while price growth remains so benign.

This six-year herky-jerky recovery has made fools of many prognosticators, especially those who have shouted loudly that inflation is nigh. “Given that CFOs expect continued strong employment growth, it is surprising that wage pressures are not even great,” says Duke finance professor John Graham. Indeed.

What does this mean for your portfolio?

Well, one option is to add to your Treasury Inflation-Protection Securities (TIPS) holdings, especially short-term TIPS if you’re a conservative investor (though this should still be only a satellite portion of your investments).

TIPS have struggled recently after outperforming equities by 11 percentage points in 2011, and investors have started to put their money elsewhere.

But the best time to get inflation protection is when there’s little fear of rising consumer prices — and when inflation-protected bonds are cheap, like now. For instance, the Vanguard Target Retirement 2015 fund currently allocates about 8% of its portfolio to short-term inflation protection.

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