Advertiser Disclosure

News

What Midterm Election 2018 Results Mean for Your Student Loans

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

From health care to the economy, voters had many concerns in mind as they headed to the polls for this year’s midterm elections.

But one major issue that might not have gotten as much attention in news coverage was the government’s handling of student loans, a subject which impacts 44 million Americans. As our national student debt has exceeded $1.5 trillion, many borrowers are hoping for relief.

But while Democrats call for an expansion of financial aid and forgiveness programs, conservatives warn that increasing aid could be a burden for taxpayers.

Given the election results that gave the Democratic Party a majority in the House of Representatives, we might see them looking to influence the education policies moving forward. Still, they won’t have much hope for passing their own legislation without working out deals with the Republican-led Senate and White House.

On the other hand, a few ballot measures across the country and the presence of some lawmakers with a personal interest in student debt are enough to cast educational debt in a bigger spotlight.

Whether you’re a student, loan borrower or parent preparing for the costs of colleges, find out what the 2018 midterm election results could mean for you.

Democrats to weigh in on education policies

While some races are still too close to call, Democrats have locked in a majority in the House of Representatives, taking the gavel from the Republicans, while the GOP has added to its majority in the Senate.

This shift in the House could mean Democrats have greater influence when it comes to Department of Education policies, particularly those related to for-profit colleges and student loan forgiveness programs.

Critics of Secretary of Education Betsy DeVos have accused her of protecting for-profit schools at the expense of students. They have also objected to her efforts to scale back certain Obama-era protections, such as borrower defense to repayment, which discharges loans for defrauded borrowers.

Democrats have sent letters objecting to education policies under the Trump administration, but as the minority, they were unable to conduct oversight of the department. Now that they lead the House, however, Democratic members will likely be active on this front.

“Expect a Democrat-led House, for instance, to conduct hearings, demand documents and press the Trump administration on its appointment of officials with ties to for-profit colleges — and its reversal of Obama-era policies meant to crack down on the industry,” wrote Michael Stratford, education reporter for Politico on Tuesday.

Ally Bernstein, legislative counsel for the Association of Young Americans (AYA) agreed, “The [Democrats will] hold the department’s feet to the fire on its controversial rewrites of rules governing for-profit institutions, including whether federal student loan borrowers are protected from continuing to repay loans if these institutions committed fraud against them.”

The free-college movement shows up at local level

When running for president in 2016, Sen. Bernie Sanders (I-Vt.) supported the movement to provide free public college for all. In 2017, Sanders and Sen. Elizabeth Warren (D-Mass.) proposed a bill that would provide $41 billion a year to states to help eliminate tuition.

While there hasn’t been much progress on the national level, various state politicians have voiced their support for free community college during this midterm election season. For example, Ned Lamont, who won his bid for governor of Connecticut, supports two years of community college for state residents who agree to remain in state following graduation.

In fact, both the Republican incumbent Larry Hogan and his Democratic opponent for the governor’s seat of Maryland, Ben Jealous, proposed expanding Maryland’s free tuition college program, which currently provides no-cost community college to residents. Hogan, who won the race, said he supported expanding the tuition-free program to include four-year institutions.

And it’s not just the state governments. Seattle voters approved a measure to offer two free years of community college for public school students. The move will be funded by a property tax hike which the city predicts will raise over $600 million over several years.

So although the free college movement hasn’t gained much traction nationally, these city- and state-level victories could be signs of changes to come.

Politicians have student debt, too

For some politicians in this election, student loans are a personal issue. According to CNBC, one in 10 current members of Congress are repaying student loans, either for themselves or a family member.

Some of them are also trying to address the issue more broadly. Consider Rep. Tom Reed (R-N.Y.), who was re-elected to the House Tuesday.

“This is an area that affects the futures of so many young men and women, and it’s time to address the issue before it gets even worse,” Reed told Student Loan Hero in an interview earlier this year. “We’re shackling our children and grandchildren to debt if we don’t do something.” (Note: Student Loan Hero and MagnifyMoney are both part of LendingTree.)

Reed introduced a bill this year that would force some universities to use a portion of their endowments to help low- and middle-income students.

And there may be more such elected officials on the way, as millennials join the political arena and move up the ranks of state government.

Natalie Higgins of Massachusetts and Matt Lesser of Connecticut are two re-elected state representatives who have been open about their struggles with student debt.

Higgins, for example, borrowed more than $130,000 to pay for law school.

Lesser, also a student loan borrower, has made student debt a signature issue in his past few years on Connecticut’s state senate. In 2015, he sponsored a “student loan bill of rights,” aimed to make student loan companies follow consumer protection rules.

Committed to easing the burden for student borrowers, both Higgins and Lesser introduced a state bill requiring student loan servicers to abide by consumer protections.

“Having representatives who have experienced or are still experiencing student loans and understand the burdens and problems is really important,” said Ben Brown, founder of AYA.

Student loan legislation remains murky

With divided affiliations in Congress, competing visions for higher education from the Republicans and Democrats look less likely to become law.

Late last year, Republicans proposed the PROSPER Act, which would reduce regulation of for-profit schools, limit student loan forgiveness and increase funding for community colleges and apprenticeships, among other things.

Democrats, meanwhile, have proposed the Aim Higher Act, which would expand Public Service Loan Forgiveness (PSLF), increase funding for Pell Grants and revise income-driven repayment plans.

While the Republicans could pass PROSPER during the “lame duck” session before the new Democratic-majority House sits, any overhaul of the student loan system by the new Congress would require a deal between the two sides.

Student loans have become a political issue

With millions of Americans dealing with student loans, and with the cost of college higher than ever, it’s not surprising that higher education issues are increasingly part of the political conversation.

Now that Democrats have won a majority in the House, the current push to roll back Obama-era protections is likely to come under a lot more scrutiny. Likewise, previous plans for major changes to student debt through the PROSPER Act might need bipartisan consensus to move forward.

As a student loan borrower, make sure to stay informed about any changes to federal programs, such as income-driven repayment or loan forgiveness. Also know that even though the election is over, you can still make your voice heard. Contacting your elected officials is easy and can have an impact if enough people take action.

Even if these debates feel far away, they could have a very real effect on your life and finances.

This report originally appeared on Student Loan Hero. Both MagnifyMoney and Student Loan Hero are part of LendingTree.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Rebecca Safier
Rebecca Safier |

Rebecca Safier is a writer at MagnifyMoney. You can email Rebecca here

Advertiser Disclosure

News

2019 Fed Meeting Predictions — Fed Cut Rates for First Time in Over a Decade

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

iStock

The Fed cut the federal funds rate at its July meeting, the first time in over a decade. The cut is designed to sustain the economy’s continued expansion by protecting against what the Fed sees as downside risks to the economy.

Now, the question on everyone’s minds is whether this cut is a one-off or whether it’s the first in a string of cuts.

Read on for our predictions for each upcoming Fed meeting and updates on what went down at the most recent conclaves.

Our September Fed meeting predictions

It certainly looks like the Fed may cut rates again at its September meeting. The 25 basis point (bp) cut in July — the first in over a decade — reduced the federal funds rate to 2.00% to 2.25%, and the Federal Open Market Committee (FOMC) justified its move by saying it wanted to protect against “downside risks,” namely weak global growth and rocky trade policy negotiations. Due to the persistence of these risks in the interim, markets and economic experts are preparing for yet another 25 bps cut later this month, which would put the federal funds rate at 1.75% to 2.00%.

After the July meeting, Fed Chair Jerome Powell stated that he and the FOMC did not see the historic rate reduction as the first in a string of cuts. However, Powell spoke at the University of Zurich on Sept. 6, right before the FOMC’s pre-meeting silent period, and stated that the committee would “continue to act as appropriate” to protect the U.S. economy. The risks cited in July have not abated in September, so many have concluded it’s not too far-out to assume this signals another rate cut.

Economist and Fed-watcher Tim Duy agrees — and he thinks the cuts won’t end in September, either. “The Fed will cut rates 25bp next week and leave the door open for more,” he wrote.

We’ll get a look at the Fed’s newest Summary of Economic Projections this month. Every other Fed meeting brings the release of the Summary of Economic Projections (SEP), which outlines each committee member’s outlook for the U.S. economy over the next couple of years and the longer term. These forecasts include GDP growth, inflation, unemployment and the federal funds rate. The SEP gives us a relative idea of what to expect from the economy in the future.

Relatedly, Powell should once again stress that we’re not on the verge of recession. While speaking in Zurich, Powell assured that the Fed’s “main expectation is not at all that there will be a recession.” He points to the U.S. economy’s continued expansion — “moderate growth, a strong labor market” and inflation, although muted, hovering around the 2% goal. He also reminded us that we’re now in the 11th year of an economic expansion. It is expected that Powell will use the post-meeting press conference, as he has done before, to address and dispel recession concerns.

That said, recession concerns aren’t entirely unfounded. Overall growth has slowed from its speedy pace in 2018, and the latest jobs report showed fewer new jobs in August. Further, the Treasury yield curve — a tool used to look at the future direction of interest rates and broader economic trends — has inverted recently. This phenomenon — where long-term Treasury interest rates fall below short-term Treasury rates — has historically indicated an upcoming recession. A yield curve inversion like this shows that markets are predicting lower rates in the future. However, there’s certainly room for prediction error; the curve inverted once before this year and it was not followed by an immediate recession.

Upcoming Fed meeting dates:

Here is the FOMC’s calendar of scheduled meetings for 2019. Each entry is tentative until confirmed at the meeting proceeding it. For past meetings, click on the dates below to catch up on our pre-game forecast and after-action report.

Our July Fed meeting predictions

Chances of a rate cut at the July meeting are way up. Committee Chair Powell all but confirmed the possibility in his recent testimony before Congress. “Since the June meeting, and even for a period before that, the data have continued to disappoint,” he said. As the Fed relies on jobs, manufacturing and wage data to help inform their policy decisions, disappointing data like what we’ve been seeing, provides a real justification of a rate cut.

However, the cut shouldn’t be anything more than 25 basis points. “The data doesn’t support a 50bp move,” maintains economist Tim Duy. Growth has certainly slowed in 2019, but June’s job reports provided a positive surprise, while wage growth still weakened.

Experts speculate that if the Fed does not cut rates this month, they will signal a rate cut to come in September instead. For one, Boston Federal Reserve President Eric Rosengren has vocalized that he thinks the economy is “quite strong” at the moment and doesn’t quite yet need Fed policy interference. Whether the rest of the FOMC agrees with him or not will be revealed next week.

We’ll hear more about the economy’s future as talk of an impending recession continues. Speculation about an upcoming recession has held steady since December 2018, when the Fed downgraded their economic outlook. Since then, growth has continued to slow, although a few positive surprises along the way have buoyed sentiment.

One recession indicator will be very clear if the Fed actually holds off on a rate cut this month. “Without a rate cut, the markets may consider the odds of a more significant slowdown as increasing,” said Ken Tumin, founder of DepositAccounts.com, another LendingTree-owned site. One interpretation of the Fed not cutting rates yet would be a need to maintain an insurance policy against an impending economic slowdown. “Keep your powder dry” is a common saying, and no cut may mean the Fed wants to reserve it’s finite rate cutting policy tools to fight a recession later.

What happened at the July Fed meeting

The Federal Reserve cut the federal funds rate by 25 basis points. After a six-month monetary policy pause, the Federal Open Market Committee (FOMC) has lowered the federal funds rate by 25 basis points to a range of 2.00% to 2.25%, a choice it maintains is “appropriate to sustain the expansion” of the economy.

The FOMC statement cites “implications of global developments” (such as trade conflict and Brexit) and “muted inflation pressures” as its chief reasons for the rate cut, also calling out softer growth in U.S. business fixed investment. On the other hand, the committee acknowledged the still-favorable parts of the U.S. economy, including the strong labor market, low unemployment and increased household spending.

At the press conference, Fed Chair Jerome Powell underscored these good bits, stressing that “nothing in the U.S. economy that present a prominent, near-term threat,” while very pointedly calling out global risks, warning that the implications of these risks weigh heavily on the FOMC’s thinking.

As to whether these points signal more rate cuts, Powell was adamant that they do not. In reference to previous instances where mid-cycle rate cuts have evolved into rate cutting cycles, Powell said that “the Committee is not seeing that,” adding “that’s not our perspective … or outlook.”

The Fed maintained a positive outlook for the U.S. economy. Despite slower growth, the US economy has continued to grow, and Chair Powell made sure to emphasize the point in his press conference. “The Committee still maintains a favorable baseline outlook,” he said, continuing to stress the issue throughout.

Powell begs us not to take the rate cut as a signal of panic at the Fed. If you remember, Boston Federal Reserve President Eric Rosengren spoke on July 19 about his preference to wait to make any rate changes, “given that the economy is quite strong” and with inflation holding around 2%. In fact, Rosengren and Kansas City Fed President Esther L. George were the two dissenters at the July meeting. Both indicated their preference to keep rates unchanged.

At the press conference, Powell doubled down on the rate cut as a safeguard from downside risks. He identified three threats the rate cut would protect against. First, weak global growth, namely in Europe and China. Secondly, weak domestic manufacturing. Third — a byproduct of risks one and two — is stubbornly muted inflation growth.

For some, however, the Fed rate cut is hardly justified, or is merely a fig leaf.

Ahead of the July meeting, University of Oregon economist Tim Duy proclaimed that “the December rate hike was simply a small mistake than needed to be rectified,” and he remained as emphatically critical in its wake. “All policy makers really know at this point is that they are navigating a mid-cycle course correction,” he wrote in Bloomberg.

The Fed’s reassurances of a positive economic outlook suggest a recession remains a distant threat, at best. We’ve seen consistent growth throughout this year, albeit at a slower pace than 2018. Plus, the Fed continues to keep a positive outlook for the U.S. economy. Any threats that are perceived now are the target of today’s rate cut, designed to continue the growth we’ve been seeing.

When asked about how cutting rates today would give the Fed little wiggle room to cut again when a recession hits, Powell was quick to shut down any assumption that one was impending. “In other cycles, the Fed wound up raising rates again after a mid-cycle adjustment,” he countered, quickly adding, however, that “I’m not predicting that.” Still, he leaves it open to the possibility of future rate hikes after this cut, rather than an overall downward turn.

Our June Fed meeting predictions

The Fed could signal a possible future rate cut. Chair Jerome Powell recently indicated the Fed’s willingness to cut rates, if necessary, in response to a bad outcome in trade negotiations, or data pointing to a weakening economy. This was the first time Powell had hinted at the possibility of monetary policy changes since the Fed chose to put an end to its rate hike streak back in January.

Economist Tim Duy points to the May jobs report, especially revisions to the prior months’ data, as another trigger for the Federal Open Market Committee (FOMC) to foreshadow a possible rate cut. Job gains slowed in May, due to softer economic growth rather than a lack of workers. But Duy warns that the revisions indicate U.S. job growth has “slowed markedly” over the last four months, another worrying sign.

Note that there is practically zero chance of a rate cut at the upcoming June meeting. Instead, you should look for hints to a rate cut later in 2019. “I don’t think they’ll change the rate,” says Tendayi Kapfidze, chief economist at LendingTree. “Definitely not at this meeting. I’d be surprised if it happens before September.”

The Fed could soften their economic forecast. The June Fed meeting will bring the latest Summary of Economic Projections (SEP). Much like it sounds, this is where the FOMC updates their long-term forecast for economic performance over the next few years.

Kapfidze predicts we’ll see another downgraded SEP forecast. “I think they’ll come up with a softer forecast. It’s just a question of how soft,” he said. With the data coming in somewhat mixed and trade negotiations remaining highly unpredictable, Kapfidze said the Fed finds itself in a “delicate moment to get the pulse of the state of the economy.”

We should learn more about the Fed’s approach to their 2% inflation goal. At the April/May meeting, we learned that inflation for personal consumption expenditures — the Fed’s preferred measure of price changes — fell unexpectedly. This left many economists and experts concerned that the Fed was neglecting its mandate to keep inflation symmetrically around 2%.

“Perhaps inflation is not coming back as they anticipated,” Kapfidze muses. So while inflation is stable right now, it’s definitely still a concern.

What happened at the June Fed meeting

The Fed kept the federal funds rate steady… for now. The federal funds rate was left at 2.25% to 2.50%, as the Fed continues its rate pause. The Fed changed its tone by dropping its “patient stance” language, saying instead that it would “closely monitor the implications” given the “uncertainties about this outlook,” namely trade developments and global growth concerns.

In simpler terms, the FOMC felt the current data didn’t support a case for cutting rates right now. However, it does expect the economic climate to change in the next few months – possibly for the worse.

“The Committee wanted to see more [before making any changes],” said Fed Chair Jerome Powell at the post-meeting press conference. “I expect a full range of data, and that something will change before the next meeting.” Essentially, as these “uncertainties” become clearer, the Fed will adjust policy accordingly.

The dovish St. Louis Fed President James Bullard was the only dissenter to the policy decision, voting to lower the federal funds rate range by 25 basis points, while all others voted to maintain rates where they are.

A rate cut at the next meeting is by no means an inevitable conclusion. Most experts expected the Fed to signal that a rate cut was imminent. We didn’t get that strong of a sign.

The Fed’s latest Summary of Economic Projections (SEP) predicts no rate changes until 2020, keeping the projection for 2019 within the current range at 2.4%. The 2020 projection, however, dropped to 2.1%, which lies below the current lower limit of the rate range. It’s also well below the previous March projection for 2020 of 2.6%.

Still, Tendayi Kapfidze, chief economist at LendingTree, points to three signs that a rate cut is coming. “For one, at least eight Fed members projected a cut before the end of the year,” he shares. “Two, we saw one member already voting for a cut at this meeting. Three, the Fed removed the word ‘patient’ in their statement, instead calling out the uncertainties and risks.”

As for when the Fed might reduce rates, Kapfidze thinks the next Fed meeting in July is still too soon. “Perhaps September is more realistic.”

The SEP was stronger than expected. The Fed’s economic projections were little changed from its March outlook, again contradicting expert predictions of a softer outlook. Change in real GDP and the federal funds rate projections for 2019 matched the numbers in March, while the unemployment rate projection dropped by a single basis point for 2019.

In its statement, the FOMC points to strong labor market reports, low unemployment, higher household spending and overall moderate economic growth as support for a continued favorable baseline outlook.

That tricky problem with inflation remains. If you recall from last month’s meeting, inflation was the hot topic as the Fed was concerned about inflation continuing to fall short of its goal of 2%. This time around, the Fed again acknowledged that overall inflation and inflation for items other than food and energy are running below 2%.

Chair Powell shared that the Committee points to uncertainties in global growth and trade negotiations as factors for muted inflation. Plus, the SEP gives us some additional insight, showing us that the Fed expects inflation to continue to run below target.

Still, Powell reiterated the Committee’s firm commitment to its inflation objective. He also stated that while inflation continues to run below target, the Committee expects it to pick back up thanks to solid growth and a strong job market, although “at a slower pace than had been expected.”

Our April/May Fed meeting predictions

The Fed should reaffirm their patient stance at the April 30/May 1 meeting, and may reiterate their view that stronger U.S. economic data is needed before they can make more policy changes. The Fed already said as much in its March meeting minutes, where it confirmed that “a majority of participants” agreed to leave “the target range unchanged for the remainder of the year,” due to the unsettled economic outlook. When considering rate changes, the Fed looks at job growth, wages, and inflation pressures; if the numbers meet the Fed’s parameters, rates stay unchanged, but if they are too hot or too cold, rates need to change. Inflation has been hovering around the Fed’s target of about 2%, and while both job growth and retail sales were points of concern due to low numbers since December, both measures have recovered somewhat in March economic data reports.

Without drastic changes to the data, there is little risk the Fed will be moving rates up (or down). As economist Tim Duy succinctly told MagnifyMoney, “We will not see a rate cut. I don’t think we will see much change in policy at all. It should be a boring meeting.”

About that economic outlook! Even if the Fed stays on pause, it seems like the latest data should tamp down talk of an upcoming recession. We’ve been hearing analysts and commentators talk about a possible recession since December, when the data showed a decline in economic indicators across the board. The cynicism really started to kick in when the Treasury yield curve began to invert, which can be (but isn’t always) a harbinger of recession. However, the stronger March jobs, retail and new home sales reports have lessened such concerns. Plus, the latest GDP report from the Bureau of Economic Analysis shows growth at an annual rate of 3.2% in the first quarter of 2019, exceeding economists’ predictions of 2.5% growth.

Tendayi Kapfidze, lead economist at LendingTree, said as much back in March ahead of that month’s Fed meeting: “Since the financial crisis, data in the first quarter has been coming in weak because of seasonal adjustment. Models that make this adjustment are skewed by this, but then everything can reaccelerate in following quarters.” Plus, on top of that adjustment, the government shutdown greatly affected reports in both their results and how they were measured.

On the whole, we’re still seeing an economy on the rise, not a decline — it’s just not growing quite as fast as it was in 2018.

What happened at the April/May Fed meeting

The Fed maintained their patient policy stance. The Fed left rates unchanged at 2.25% to 2.50%. The latest economic data has indicated some recovery in jobs and retail sales growth, while the unemployment rate remains low, as well. Plus, GDP grew 3.2% in the first quarter, exceeding expert economists’ predictions of 2.5%. This data supports the Fed’s outlook for a growing economy and its decision to keep interest rates unchanged.

What about the Fed’s inflation goal? This was the big question for Fed Chair Jerome Powell at his press conference following the FOMC meeting. Inflation for personal consumption expenditures — the Fed’s preferred measure of price changes — has been dropping for the past three months, with the first quarter coming in at 0.7%, below the committee’s 2% target. Powell did note that inflation “unexpectedly fell,” standing at 1.6% for the previous 12 months ending in March.

When asked about what signs the FOMC might see as a need to take action, Powell first answered, “We are strongly committed to our 2% inflation objective, and to achieving it on a sustained and symmetric basis,” a point he reiterated throughout the conference. “The Committee would be concerned if inflation were running persistently above or below 2%” he continued, also noting that what they are currently seeing does not indicate a persistent problem.

While policy remains on hold for now, economist Tim Duy has indicated that weak inflation numbers should still push the Fed to cut rates before the end of the year — “If the Fed is serious about the inflation target, then the odds favor a rate cut over a rate hike,” he writes. Given Powell’s reassurance of the Fed’s strong commitment to its inflation goal, a rate cut could certainly be in the near future.

Our March Fed meeting predictions

There’s little chance of a rate hike this time around. In a policy speech on March 8, Fed Chair Jerome Powell reinforced the FOMC’s patient approach when considering any changes to the current policy, indicating he saw “nothing in the outlook demanding an immediate policy response and particularly given muted inflation pressures.”

This is no different from what we heard back in January, when the Fed took a breather after its December rate hike. There was no change to the federal funds rate at that meeting, and Powell had stressed that the FOMC would be exercising patience throughout 2019, waiting for signs of risk from economic data before making any further policy changes.

Further strengthening the case for rates on hold, the reliably hawkish Boston Fed President Eric Rosengren cited several reasons that “justify a pause in the recent monetary tightening cycle,” in a policy speech on March 5. His big tell was citing the lack of immediate signs of strengthening inflation, which remains around the Fed’s target rate of 2%.

Even though there had been some speculation of a first quarter hike at the March Fed meeting, LendingTree chief economist Tendayi Kapfidze reminds us that the Fed remains, as ever, data-dependent. “The latest data has been on the weaker side, with the exception of wage inflation,” he says.

The economic forecast may be weaker than December’s. The Fed will release their longer-range economic predictions after the March meeting. These projections should include adjustments in the outlook for GDP, unemployment and inflation. The Fed will also provide its forecast for future federal funds rates.

Kapfidze expects we’ll see a weaker forecast this time around than what we saw in December. “I except the GDP forecast to go down, and the federal funds rate expectations to go down.” This follows a December report that posted lower numbers than the September projections.

Despite flagging economic projections, Rosengren offered a steady outlook in his speech. “My view is that the most likely outcome for 2019 is relatively healthy U.S. economic growth,” he said, again attributing this to “inflation very close to Fed policymakers’ 2 percent target and a U.S. labor market that continues to tighten somewhat.”

The Fed’s economic predictions offer clues to its future policy decisions. In September, the Fed projected a 2019 federal funds rate of 3.1%. That number dropped to 2.9% in the December report. With the current rate at 2.25% to 2.5%, there’s still room for more hikes this year. Keep in mind, however, that, the March meeting may narrow projections for the rest of 2019.

As for Kapfidze, he thinks we’ll see a rate hike in the second half of the year. “If wage inflation continues to increase and it trickles more into the economy, the Fed could choose to raise rates due to that risk.”

However, as of March 12, markets see the odds of a rate hike this year at zero, while the odds of a federal funds cut has risen to around 20%, based the Fed Fund futures.

What happened at the March Fed meeting

The Federal Reserve signaled no rate hikes this year, and the possibility of only one increase in 2020. The Fed has pivoted pretty rapidly from its hawkish stance in 2018 to a more dovish outlook as it puts policy on ice. This change in tone grows directly from the FOMC’s observation of slowing growth in economic activity, namely household spending and business investment. The Fed also noted that employment gains have plateaued along with the unemployment rate, which nevertheless remains at very low levels.

So the federal funds rate looks to remain at 2.25% to 2.50% for a year or more, and the FOMC highlighted that this is the not-too-hot, not-too-cold level that for now best serves its dual mandate to “foster maximum employment and price stability.”

The Fed also released its Summary of Economic Projections (SEP). The March SEP indicated a median projected federal funds rate of 2.6% for 2020, which is why everybody is discussing the possibility of at least one, small increase next year.

For those who were really hoping for at least one more rate hike, all is not lost — Tendayi Kapfidze, LendingTree chief economist, believes we shouldn’t take March’s decision too gravely. “There are special factors that suggest the economy could reaccelerate,” he says. “The government shutdown threw a wrench into things, slowing some activity and distorting how we measure the economy.” He also remarks that since the financial crisis, data in the first quarter has continued to come in weak, still leaving room for everything to reaccelerate in the second and third quarters. He points to the already strong labor market as a plus.

Fed economic forecasts hint at a possible rate cut by the end of 2019. Just as the Fed projects a slightly higher federal funds rate in 2020, it also posted a projected 2.4% for 2019. Note that this projected rate falls below the upper end of the current rate corridor of 2.5%. This means the doves may want to see a possible rate cut if improvements in the economic outlook don’t materialize by mid-year.

When asked about this potential rate cut, Fed Chair Jerome Powell emphasized the Committee’s current positive outlook, while also emphasizing that it remains mindful of potential risks. Still, he maintained that “the data are not currently sending a signal that we need to move in one direction or another.” He also remarked that since it’s still early in the year, they have limited and mixed data to consult.

Kapfidze offers a more concretely positive outlook, noting that the chances of a rate cut are pretty slim. “To get a rate cut, you’d have to have sustained growth below 2%. There would have to be further weakness in the economy, like if trade deals get messier, to warrant a rate cut.”

The Fed downgraded its economic outlook for 2019 for the second time in recent months. In line with Kapfidze’s predictions, we did see a weaker economic outlook coming out of this month’s Fed meeting. The median GDP forecast for 2019 and 2020 decreased from December projections, while it remained the same for 2021 and beyond. This comes hand in hand with the decreased fed funds rate projections.

The FOMC increased their unemployment projections, which Kapfidze found surprising because the labor market has been so strong. “Maybe they believe that those numbers indicate a deceleration,” he said, “but really, it has to be consistent considering the other changes that they made.”

Why the Fed March meeting is important for you

It’s easy to let all of this monetary policy talk go in one ear and out the other. But what the Fed does or doesn’t change has an impact on your daily life. Without a rate hike since December, we’re already starting to see mortgage rates fall. This is helpful not only for those who want to buy a home, but also for those who bought homes at last year’s highs to refinance.

As for personal loans and credit cards, we may still see these rates continue to increase, just at a slower rate. These rates have little chance of decreasing because lenders may take the current weaker economic data as a sign that the economy is going to be more risky.

Deposit accounts will feel the opposite effects as banks may start to cut savings account rates. At best, banks will keep their rates where they are for now, until more evidence for a rate cut arises.

Our January Fed meeting predictions

Don’t expect a rate hike. The FOMC ended the year with yet another rate hike, raising the federal funds rate from 2.25 to 2.5%. It was the committee’s fourth increase of 2018, which began with a rate of just 1.5%.

But the January Fed meeting will likely be an increase-free one. Tendayi Kapfidze, chief economist at LendingTree, the parent company of MagnifyMoney, said the probability of a rate hike is “basically zero.”

Kapfidze’s assessment is twofold. First, he noted that the Fed typically announces rate increases during the third month of each quarter, not the first. This means a hike announcement would be much more likely during the FOMC’s March 19-20 meeting, rather than in January.

Perhaps more importantly, Kapfidze said there’s been too much market flux for the FOMC to make a new decision on the federal funds rate. He predicts the Fed will likely wait for more evidence before it considers another rate hike.

“I think a lot of it is a reaction to market volatility, and therefore that’s lowered the expectations for federal fund hikes,” Kapfidze said.

But if a rate hike is so unlikely, what should consumers expect from the January Fed meeting? Here are three things to keep an eye on.

#1 The frequency of rate hikes moving forward

It’s unclear when the next increase will occur, but the FOMC’s post-meeting statement could give a clearer picture of how often rate hikes might occur in the future.

The Fed released its latest economic projections last month, which predicted the federal funds rate would likely reach 2.9% by the end of 2019. This figure was a decline from its September 2018 projections, which placed that figure at 3.1%.

As a result, many analysts — Kapfidze included — are forecasting a slower year for rate hikes than in 2018. Kapfdize said some analysts are predicting zero increases, or even a rate decrease, but he believes that may be too conservative.

“I still think the underlying economic data supports at least two rate hikes, maybe even three,” Kapfidze said.

Kapfidze’s outlook falls more in line with the Fed’s current projections, as it would mean two rate hikes of 0.25% at some point this year. There could be more clarity after the January meeting, as the FOMC’s accompanying statement will help indicate whether the Fed’s monetary policy has changed since December.

#2 An economic forecast for 2019

The FOMC’s post-meeting statement always includes a brief assessment of the economy, and this month’s comments will provide a helpful first look at the outlook for 2019.

Consumers will have to wait until March for the Fed’s full projections — those are only updated after every other meeting — but the FOMC will follow its January gathering with its usual press release. This statement normally provides insight into the state of household spending, inflation, the unemployment rate and GDP growth, as well as a prediction of how quickly the economy will grow in the coming months.

At last month’s Fed meeting, the committee found that household spending was continuing to increase, unemployment was remaining low and overall inflation remained near 2%. Kapfidze expects January’s forecast to be fairly similar, as recent market fluctuations might make it difficult for the FOMC to predict any major changes.

Read more: What the Fed Rate Hike Means for Your Investments

“I wouldn’t expect any significant change in the tone compared to December,” Kapfidze said. “I think they’ll want to see a little more data come in, and a little more time pass.”

At the very least, the statement will let consumers know if the Fed is taking a patient approach to its analysis, a decision that may help indicate just how volatile the FOMC considers the economy to be.

#3 A response to the government shutdown

The big mystery entering January’s Fed meeting is the partial government shutdown. While Kapfidze said the FOMC’s outlook should be similar to December, he also warned that things could change quickly if Congress and President Trump can’t agree on a spending bill soon.

“The longer it goes on, and the more contentious it gets, the less confidence consumers have — the less confidence business have. And a lot of that could translate to increased financial market volatility,” Kapfidze said.

Kapfidze added that the longer the government stays closed, the more likely the FOMC is to react with a change in monetary policy. During the October 2013 shutdown, for example, the Fed’s Board of Governors released a statement encouraging banks and credit unions to allow consumers a chance at renegotiating debt payments, such as mortgages, student loans and credit cards.

“The agencies encourage financial institutions to consider prudent workout arrangements that increase the potential for creditworthy borrowers to meet their obligations,” the 2013 statement said.

What happened at the January Fed meeting:

No rate hike for now

In its first meeting of 2019, the Federal Open Market Committee announced it was keeping the federal fund rate at 2.25% to 2.5%, therefore not raising the rates, as widely predicted. This decision follows much speculation surrounding the economy after the Fed rate hike in December 2018, which was the fourth rate hike last year. In its press release, the FOMC cited the near-ideal inflation rate of 2%, strong job growth and low unemployment as reasons for leaving the rate unchanged.

In the post-meeting press conference, Federal Reserve Chairman Jerome Powell confirmed that the committee feels that its current policy is appropriate and will adopt a “wait-and-see approach” in regards to future policy changes.

Read more: How Fed Rate Hikes Change Borrowing and Savings Rates

Impact of government shutdown is yet to be seen

The FOMC’s official statement did not address the government shutdown in detail, although it was discussed briefly in the press conference that followed. Powell said he believes that any GDP lost due to the shutdown will be regained in the second quarter, providing there isn’t another shutdown. Any permanent effect would come from another shutdown, but he did not answer how a shutdown might change future policy.

What the January meeting bodes for the rest of the year

Don’t expect more rate hikes. As for what this decision might signal for the future, Powell maintains that the committee is “data dependent”. This data includes labor market conditions, inflation pressures and expectations and price stability. He stressed that they will remain patient while continuing to look at financial developments both abroad and at home. These factors will help determine when a rate adjustment would be appropriate, if at all. When asked whether a rate change would mean an increase or a decrease, he emphasized again the use of this data for clarification on any changes. Still, the Fed did predict in December that the federal funds rate could reach 2.9% by the end of this year, indicating a positive change rather than a negative one.

CD’s might start looking better. For conservative savers wondering whether or not it’s worth it to tie up funds in CDs and risk missing out on future rate hikes – long-term CDs are looking like a safer and safer bet, according to Ken Tumin, founder of DepositAccounts.com, another LendingTree-owned site. Post-Fed meeting, Tumin wrote in his outlook, “I can’t say for sure, but it’s beginning to look more likely that we have already passed the rate peak of this cycle. It may be time to start moving money into long-term CDs.”

Look out for March. Depending on who you ask, the FOMC’s inaction was to be expected. As Tendayi Kapfidze, LendingTree’s chief economist, noted [below], if there is going to be a rate increase this quarter, it will be announced in the FOMC’s March meeting. We will also have to wait for the March meeting to get the Fed’s full economic projections. For now, its statement confirms that household spending is still on an incline, inflation remains under control and unemployment is low. It also notes that growth of business fixed investment has slowed down from last year. As for inflation, market-based measures have decreased in recent months, but survey-based measures of longer-term inflation expectations haven’t changed much.

 

magnifying glass

Learn more: What is the Federal Open Market Committee?

The FOMC is one of two monetary policy-controlling bodies within the Federal Reserve. While the Fed’s Board of Governors oversees the discount rate and reserve requirements, the FOMC is responsible for open market operations, which are defined as the purchase and sale of securities by a central bank.

Most importantly, the committee controls the federal funds rate, which is the interest rate at which banks and credit unions can lend reserve balances to other banks and credit unions.

The committee has eight scheduled meetings each year, during which its members assess the current economic environment and make decisions about national monetary policy — including whether it will institute new rate hikes.

A look back at 2018

As we continue through an economically uncertain 2019, it’s worth understanding what the Fed did in 2018, and how those decisions might affect future policy.

The year 2018 was the Fed’s most aggressive rate-raising year in a decade. The FOMC’s four rate hikes were the most since the 2008 Financial Crisis, after the funds rate stayed at nearly zero for seven years. This approach was largely based on the the FOMC’s economic projections, which found that from 2017 to 2018 GDP grew, unemployment declined and inflation its Fed-preferred rate of 2%.

In addition to the rate hikes, the FOMC also continued to implement its balance sheet normalization program, through which the Fed is aiming to reduce its securities holdings.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Lauren Perez
Lauren Perez |

Lauren Perez is a writer at MagnifyMoney. You can email Lauren here

Advertiser Disclosure

News

Where U.S. Taxpayers Get the Biggest Refunds and Tax Bills

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

The 2019 tax season officially kicked off January 28, and 150 million tax returns are expected to be filed this year. While most filers will look forward to getting a refund, others might be worried that they’ll owe taxes to the IRS. Whether you can look forward to a refund is probably tied to where you live, according to the latest MagnifyMoney annual tax study (see 2018 results here). We analyzed IRS tax data for 100 of the largest U.S. metros over a five-year period (2013-2017) to find out where people owe the most taxes at the time they file their return — and where people are getting the biggest refunds.

Key findings:

Taxpayers are getting slightly smaller refunds while tax bills are increasing. On average, we found taxpayers in the 100 largest metros who owed taxes faced a federal tax bill of $5,307 when they filed, while those taxpayers who got a refund averaged $3,016. Compared to last year’s study, which reported an average tax bill of $5,294 and average refunds of $3,052 for returns filed 2012 to 2016.

Nearly one in five taxpayers owes Uncle Sam when he or she files. Among the 100 metros analyzed, 19% of taxpayers owed taxes and 77% got a refund. This shows a trend of more people owing taxes and fewer receiving refunds, as our previous study found 17% of city-dwelling residents owed taxes and 78% received refunds.

High tax bills could correlate to more itemized returns. As in last year’s study, an average of 33% of taxpayers itemized their taxes each year during the study period. But a greater proportion of filers itemized their returns in the 10 metros where taxpayers owed the most. In these cities, on average, 39% of filers itemized their taxes.

In San Francisco, the second-ranking metro with filers who owed the most, some 40% of taxpayers itemize. The exception was Sarasota, Fla. Although the 27% of taxpayers who itemize there was below the national average of 33%, the share of Sarasotans who owed taxes was greater than the national average (21% versus 19%).

Of course, with the 2018 tax reform changes, fewer people will likely itemize when they file taxes this year since the standard deduction was raised.

More people face tax bills in the West. Eight of the top 10 metros where taxpayers owed the IRS were located in the Western United States. California metros took three of the top spots. But Denver was in a three-way tie for second place along with Sacramento and San Diego, where 22% of taxpayers owed Uncle Sam in all three metros. However, Denver has slightly bigger problems, given the average taxpayer there owes more — $5,642 on average, compared with San Diego ($5,298) and Sacramento ($4,299).

San Francisco ranks high on the list among those who owe taxes. One in four San Francisco taxpayers owes taxes when he or she files, we found, with an average tax bill of $7,261. That’s about 37% greater than the national average. San Franciscans might pay a lot come tax season but they also take home the sixth-largest tax refund – $3,506 vs. the $3,058 national average.

Where taxpayers are getting the biggest refunds

Overall, tax refunds fell slightly from a $3,052 average in last year’s study to $3,016 this year.

While the 10 cities where taxpayers receive the largest refunds are the same year-over-year, however, refunds didn’t grow in every metro area. Tax refund amounts trended down in three Texas cities: McAllen, Houston, and Corpus Christi. San Francisco residents, on the other hand, saw the biggest increase in their tax refunds, getting back $40 more ($3,506 in this year’s study compared to $3,466 in last year’s study).

Where filers are most likely to owe taxes

When looking at the cities where more people ended up owing the IRS at the time of filing, not much has changed.

The average overall size of a tax bill in all top 100 metro areas jumped this year to $5,307 from $5,294. Similarly, the individual averages owed in each of these 10 cities went up. Boise, Idaho’s $120 jump in its average tax bill is the largest increase, dollar-for-dollar.

Higher tax bills correlate with larger tax refunds

A look at the average tax bills and refund amounts in each city reveals an interesting trend: higher tax bills are correlated positively with higher tax refunds.

In other words, the cities where people get fatter refund checks are also where filers who owe taxes will pay the most. The scatter plot below shows this relationship between high refunds and high tax bills.

Take Ft. Myers, Fla. as an example. This city has the largest tax refunds at $3,833 — but it also has the highest average tax bill of any city, at $8,194.

Tax year 2018 will bring big changes

This study highlights some big trends and differences in tax burdens by city, but it’s based on a past iteration of the American tax code. The Tax Cuts and Jobs Act made sweeping changes to the U.S. tax code that officially took effect for the 2018 tax year (which is outside the five-year period looked at in this study).

So the 2019 tax season is the first time taxpayers will file a return under this new tax code, and the rule changes will bring surprises to many. Only 5% of taxpayers are expected to see their tax costs increase, according to the Tax Policy Center. But confusion over how the tax changes impacted withholding calculations could mean that many taxpayers have already paid too much or too little in taxes.

The proportion of itemized returns is also likely to decrease this tax season. The tax code overhaul included nearly doubling the standard deduction. Since filers have the option to take a standard deduction or itemize their returns, a higher standard deduction is likely to incentivize more of them to do the latter. As a result, itemized tax returns are expected to decrease from 26.4% to just 10.9% among filers, according to the Tax Policy Center.

Tips for filing taxes in 2019

Because the new tax laws will bring many changes, you should expect the unexpected this tax season. And on top of these new changes, the recent federal government shutdown could impact IRS functions and return processing. Here’s what you can do to get ahead of these major tax changes when filing your 2018 return.

File as early as you can. With potential delays at the IRS, it’s even more important to do your part to get your tax refund as soon as you can. The best way to do this is to file as early as possible — don’t put it off until the April 15th deadline. As a bonus, filing early is also a smart way to protect yourself from tax refund theft. And if you end up owing, you’ll also have more time to gather the funds needed to settle your tax bill by the deadline.

Get familiar with new tax forms. The previous years’ tax forms 1040A and 1040EZ are gone, replaced by Form 1040. The new 1040 will be simpler for many tax filers, but not all. Many people will need to file additional schedules with their Form 1040 to adjust taxable income or claimed some tax credits. It’d be wise to review these new forms and changes ahead of completing your return so you know what to expect.

Expect your tax situation to change. With the major changes to the tax code and withholdings in the 2018 tax year, taxpayers should not expect filing to be business as usual. Your tax refund could be higher or lower than it has been in previous years, or you might wind up owing a tax bill. Take a second look at your finances and budget and make a plan for how you’ll manage if you don’t get your usual refund.

If you owe a tax bill, pay it. If you find that you owe a tax bill, pay it as soon as you can. You can file for an extension to give yourself more time to complete a return, but at least 90% of your tax bill will still be due by the April 15th deadline. If you underpay, you’ll owe another 0.5% of the outstanding balance for each month your tax bill goes unpaid.

Consider hiring a professional. With so many tax code changes to grapple with at once, preparing your own taxes could come with more headaches and complications than usual. It could be a good year to hire the help of an accountant or other tax professional. They can review your tax situation, ensure your tax return is prepared correctly and help you identify any potential credits or deductions you might have missed on your own.

Read more: The Best Tax Software of 2019

Methodology:

Using IRS Statements of Income data, we aggregated the data for five years, for returns filed from Jan. 1, 2013 – Dec. 31, 2017 in the 100 largest U.S. metros.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Elyssa Kirkham
Elyssa Kirkham |

Elyssa Kirkham is a writer at MagnifyMoney. You can email Elyssa here