5 minutes
6 things to watch during the rest of this year
Right before Christmas, Congress passed the Tax Reform Act with the idea of stabilizing financial service markets at least until this fall’s mid-term elections. However, events in the first quarter of 2018 have been anything but stable.
The Fed has a new chair, yet the policy of rate increases remains; the stock and bond markets are volatile; political marches on subjects ranging from gun control to women’s rights are widespread; escalating trade wars loom; Facebook lost the privacy of 87 million users; and the Dodd-Frank Act is up for major overhaul, especially the Consumer Financial Protection Bureau.
What does the remainder of 2018 have in store? The answer lies in the following six areas: the money supply, the Fed, checking account balances, security markets, tax reform and trade. Check out the following consequences and unintended consequences for each of these.
1. The Money Supply
Since the mortgage bubble triggered the Great Recession in 2008, the Federal Reserve in Washington has expanded the money supply (insured and uninsured deposits and money market mutual funds) by only 4.2 percent. The normal growth rate is 7.3 percent. There was negative growth in 2009 and 2010.
The Fed is fixated on inflation and unemployment from its Congressional mandate in 1947 for stable purchasing value of goods and services—and on nothing else. The Fed’s only way to control low inflation and high employment is rate increases. The basic rate now stands at 1.75 percent from a low of 0.25 percent less than five years ago.
The Fed’s own balance sheet is $3.5 trillion more than normal. This adds an additional $3.5 trillion to the nations’ debt of $21 trillion for a total of almost $25 trillion. The Gross Domestic Product—all goods and services produced in the United States in a year—is less than $20 trillion.
Any further 0.25 percent basic rate increases will reduce spending in the Congressional budget to cover additional interest of $62.5 billion on U.S.’s $20 trillion in debt.
2. The Fed
While the Fed needs to grow money stock—currency and bank and CU reserves—and cease rate increases to Fed funds, it appears more than likely there will be two more rate increases this year.
Current inflation for 2018 is 2.1 percent and the Fed target rate is 2 percent. Unemployment (U3 measure, the official unemployment rate) is 4.1 percent, while full unemployment (U6 measure, which adds on workers who are part-time for economic reasons but would rather be full-time) is 8.1 percent. The goal of the Fed is 5 percent unemployment for U3.
The Fed does not need to increase the Fed funds rate with inflation at goal and unemployment below goal. Increasing the Fed funds rate would dampen economic growth. As already mentioned, increasing rates means the federal government will pay more in debt service—using funds that could otherwise have been used to repair roads or pay off debt. Consumers will pay more for car and home loans. Businesses will pay more for equipment loans and so on—all because of the Fed.
3. Checking Account Balances
The average checking balance total for all financial institutions rose in 2017 to $3,711, or an increase of 5.35 percent. Credit union average checking balances rose 3.74 percent from 2016 to $2,584. More important, the number of checking accounts at credit unions increased in 2017 by 5.13 percent while the number at banks declined .84 percent and thrifts declined 7.53 percent.
Almost 75 percent of credit unions offer free checking, compared to less than 50 percent of all banks and thrifts. CUs are more inclined to take a new member with only checking, while banks and thrifts want a relationship of two or more services.
According to the Fed, 70 percent of the U.S. economy is consumer-driven. It appears the consumer has not engaged in the economy based on the checking dollar movements and numbers.
4. The Security Markets
The CBOE Volatility Index is a measure of risk or price volatility in the stock markets. Until Q1 2018 the VIX had been about 10 for some time. Recently it has gone over 20, reflecting more volatility in the major stock exchanges. Why? Most traders and security analysts think the stock market has hit an overall top price. Many believe the Fed’s monetary policy has gone as far as it can. Checking balances indicate the consumer has not engaged in the market, especially retail and home improvement.
Fiscal policy is needed. Tax reform should benefit the economy, but by all economic measures will take at least six months to kick in.
5. Tax Reform
Q3 2018 will expand the story on tax reform. Lower tax rates for business and most consumers is the major feature, coupled with limiting the deductions for home equity and second mortgages, as well as limits to state taxes and total mortgage interest. Housing will be a key component of economic activity in 2018.
6. Trade
Among the potential consequences looming with the White House policies for reducing the trade deficit are a small impact on international trade, less investor demand for U.S. securities, a fall in the U.S. dollar, an increase in U.S. inflation rate, and a decline in U.S. stock prices.
The result of such events will be higher rates for loans and deposits. Also, credit unions in markets adversely affected by manufacturing job loss need to be prepared for a declining marketplace and subsequent loan delinquencies.
What’s a Credit Union to Do?
The Fed will increase rates even though it should not. Individual credit unions must be very careful how they adjust share dividends, deposit rates and loan rates. It’s a good idea to promote free checking and strive to make checking portfolios profitable by cutting operations costs and lowering fees to stimulate more fee volume.
Tax reform should have a positive effect and offset the volatility of stock and bond markets in the last half of 2018. Watch trade negotiations especially in markets with manufacturing operations. Now is a time to cut overall costs and increase total fee revenue. 2018 will be difficult but should also be a boost for capital at most credit unions.
Mike Moebs’ economic research firm, Moebs $ervices, Lake Forest, Ill., has provided data, information and intelligence to government agencies, news outlets and thousands of financial institutions. The former credit union director and bank director holds several patents on risk management for loans and overdrafts.
Also by Moebs, read CFO Focus: State of Overdrafts.
You may also like reading, “Are Checking Accounts Financial Services ‘Film’?” and “CFO Focus: Has the Inflation Genie Escaped?”
