Finally a Pause - Sort Of…
After 15 months of consecutive hikes, one of the most aggressive in history, the Federal Reserve has decided to pause raising interest rates. In isolation, this event would be a cause for market celebration. However, Jerome Powell's comments gave investors cause for caution. His speech signaled a wide consensus among the Fed members that they will need to continue the rate hikes this year to contain inflation. The Fed is in a tough spot. We have resilient inflation on one end, with a credit crisis on the other. The labor market appears very strong and the bank collapses in March and April seem to be in the rearview mirror. The simple fact remains that the Fed’s inflation target is 2%, yet we've only managed to get down to the current level of 4.1%. General consensus is that the remaining ~2% reduction in inflation will be the hardest to achieve, with an increasing probability of the Fed going too far, and potentially causing a hard landing for the economy. Raphael Bostic, president of the Atlanta Fed was quoted last month saying “We haven’t gotten to the hard part yet," emphasizing the difficult situation, and potentially explaining the pause in interest rate hikes. As mentioned in previous emails, we will continue to monitor the labor market, housing market, and consumer spending as indicators of a recession. Currently, all three are resilient, to say the least.
Student Loans
As part of the recent debt ceiling negotiations, the topic of student loans has resurfaced. Interest charges are scheduled to resume in September, and payments will be due in October. This will end a 3+ year stretch of payments not being required. Also of note, interest rates for new student loans were announced, and like all interest rates, they have gone up significantly. Undergraduate rates (for loans taken out by students this fall) are 5.5%, graduate student loans are at 7.05%, and direct plus loans (loans taken out by parents for their children) are at 8.05%*. The supreme court has recently ruled against Biden’s plan for student loan forgiveness, however the administration says it will still pursue other options.
Digital Dollar
The term ‘Digital Dollar’ has been thrown around a lot in the last year, and its meaning has been somewhat lost. The majority of questions arise from the Federal Reserve's announcement of the FedNow payment system. The system was cleared for testing in April and will go live in July. However, last year President Biden requested that the US Treasury study the potential of a Central Bank Digital Currency (CBDC). To be clear, these are totally separate items, but they have both found a home in the term digital dollar. FedNow is the first government-created and backed system to enable banks to transfer money instantly. The current money transfer system utilized by most banks was created in the 1970s, and takes days to transfer payments. Think of FedNow as Venmo for banks, not a digital currency. A Central Bank Digital Currency is a whole different animal. CBDC is broadly defined as a virtual currency issued and backed by a central bank. Currently, 130 nations including the US are exploring CBDC creation, and they are currently being tested in 19**. China launched its digital currency in April 2020, and Europe plans to launch a digital Euro near the end of this year. While a US CBDC is more than possible, its creation, implementation, and potential use cases will likely be scrutinized and contested by many, specifically in the areas of privacy and government control.
As always, please reach out to us if you have any questions!
Citrus Wealth Management
O: 909.312.4412 // F: 909.312.4441
1461 Ford Street, Suite 103, Redlands, CA 92373
*https://studentaid.gov/understand-aid/types/loans/interest-rates
**https://www.atlanticcouncil.org/cbdctracker/
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Citrus Wealth Management and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.