Inflation data to show whether prices continued cooldown
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(NEW YORK) — A fresh inflation report on Wednesday will show whether price increases have continued a monthslong cooldown as they fall toward normal levels.
Economists expect prices to have increased 2.6% over the year ending in August. That figure would mark a notable slowdown from the year-over-year rate of 2.9% recorded in the previous month.
After six consecutive months of slowing price increases, inflation stands at its lowest level since March 2021. However, inflation remains nearly a percentage point higher than the Federal Reserve’s target rate of 2%.
The new price data on Wednesday holds major implications for the course of widely expected interest rate cuts.
The chances of an interest rate cut at the Fed’s meeting next week are all but certain, according to the CME FedWatch Tool, a measure of market sentiment. Market observers are divided over whether the Fed will impose its typical cut of a quarter of a percentage point, or opt for a larger half-point cut.
So far this year, the job market has slowed alongside cooling inflation. That trend was underscored last week by a weaker-than-expected jobs report, though employers added a solid 142,000 jobs. The unemployment rate has ticked up this year from 3.7% to 4.2%.
The Fed is guided by a dual mandate to keep inflation under control and maximize employment. In theory, low interest rates help stimulate economic activity and boost employment, while high interest rates slow economic performance and ease inflation.
Recent trends have shifted the Fed’s focus away from controlling inflation and toward ensuring a healthy job market.
Speaking at an annual gathering in Jackson Hole, Wyoming last month, Fed Chair Jerome Powell said the “time has come” for the Fed to adjust its interest rate policy.
At previous meetings, Powell said the Fed needed to be confident that inflation had begun moving sustainably downward to its target rate of 2% before instituting rate cuts. Last month, Powell appeared to indicate that the Fed had achieved that objective.
“My confidence has grown that inflation is on a sustainable path down to 2%,” Powell said.
Since last year, the Federal Reserve has held interest rates at their highest level in more than two decades. High borrowing costs for everything from mortgages to credit card loans have helped slow the economy and lower inflation, but the policy risks tipping the U.S. into a recession.
Last month, Goldman Sachs economists raised the probability of a U.S. recession in the next year from 15% to 25%. However, economists disagree about whether current economic conditions warrant serious concern.
(NEW YORK) — The Federal Reserve delivered a jumbo-sized rate cut this week in a move widely viewed as a declaration of victory over inflation and a signal of relief for borrowers.
Few areas of the economy welcomed the news more than the nation’s sluggish housing market, where high mortgage rates have largely shut out homebuyers.
Experts who spoke to ABC News cautioned that the rate cut would not deliver an immediate drop in mortgage rates or a loosening up of the housing market.
Mortgage rates had already dropped over recent months in anticipation of the rate cut, they said. They forecasted a gradual thaw in the market as homebuyers perk up and borrowing costs slowly decline.
“This is a harbinger of good times to come, but we’re not there yet,” Susan Wachter, a professor of real estate at University of Pennsylvania’s Wharton School of Business, told ABC News.
Here’s what to know about what the Fed’s rate cut means for mortgage rates and the housing market.
What does the Fed’s rate cut mean for mortgage rates?
The interest rate cut likely will not have a significant impact on mortgage rates over the short term, experts said. That’s because mortgage rates had already moved due to an expectation of this rate decision.
The average interest rate for a 30-year fixed mortgage stands at 6.09%, according to Freddie Mac data released on Thursday.
That figure has plummeted more than a percentage point since May. The average interest rate for a 30-year mortgage has dropped even further from a peak reached last October.
“Everybody has been talking about an expected drop in the Fed Funds rate,” Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors, told ABC News. “The mortgage market heard that loud and clear.”
Initial evidence suggesting unchanged mortgage rates can be found in the yield on a 10-year Treasury bond, experts said.
Mortgage rates closely track the yield on a 10-year Treasury bond, or the amount paid to a bondholder annually. In the aftermath of the Fed’s rate cut on Wednesday, the yield on a 10-year Treasury bond ticked slightly upward, defying the nudge downward by the central bank.
“Ten-year rates are basically pricing in the effect of interest rates coming down,” Lu Liu, a professor at the Wharton School at the University of Pennsylvania, told ABC News.
Still, experts added, mortgage rates may gradually decline over the remainder of 2024 and the duration of 2025.
The Federal Open Market Committee, a policymaking body at the Fed, on Wednesday forecasted further interest rate cuts.
By the end of 2024, interest rates will fall nearly another half of a percentage point from their current level of between 4.75% and 5%, according to FOMC projections. Interest rates will drop another percentage point over the course of 2025, the projections indicated.
If interest rates track those projections, then mortgage rates may see some decline as investors gain confidence that falling interest rates will not hit a snag, experts said.
“By the end of 2025, we can expect mortgage rates to be in the 5% range,” Wachter said.
Lautz offered a slightly less optimistic assessment, predicting mortgage rates next year in the high 5% range.
Uncertainty about the path of mortgage rates remains significant, said Liu. “It’s always a little bit of wait and see,” Liu said.
Experts agreed, however, that mortgage rates would not return to levels of between 2% and 3% enjoyed by homebuyers as recently as 2021. Those rates came in response to aggressive rate cuts at the Fed in response to COVID-19.
“That was a very unusual environment,” Lautz said. “It’s very unlikely to happen.”
What does the Fed’s rate cut mean for the housing market?
Experts expect the housing market to eventually heat up. But they do not expect the interest rate cut to deliver a sudden jolt.
The housing market remains sluggish. Existing-home sales declined 2.5% in August compared to the previous month, according to a report released by the National Association of Realtors on Thursday. The slowdown took place despite a significant decline in mortgage rates over that period.
The housing market will loosen up as low mortgage rates trickle through to homebuyers, and as those consumers proceed through the monthslong process of purchasing a home, experts said. The lower mortgage rates will also entice prospective buyers who previously balked at higher borrowing costs, they added.
Still, the current drop in mortgage rates may not rekindle the housing market, experts said, citing a phenomenon known as the “lock-in effect.”
While mortgage rates have fallen, they remain well above the rates enjoyed by most current homeowners, who may be reluctant to put their homes on the market and risk a much higher rate on their next mortgage.
In turn, the market could continue to suffer from a lack of supply, making options limited and prices sticky. Over the coming months, however, the housing market could loosen up, experts said.
“Now with rates coming down, we may gradually see some people willing to give up lower rates, move and sell their houses,” Liu said. “Hopefully there will be a little more supply on the market, but prices aren’t likely to come down all that much.”
Lautz agreed, predicting better days ahead. “It’s a slow burn,” she said. “We should see a change in activity and more buyers able to afford the market.”
Arian Simone (L) presents the Fearless Strivers New Orleans Grant onstage during the 2022 Essence Festival of Culture at the Ernest N. Morial Convention Center on July 1, 2022 in New Orleans. (Paras Griffin/Getty Images)
(NEW YORK) — Fearless Fund, a venture capitalist firm that invests in female entrepreneurs of color, has settled a discrimination lawsuit over a grant program specifically for Black women.
The lawsuit from the American Alliance for Equal Rights (AAER) claimed that the fund’s Fearless Strivers Grant Contest, which was open “only to Black females,” was discriminatory.
The grant program was at its end when the court case began in 2023, according to an online post by Fearless Fund founder Arian Simone, and the fund said it was motivated to avoid a court ruling so as not to lead to a Supreme Court decision that could end minority-based funding nationwide.
The Fearless Fund said it will continue to focus on “helping under-resourced entrepreneurs who have been ill served by traditional capital markets for far too long.” In a statement on the settlement, it announced a new $200 million debt fund with the goal of lending to more than 3,000 under-resourced founders.
Representatives of Fearless Fund partners Simone and Ayana Parson told reporters in August 2023 that the fund was established to address the wide gap in venture capital funding for businesses led by women of color “who confront barrier after barrier to obtain support and investments for their businesses.”
The Fearless Strivers Grant Contest was created specifically for Black women because Black women-owned businesses receive less than 1% of venture capital funding, according to the organization.
AAER called the grant program “divisive and illegal” and claimed that it “encouraged the Fearless Fund to open its grant contest to Hispanic, Asian, Native American and white women but Fearless has decided instead to end it entirely.”
White women-founded companies take home 64% of “Diversity Investments” by deal count, meanwhile women of color-owned businesses only take home 10%, according to an analysis of Crunchbase data by venture capital firm BBG Ventures.
Fearless Fund partners have long defended their work, citing the poor representation of women of color among venture capital recipients and evidence of racial bias in the investment decisions of asset allocators.
“From the moment the lawsuit was filed, I pledged to stand firm in helping and empowering women of color entrepreneurs in need. I stand by that pledge today and in fact my commitment remains stronger than ever,” read a statement from the organization’s co-founder Arian Simone. “Our overarching mission remains focused on helping and empowering entrepreneurs who have been historically overlooked in the venture capital marketplace.”
AAER’s founder Edward Blum also leads the Students for Fair Admissions, the group that initiated the anti-affirmative action case that reached the Supreme Court and won the case, setting new limits on the use of race-based policies in college admissions.
The conservative group claimed that affirmative action, which was implemented to address racial inequities in access to higher education, violated the equal protection clause of the 14th Amendment.
(NEW YORK) — A surging stock market, low unemployment and robust growth — by just about every measure, the economy stood poised to deliver victory for Vice President Kamala Harris.
The exception, of course, was inflation, and it appears to have overshadowed other indicators. More than two-thirds of voters say the economy is in bad shape, according to the preliminary results of an ABC News exit poll.
Inflation likely shaped negative voter perceptions of the economy and helped fuel anger toward the party in power, just as it has done across the globe since the pandemic unleashed a wave of rapid price increases, experts told ABC News.
The political potency of inflation stems from the visceral, recurring sense of unease caused by high prices, experts added. That feeling leaves voters insecure about their future and desperate for a leader who can change the nation’s course.
“Inflation has a specific and special power in elections,” Chris Jackson, senior vice president of public affairs for Ipsos in the U.S., told ABC News. “It’s something people see in their face every day — every time they go to the grocery store or fill up their car.”
He added, “Inflation is present in people’s lives. It’s something they’re unhappy with and it’s something they rightly or wrongly blame on whoever is in charge.”
The pandemic set off an acute bout of inflation that impacted nearly every country across the world, when global supply chain blockages caused an imbalance between the availability of goods and the demand for them. In other words, too much money chased too few products.
Prices began to rise rapidly in the U.S. in 2021, catapulting the inflation rate to a peak of about 9% the following year. Inflation soared even higher in many other countries, including the likes of Brazil and England, where leaders faced an angry electorate.
In Brazil, where President Jair Bolsonaro cut taxes on fuel and electricity in an effort to slash prices over the months preceding an election that concluded in October 2022, the nation nevertheless replaced him with a leftwing challenger.
Earlier that year, in England, Prime Minister Liz Truss responded to the highest inflation in four decades with an economic policy centered on tax cuts and energy price controls. Her tenure in office lasted just 44 days before market reaction and political disarray led to her stepping down.
The post-pandemic pattern has exemplified a high rate of leadership change amid inflation crises around the world over the last half century, according to a study by Eurasia Group, a political risk consultancy firm. Examining 57 inflation shocks since 1970, the firm found government turnover in 58% of cases.
Further, when there was an election during or within two years of an inflation shock, it led to a change in government in roughly three out of every four instances, according to Eurasia Group.
“We’re seeing this trend on jet fuel after the pandemic,” said Robert Kahn, the managing director of global macro-geoeconomics at the New York-based Eurasia Group. “The pandemic inflation shock contributes to a sense of instability and a loss of confidence among people in their governments.”
Carola Binder, an economics professor at the University of Texas at Austin who studies the history of inflation in the U.S., characterized recent anti-incumbent sentiment in a slightly different way: “When people are experiencing inflation and suffering from it, they want to have someone or something to blame.”
Inflation has cooled dramatically over the past two years, now hovering near the Federal Reserve’s target rate of 2%. Even so, that progress hasn’t reversed a leap in prices that dates back to the pandemic. Since President Joe Biden took office in 2021, consumer prices have skyrocketed more than 20%.
The potential role of inflation in the U.S. election owes to a typical lag between when inflation comes down and when consumers acclimate to new price levels, since a lower inflation rate does not mean prices have come down but rather that they have begun to increase at a slower pace, experts told ABC News.
“When inflation comes back down, the prices of many critical items remain high, especially for people who are stretched and living paycheck to paycheck,” Kahn said.
Consumers will likely acclimate to current price levels over the coming months, but voters will remain sensitive to inflation, experts said.
President-elect Donald Trump’s proposals of heightened tariffs and the mass deportation of undocumented immigrants risk rekindling rapid price increases, some experts said.
When asked about whether inflation could reemerge as an important issue ahead of the next midterm elections in 2026, Jackson said: “If Republicans shoot themselves in the foot, absolutely.”
