The Federal Reserve raised interest rates again earlier this week by another 0.25% to a range of 5.0% to 5.25%. That completes an overall 5% increase in interest rates since the Fed began raising rates in March of last year, and sets interest rates to their highest since 2007. The interest rate increase was widely expected, but some still found it surprising with the apparent instability of the banking sector. The interest rate is now at what the Fed previously considered its terminal interest rate for the year, or the rate at which the Fed expects the interest rate to be at the end of the year. However, that doesn't mean the Fed can't change that and either raise or lower rates based on changes in the economy.
The Fed and the Treasury Department continue to proclaim that the banking sector is strong and sound. However, First Republic Bank failed this week and was taken over by the FDIC and then bought by JP Morgan Chase. It was the 4th significant bank failure in the last couple months and the second-largest bank failure in U.S. history (behind Washington Mutual in 2008). Struggles of other banks continued this week as well, so that may suggest the banking industry is not as strong and sound as the Fed and Treasury Department are suggesting. It remains to be seen if there will be more bank failures and what the impact will be on investments and the economy as a whole.
Other economic reports from this week included labor market data showing a decrease in job openings, though those continue to remain higher historically at about 9.59 million. Prior to the pandemic, the highest job openings recorded was about 7.5 million in 2018. The peak in 2007, before the Global Financial Crisis and Great Recession, was only about 5 million. Employers also hired 269,000 new workers last month, a significant increase over the previous month's 142,000, plus only 148,000 was expected. Non-farm payrolls also increased by 230,000, which was 50% higher than expected. Though those reports showed strength, last week's initial jobless claims did rise over the previous week and were slightly more than expected. That's not enough, though, because today the unemployment rate for April was released at 3.4%, which is down from March when it was expected to increase. It's actually the lowest unemployment rate since 1969... that's 54 years! It's clear that the labor market is still not showing the weakness that the Fed needs to see to be confident that inflation is going to come down to its 2% target and stay there.
That's the real issue. The Fed needs the inflation rate, which is 5% right now, to come down to 2%, and it needs the inflation rate to stay at that 2% target. Historically, the only way to accomplish that has been to significantly hamper consumer demand, which means consumers must have less money, and that means the labor market needs to experience a significant increase in unemployment. That doesn't mean that's what needs to happen this time, but historically that's what has been necessary. It's possible that the economy could be slowly moving in that direction and towards a recession.
What should we expect from here? With the labor market still showing a lot of resilience and strength, inflation still at a level it hasn't been at since 2008, and interest rates at the highest since 2007, it's difficult to say and impossible to predict. Experts widely agree that the Fed will likely pause interest rate increases for now to see what happens with inflation and the labor market. The next Fed meeting is six weeks away, with a potential interest rate change on June 14th. A lot can happen between now and then, with many economic reports to be released in that time (including inflation, labor market, consumer spending, real estate, and more), and the Fed says it will focus on new data it receives for making its decisions about interest rate changes. We will have to wait and see.
What can you do in the meantime? Be prepared for the possibilities. Have a diverse investment portfolio, make sure you have an emergency fund to weather any kind of unemployment or decrease in income, and keep spending under control. Escient Financial is here and available to help with all of that with its
Ongoing Comprehensive Financial Planning + Investment Advice service.
If you'd like to understand more about why the Fed's interest rate is so important and how it's affecting banks (and is partially causing bank failures), check out these previous Escient Financial Insights articles:
Bank Failures and Fractional Reserve Banking
This week, the S&P 500 was down about 0.8%, the Nasdaq was up about 0.07%, and the Dow was down about 1.24%. The week started with markets down, mostly due to bank struggles and the interest rate increase, but markets rebounded some at the end of the week with strong economic data, especially the unemployment rate.
In crypto markets, most crypto assets were down earlier in the week, but mostly shrugged off the bank failure news and interest rate increase, and have been rising since the middle of the week. Bitcoin is relatively flat at about a 0.03% gain and Ethereum is up about 2% from a week ago, with Bitcoin (BTC) currently trading at around $29,500 and Ethereum (ETH) currently trading at around $1,990.
Each person's situation is unique. If you would like guidance on how you can navigate changes in the economy, especially when it comes to inflation and expenses rising, as well as downturns in investments, Escient Financial is available to help. Simply click the Schedule a Meeting button near the bottom of this newsletter.
