The U.S. economy continues to rebound from the coronavirus pandemic, but that doesn’t mean the Federal Reserve’s crisis response is over. Next up comes another important stage, one that’s bound to have an impact on consumers’ wallets for years to come: Weaning the world’s largest economy off of the extraordinary accommodation that came with the COVID-19 crisis.
The Fed’s two most high-profile ways of stimulating an economy during a severe recession — the tools that took center stage during both the virus outbreak and the financial crisis a decade before it — are cutting interest rates and purchasing government-backed debt. Those moves are intended to keep the economy awash with credit and borrowing costs cheap.
Yet, when the financial system is ready, the Fed will eventually start to raise interest rates and gradually decrease how many bonds it’s buying each month, in a policy known as “taper.”
While consumers might be able to easily infer how hiking interest rates affects their finances, taper’s implications can often be much more complex. Here’s everything you need to know about the next stage of the Fed’s crisis response, including what taper is, how it could work and how it could impact you.
What does the Fed mean when it talks about tapering?
Taper refers to a post-crisis asset purchase plan, where the Fed, at a predetermined stated pace, starts to slowly and gradually decrease how many assets it’s buying (the process of purchasing securities for stimulative purposes is commonly called quantitative easing, or Q.E. for short).
In today’s case, the Fed is currently buying $80 billion worth of Treasury securities and $40 billion of mortgage-backed bonds each month, the largest asset purchase program in Fed history that illustrates the severity of the pandemic-induced recession. The Fed purchases those assets on the open market and then adds it to its balance sheet, which has ballooned to more than $8 trillion since the pandemic.
When the Fed ultimately decides that it’s time to taper those purchases, it won’t have been the first time it’s done so. Following the financial crisis of 2008, the Fed in December 2013 began reducing its mortgage-backed and Treasury security purchases by a cumulative $10 billion each month. The process concluded 10 months later, when those purchases hit zero.
“The precedent is that they dialed back their stimulus at a stated pace, and they adhered to that,” says Greg McBride, CFA, Bankrate chief financial analyst. “And unless circumstances would dictate otherwise, expect something similar this time.”
Taper, however, is not to be confused with selling assets and shrinking the balance sheet. Rather, the Fed is simply gradually reducing over a certain period of time how much it’s buying.
“Even if tapering begins, we still have an incredibly accommodative monetary policy,” says Kristina Hooper, chief global market strategist at Invesco. “The Fed is still going to be buying assets, just at a lower rate than it had in the past. There are certainly reasons why the Fed would be motivated to begin tapering this year, even if there are a few hiccups (in the economy).”
How the Fed could taper following the impact of COVID-19
Records of the Fed’s July meeting suggest that officials are still mulling over what taper could look like, including at what pace. One such example could be tapering Treasury securities by $10 billion a month and mortgage-backed bonds by $5 billion, McBride adds, which would give officials an eight-month runway to shrink its purchases down to zero.
“They’ve been buying Treasurys at twice the pace of mortgage-backed securities,” McBride says. “It’s quite possible they taper Treasury purchases at twice the pace of mortgage-bond purchases.”
That, however, is still being discussed, Powell indicated during the Fed’s July press conference. Regardless, Fed officials say they’d taper both mortgage-backed and Treasury security purchases at the same time, Powell added in July.
When the Fed could start to taper
Fed officials in July also admitted that the economy had shown progress, while records of that rate-setting meeting showed that “most” participants could see a bond-buying slowdown beginning at some point this year.
All of that depends on how the economy evolves. The Fed has said that it’d like to see the recovery make “substantial further progress” toward its objectives of stable prices and maximum employment. On the one hand, inflation has soared, with consumer prices in July rising at a pace not seen in 13 years. Meanwhile, the Fed’s favorite gauge of inflation in July soared 4 percent from a year ago.
While inflation has risen, the job market is still being held down by labor shortages and work disruptions as virus cases, enhanced unemployment benefits and child care issues combine to keep workers on the sidelines.
About 3.1 million people have dropped out of the labor force since the start of the pandemic, and up in the air is how many of those exits became permanent. Early retirements and fewer individuals in a household working could’ve been a consequence of the pandemic. Meanwhile, the unemployment rate has steadily declined to 5.4 percent from a high of 14.6 percent, yet the U.S. economy is still short some 5.7 million jobs compared to pre-outbreak levels.
At the same time, Powell seemed confident in July that the economy could quickly recover its lost ground.
“If you look at the number of job openings compared to the number of unemployed, we’re clearly on a path to a very strong labor market with high participation, low unemployment, high employment, wages moving up across the spectrum,” Powell said.
“At what rate could they start, that just depends on the path that the economy takes,” McBride says. “It depends on the path of the economy as well as the threat the virus poses.”
How tapering could impact you
Whatever path the Fed takes, officials will want to give consumers and investors plenty of notice.
That’s because they might have post-traumatic stress from a market sell-off in June 2013, known today as the “taper tantrum.” Then-Fed Chairman Ben Bernanke suggested the economy would soon be strong enough for the Fed to start slowing down its monthly asset purchases, which resulted in a bond and stock market sell off, with equity prices failing and yields soaring.
While experts say the Fed has certainly been more calculated in its communications surrounding taper this time around, consumers might want to brace for volatility, at least in the stock market. Keep a long-term mindset and avoid making any knee-jerk reactions to downdrafts in the market. Better yet, see any market downdraft as a buying opportunity, McBride says.
“The stock market is likely to show heightened volatility amid tapering, but investors are better served focusing on the long run,” McBride says. “And in the long run, if the economy is getting better, so too are corporate profits, and that’s ultimately what drives stock prices. If they (Fed officials) continue to check those boxes, they won’t have to worry about a redo of the taper tantrum — at least in the bond market.”
How the Fed’s eventual taper could impact mortgage rates is also up in the air. Typically, yields would rise once the biggest buyer in the marketplace steps away, which could cause mortgage and refinance rates to also go up. But investors also take into account their expectations for inflation when buying Treasurys.
“The Fed tapering could also be perceived by the market as a more hawkish stance on inflation,” McBride says. “You could actually see long-term yields hover near current lows or move even lower,” McBride said.
“Time is always of the essence because rates can move suddenly, and if they move suddenly, your potential savings can diminish quickly,” McBride says. “I don’t know that the prospect of tapering by itself means people should refinance quickly as much as just the volatile nature of rates. The tremendous savings opportunity that currently exists should get people to refinance as soon as they can.”
When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.
However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.
What is Sallie Mae?
Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.
In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.
However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.
In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).
At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.
What is the difference between private and federal student loans?
With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.
On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.
Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.
As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.
Are Sallie Mae loans better than federal student loans?
In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.
However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.
If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.
With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.
The bottom line
Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.
Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.
PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have.
1. Analyze Your Finances Quarterly or Biannually
You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.
With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.
The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.
4. Savings and Retirement Accounts
The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.
A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies.
Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan.
Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito.