AVB’s resident economics observer Joe Higgins provides a fiscal Q&A.

Economic expert Joe Higgins answers his audiences’ most frequently asked questions

By Joe Higgins, Quest 4 Quality

I often get questions about the U.S. economy at the end of my presentations, whether I am doing them live or on Zoom. I always enjoy these interactions with the audience.

 Here are the three most frequently asked questions. 

Question 1: How high will interest rates (Fed funds) go? 

As you all know, the Federal Reserve has raised rates six times this year to slow the economy just enough, but not enough cause a recession. The Fed has named the actions of raising interest rates just enough, without dire consequences, a “soft landing.” Analysts see the Fed moving rates another 50 basis points in December with more increases into 2023. 

James Bullard, president of the St. Louis Fed, said the Fed funds rate (the key benchmark rate for banks and other lenders) could move from 4.75% to 7% next year. Fed Chair Jerome Powell is profoundly serious about staying the course, and while hoping for a soft landing, he plans to bring down inflation even if it is “painful.” (I will discuss what painful means in Question 2.)

Last week the CPI (Consumer Price Index) rose less than expected at 0.4% with an annual rate of 7.7%, well below the 8.3% it was the prior month. In addition, the Producer Price Index (PPI) only increased by 0.2%, a reduction from September. The PPI is what wholesalers/producers charge for their goods, and if it is declining, it will have an enormous impact on the prices of consumer goods and interest rates.

Answer: 6.7%

Question 2: Will the Fed’s actions lead to more unemployment? 

The simple answer is yes. This is the “painful” part of rising rates and a slowing economy. This action is designed to cool demand for goods and services, which will inevitably cause joblessness across the country. This approach can have severe consequences, however, and could and will push the country into recession. I know this sounds crazy, willfully putting in place measures that have the potential to induce a downturn, but as Powell himself said, “A failure to restore price stability would mean far greater pain later on.” He is right; once inflation gets entrenched in the minds of consumers, it is tough to control escalating prices. 

Economists believe that the actions taken so far by the Fed will raise the unemployment rate from its low of 3.5% in September to somewhere around 4.5% by the end of 2023.

Answer: 1.2 million Americans will lose their jobs, and the unemployment rate will rise to 4.5% at the end of 2023. 

Question 3: With mortgage rates running high, will most consumers ever be able to afford a home?

A year ago, mortgage interest rates were under 3%; last week, rates were over 7.06%, but just this week they dropped half a point and now stand at 6.6%. Every tenth of a point increase puts more buyers out of the market, so a decline is good news. I have seen estimates that only 20% of California consumers can afford a home. Other states around the U.S. are more homebuyer friendly, but not by much. No one knows where mortgage rates will go, but most experts think we are close to the top. 

Consider this: A 30-year mortgage between 7% and 8% means that monthly mortgage payments could be 60% more expensive than they were a year ago. If you throw in the fact that housing prices in many markets across the U.S. are up more than 25%, you are describing a situation that makes it impossible for the average person to afford a home. 

To put this in perspective though, in 1981, interest rates were as high as 18.6%. This is not a typo. I have met people at conventions who have held mortgages at these stratospheric levels over the years. It seems outrageous, but it is true. The last time a 30-year mortgage was 7% was in 2007, just before the beginning of the Great Recession. 

So where will a 30-year loan end up? Keep in mind that mortgages are impacted by supply and demand as well as the Fed fund rate. Mortgage bankers do not expect rates to rise above 8% and could decline in the short term. 

Answer: Affordability will be challenging throughout 2023

Bottom Line (Answers to other commonly asked questions)

Inflation has slowed. In June it topped at 9.1% and then decelerated to 7.7% in October. Further evidence suggests that inflation has peaked, although we will not see a rapid deceleration for six months. The Fed believes they can get inflation down to between 2% and 4% by the end of 2023. 

Consumers will continue to spend on goods and services using money sitting in bank accounts that’s left over from stimulus payments in 2020 and 2021. However, that cash is beginning to run out and Americans are dramatically increasing their credit card debt.

Consumer spending as a share of GDP is at its highest levels since the Great Recession in 2007. Excessive demand makes getting inflation under control problematic for the Fed. 

 I expect there will be a mild recession in the first half of 2023, but it will not be anything like what we suffered in 2008 and 2009. After we recover, America will get back on track with better days ahead. 

That’s all for now, but if you have a question I would love to hear from you. Email me at joe777claremont@gmail.com.

Joe Higgins is a 45-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YSN contributor.

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