Midterm elections grabbed all the attention this week, so you might’ve missed the other news that could affect your money. And there was a lot of it, including another cryptocurrency crisis, a possible reversal in inflation trends, layoffs (and surprise, hirings!) to early holiday trends.
While we’re waiting for all the votes to be counted from Tuesday’s election to see if Republicans control all or part of Congress, we’ll review some of the other highlights of the week and what analysts are saying about them.
More importantly, we’ll break it down for what it could all mean for the economy, the Federal Reserve, interest rates and your finances and explain why analysts say proceed with caution.
What happened to crypto?
While people were preparing for Democratic control of Congress to come crashing, the crash is actually happening elsewhere: in the crypto world.
It started with a report of irregularities on the balance sheet of trading firm Alameda Research, which has ties to FTX, one of the largest crypto exchanges and which issues its own FTT token. They’re technically separate companies but are close because both were founded by Sam Bankman-Fried and Alameda conducts trades on FTX. The balance sheet showed Alameda was heavily dependent on FTT.
The report spurred Binance, the largest crypto exchange by volume, to say on Sunday that it would liquidate its FTT token holding. Though no one knew the exact amount of FTT tokens that would come on the market, it was enough to send FTT into a downward spiral that spread to other digital assets. FTX and Alameda reportedly faced a liquidity crisis as investors pulled their money.
After days of speculation, Binance offered to buy FTX for an undisclosed amount and pending due diligence on the company. Binance didn’t like what it saw. Binance pulled its offer to buy FTX, and FTX is reportedly under investigation for how it handles customer funds.
FTX searched for a capital infusion, but failed and declared bankruptcy on Friday. Bankman-Fried also resigned as the chief executive. FTX investor Sequoia Capital had already said late Wednesday it marked down to zero its investment of more than $210 million in FTX, as possibilities of bankruptcy loomed.
Fallout is expected to continue to spread, too.
“I expect we will continue to see credit contagion spread as we learn who had exposure to both FTX and Alameda,” said Cory Klippsten, Swan.com chief executive.
This still won’t kill crypto, but spur Congress and regulatory agencies to act quickly with much needed regulation to prevent something like this from happening repeatedly, said Ric Edelman, founder of Digital Assets Council of Financial Professionals.
“It’s similar to the Titanic,” he said. “As tragic as that was, it didn’t end the cruise industry. Crypto is proving to be no different. We use each event to strengthen the system for the benefit of all.”
Is inflation under control?
Inflation eased more than expected in October, a promising sign, but economists say don’t get excited yet.
Headline annual inflation of 7.7% and 6.3% without the volatile food and energy sectors, or core rate, are still far from the Federal Reserve’s 2% goal.
“The stiff backbone of U.S. inflation finally cracked in October, though one month doesn’t make a trend,” said BMO senior economist Sal Guatieri.
Plus, the numbers were skewed lower by how the Bureau of Labor Statistics indirectly calculates health insurance premiums using health insurers’ profits, with a lag. In 2020, profits were higher because fewer people used their insurance due to the pandemic. Last year, usage rose, cutting into profits and making the health insurance in the consumer price index decline.
“It’s either because people are paying less for insurance, not likely, or because insurance companies are paying more out to doctors, which means the inflation should just show up there instead,” Michael Ashton, Enduring Investments managing partner, said.
“Insurance prices are adjusted once a year; the reprieve is not expected to last,” said Diane Swonk, KPMG chief economist.
Will the Fed pause rate hikes soon?
Not likely.
With inflation still far from the Fed’s 2% target, it’ll keep raising its short-term benchmark fed funds rate but just possibly, at a slower pace. Instead of the 0.75-point increase we’ve seen the last four times, the Fed may only raise rates by a half percentage point when it meets again Dec. 14-15.
The Fed needs more than one encouraging report to pause rate hikes, especially with energy prices remaining a wild card and the labor market still strong.
On Dec. 5, the European Union, the U.S. and some of its allies plan to put a price cap on Russian oil. Though details are still being hammered out, some economists believe this could take supply off the market and push up prices. Add to this demand uncertainty if the world falls into recession, and energy prices can swing any which way, economists said.
Several key economic reports, including the November jobs report on Dec. 2 and November CPI on Dec. 13, are also due between now and the Fed meeting.
“Nothing can be taken for granted,” said ING chief international economist James Knightley.
What does this mean for my finances?
First, don’t expect to pay less for everyday items because prices for necessities like food, shelter and energy all posted healthy gains.
But there’s a silver lining if you like holiday gifts. Most of the dip in inflation came more from areas of discretionary spending like airfare, used cars, home furnishings, computers and apparel.
“This means, in aggregate, the worst of the supply chain problems is probably over for now,” said John Norris, Oakworth Capital Bank chief economist. “It also means retailers and wholesalers are sitting on a lot of inventory. Of course, consumers are probably buying less stuff than they were. When taken together, businesses will probably be discounting like crazy after Thanksgiving.”
Already, companies are starting “Black Friday” sales early.
Just keep in mind, though, when buying all that discounted stuff that the cost of borrowing is rising. As the Fed continues to raise rates, consumer rates will follow in a ripple effect.
This week, the average interest rate on credit cards carrying a balance hit 18.43%, the highest since the Fed began tracking in 1994, and will likely keep rising with Fed Chairman Jerome Powell promising higher rates.
Some of that may be made up by higher rates on savings, but those rates tend to rise slower than interest rates on debt. They’re currently lingering around 2% to 3.5%.
What does this mean for stock markets?
Stock markets cheered easing inflation, with the Dow closing Thursday up 3.7%, the Standard & Poor’s 500 index up 5.4% and the Nasdaq up almost 7.4%.
But beyond that one report, analysts warn the economic outlook still isn’t great.
“While the market optimism is understandable based on the improving data, investors are still facing another 50 to 100 basis points of rate hikes,” said Mike O’Rourke, JonesTrading chief market strategist, who says this will hurt company profits.
“That is not an environment that will revive social media ad sales, fix Meta Platforms’ business model, eliminate Twitter as a Tesla distraction or allow Amazon to grow into its bloated delivery network.”
What’s the outlook for jobs?
Many economists forecast the unemployment rate to climb to 5%-6%, from 3.7% in October, as the Fed induces a recession to stop red-hot inflation. Some estimate that will mean about 2 million jobs lost.
Already, companies are slashing jobs. Salesforce let several hundred employees go on Monday, Coinbase dropped 60 workers, Citigroup and Barclays reportedly cut a combined 250 jobs, and Meta still plans to cut 13% of its workforce, or more than 11,000 jobs. Amazon launched a cost-cutting review, which could result in job losses. Twitter chief executive Elon Musk reportedly said the company could go bankrupt if it doesn’t start generating more cash.
The only place that seems like it’s on a hiring spree is the Internal Revenue Service (IRS), which was given $80 billion in new funding in the Inflation Reduction Act.
“In addition to the more than 4,000 people recently hired to fill critical customer service representative positions, the Internal Revenue Service is now seeking over 700 new employees to help taxpayers at Taxpayer Assistance Centers across the country,” it said on Wednesday.
