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Key Points for the Week

  • Initial jobless claims fell to 187,000 from 215,000 the prior week. That is the lowest recorded level since 1969.
  • Federal Reserve officials used speeches and interviews to suggest the odds of a half-a-percent increase was possible at the next meeting.
  • Chinese economic data indicated industrial production rose 7.5% and retail sales increased 6.7%. Both figures beat expectations by a wide margin.

In early March, almost two-thirds of Americans who participated in a Nationwide Retirement Institute survey said the Federal Reserve (Fed) should take more aggressive action on inflation. The next week, the Federal Open Market Committee (FOMC) did just that. It increased the target range for the Federal funds rate by a quarter point to 0.25 percent.

When rates rise, borrowing becomes more expensive. The change often reduces demand and pushes prices – and inflation – lower. Last week, the Fed rate hike began to affect consumers and investors in a variety of ways. We saw:

  • A sharp increase in Treasury rates. Last week, the 2-year UST rate rose from 1.97 percent to 2.30 percent. When bond rates rise, bond prices fall, and that can make bonds less attractive to investors. Ben Levisohn of Barron’s reported:

With government bonds on pace for their worst year since 1949, investors are looking for other places to put their money – and they may have settled on stocks. In recent weeks, stock and bond prices have stopped moving in the same direction…

Ben Levisohn, Barron’s

  • Demand for home loans and refinancing drop. Last Friday, the rate on a 30-year fixed mortgage rose to 4.95 percent. That’s 1.64 percent higher than it was a year ago, reported Diana Olick of CNBC.

    One consequence of higher rates is likely to be lower demand for homes. Last week, applications for mortgages were down 12 percent from the prior year, and the number of home refinancing applications dropped, too.

  • The cost of carrying credit card debt increases. Last week, the average credit card rate rose from 16.17 percent to 16.25 percent, according to Kelly Dilworth of CreditCards.com. That means carrying a balance is more costly – and that expense is likely to continue to increase every time the Fed raises rates.

    Currently, the FOMC expects to raise the target rate range at each of its six meetings this year. If rates increase by a quarter point each time, rates could be significantly higher by the end of 2022, reported Evie Liu of Barron’s.

This Week in the Markets

Initial jobless claims reached their lowest level since September 1969. Continuing claims fell to 1.35 million and reached their lowest level since 1970. The labor force was half as large then as it is today. Concerns about inflation, excess demand, and uncertainty about Russia’s attack on Ukraine have not stopped firms from keeping the workers they have on the payroll.

CTN 03-28-22 Image 1

A bevy of Federal Reserve officials commented last week that a half-a-percent increase in interest rates could be appropriate. The number of speakers commenting about accelerating rate increases spurred expectations higher. The two-year yield increased 0.33% and the 10-year yield jumped 0.32%. Market expectations for a half-percent increase at the May meeting moved from 44% to 73%.

The S&P 500 continues to rally from recent lows. The index of large-cap stocks added 1.8% last week. The MSCI ACWI added while the Bloomberg U.S. Aggregate Bond Index fell as the more aggressive Fed policy pressured bonds. Key inflation and jobs data lead the data releases this week.

Clarifying Comments

The Federal Reserve had a lot to communicate two weeks ago when it increased the number of planned interest rate hikes and reassessed expected growth rates for the economy. This Fed has generally done very well at communicating its intentions via written signals and press conferences. Fed officials often use speeches and media appearances to reinforce key points made in the press conferences.

Last week was an exception. Rather than reinforcing all the key points, Fed officials signaled a greater openness to increasing the pace of interest rate hikes as the Fed seeks to unwind economic support provided during the early stages of COVID-19.

Fed Chair Jerome Powell spoke last week at the National Association for Business Economics and had a decidedly more hawkish tone than the previous week at the wrap-up of the Fed meeting. In the speech he mentioned the Fed is willing and able to raise rates a full 50 basis points (a basis point is 1/100 of a percent) at one or more meetings this year to fight off inflation.

Prior to the meeting, the Fed’s expectation was for 25bp hikes at each meeting for the rest of the year, reaching a federal funds rate of 1.9% at the end of the year. With this more hawkish tone, the market is now pricing in a 73% likelihood of at least two 50bp hikes this year, with a year-end federal funds rate of 2.38%.

Powell cited several issues that have changed the Fed’s outlook. First, the prospect of inflation returning to normal levels once the supply-chain bottlenecks correct themselves has deteriorated, mainly due to the conflict in Ukraine. If anything, the energy and commodity impacts this year have made some of those bottlenecks worse. He also indicated we may have seen the end of the push toward globalism, one of the forces that has helped to keep inflation in check. A more fragmented global economy could lead to higher overall inflation moving forward, regardless of Fed action.

When the Fed wants to signal a new course, rarely does it do so with just one person. Other Fed officials shared the same message last week. Federal Reserve Bank of Cleveland President Loretta Mester said, “I think we’re going to need to do some 50-basis-point moves.” She also believes the economy can withstand a more rapid increase in rates to tame inflation while not pushing the economy into recession. John Williams, who serves the same role in the Federal Bank of New York, stated he was open to raising rates 50 bps if appropriate.

Bond yields adjusted to reflect the possibility of a faster increase in interest rates. Rates on two-year Treasury notes broke through the 2% level last week. Investors showed concern that the Fed may become overly restrictive and push the economy into recession. The yield on the 10-year Treasury is now below the yield for recently issued bonds maturing in three, five, or seven years. When yields are higher for a shorter-term bond than one with a longer maturity it means the market is anticipating the Federal Reserve will raise rates too high and have to cut them later.

These comments do not guarantee a more rapid rate of increase, but data is pointing in that direction. The multi-decade low in the initial unemployment claims contributed to the increased odds of a 50-basis-point hike. The employment data indicate very few workers are getting laid off and labor markets remain tight. This week’s update on the U.S. employment situation will provide further information that will shape the Fed’s intentions. If the jobs situation continues to remain robust, our expectation is the Fed will raise rates 50 basis points at its next meeting.

What’s Your Parallel Parking Strategy?

A new research study, discussed in the Annals of Improbable Research, recommends that drivers reconsider their parallel parking choices in densely populated areas.

Limited street parking creates a variety of challenges for city planners. A dearth of parking may create opposition to bike lanes or new residential developments. In addition, it can produce higher traffic volumes and greater greenhouse gas emissions when driving time is extended by the search for a parking place, reported Dr. Benjy Marks of the University of Sydney and Dr. Emily Moylan of UNSW Sydney who authored Parallel Parking Vehicle Alignment Strategies. They explained:

“The alignment of vehicles within parallel parking spaces influences the efficiency of street parking. We numerically model the effect of vehicle-alignment strategy on the packing density over a range of block lengths. We investigate the effect of four strategies:

  • front of available space
  • either end of available space
  • middle of space
  • randomly within the space

The findings quantify the advantage of aligning vehicles at the ends of the available space…

Dr. Benjy Marks of the University of Sydney and Dr. Emily Moylan of UNSW Sydney

While the researchers’ findings may be valid, drivers who do not excel at parallel parking may find the idea of employing a specific parallel parking strategy to be wildly optimistic.

A recent survey found 49 percent of American drivers have some degree of fear of parallel parking, which is a fairly complex driving maneuver. Taylor Covington of The Zebra reported:

Parallel parking spots are often located in areas where parking is limited. These areas are usually busy with pedestrians or other cars so, it increases the pressure to find and fit in a spot. That may explain why drivers reported that ‘holding up traffic’ was their biggest fear related to parallel parking. Other common concerns included hitting another car, getting blocked in, bystanders watching, and hitting the curb.

Taylor Covington, The Zebra

Perhaps self-parking cars will help.

IRS Issues Identity Theft Warning

The IRS is reminding taxpayers to be vigilant and watch out for IRS impersonation scams intended to trick them into providing their personal and financial information. Some of the schemes included text message, e-mail, and phone scams. The IRS also warns people to be aware of potential unemployment fraud.

Text Message Scams

If you receive an unsolicited text message claiming to be from the IRS or a program linked to the IRS, take a screenshot of the message and email it to phishing@irs.gov with the below information:

  • Date/time/time zone the text message was received.
  • Phone number that received the text message.
  • Do not click on links or attachments from suspicious or unexpected messages.

E-mail Phishing Scams

Please be aware that the IRS does not contact taxpayers by email to request personal or financial information. Most of the time, the IRS will contact taxpayers through regular mail delivered by the United States Postal Service. Similar to a potential text message scam, report the email to phishing@irs.gov by sending the suspicious email as an attachment.

Phone Scams

The IRS (and its authorized private collection agencies) will never:

  • Call requesting immediate payment using prepaid debit cards, gift cards, or wire transfer.
  • Threaten to arrest a taxpayer by bringing in law-enforcement or local police.
  • Demand taxes be paid without the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone

Unemployment Fraud

Organized crime rings have started using stolen identities to claim unemployment or other benefits for which the taxpayer never applied. Victims of unemployment identity theft may receive:

  • Mail from a government agency about an unemployment claim or payment they did not file.
  • An IRS Form 1099-G reflecting benefits that were not expected or received. The form itself may also be from a state for which the taxpayer did not file for benefits.

For information on necessary steps to take for suspected unemployment fraud, taxpayers can visit the U.S. Department of Labor’s fraud page here.

The IRS focuses on tax-related identity theft and suggested taxpayers take the below steps if they feel their Social Security number has been compromised:

  • Respond immediately to any IRS notice and call the number provided.
  • Complete IRS Form 14039 (Identity Theft affidavit).
  • Continue to pay their taxes and file their tax return, even if it must be done by paper.
  • For specialized assistance, call 1-800-908-4490.

If you have any questions about this information, please contact us.

Did you Know? This Week in History

March 29, 1982: Freshman Michael Jordan Hits Winning Shot to Give North Carolina NCAA Title

On March 29, 1982, 19-year-old North Carolina freshman Michael Jordan made a 16-foot jump shot with 15 seconds left to give the Tar Heels a 63-62 win over Georgetown for the NCAA Tournament championship. "To tell the truth, I didn't see it go in. I didn't want to look,” said Jordan after the game to reporters. The winning shot cemented Jordan in the national spotlight, and ultimately was the beginning of what many describe to be the career of the best basketball player of all time.

Even though only a freshman, Jordan showed the confidence that would be a trademark of his career. "I was thinking the game might come down to a last-second shot," he said. "I saw myself taking it and hitting it."

The championship was North Carolina's first under Smith and first since it won its only previous title, in 1957. The Tar Heels finished the season with a 32-2 record. "We had the best basketball" team in the tournament, Smith told reporters.

In the 1984 NBA draft, Jordan was selected by the Bulls with the third overall pick and went on to win six NBA titles.

Weekly Focus

I believe the second half of one’s life is meant to be better than the first half. The first half is finding out how you do it. And the second half is enjoying it.

Frances Lear, American Activist

You don’t have to become something you’re not to be better than you were.

Sidney Poitier, Bahamian-American Actor