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Fed Wants Inflation To Go Higher
Inflation used to be a bad word, but now the Federal Reserve thinks it could be a good thing — in moderation. In a historic shift, Chairman Jerome Powell said the Fed will allow inflation to run slightly higher for periods of time, a new practice known as “average inflation targeting.” This is a change from the previous practice of using preemptive rate hikes to control price pressures. Inflation persistently has run a bit below the 2% target for most of the period since the Great Recession, and has fallen closer to 1% during the pandemic. That 2% target is the rate the Fed believes is consistent with a growing economy. It also provides policymakers with enough policy room for times of economic stress. But along with higher inflation, the Fed’s action will mean continued low interest rates. Dallas Fed President Robert Kaplan said that if the Fed maintains annual inflation rates between 2.25% and 2.5%, the Fed may not increase interest rates so frequently. At the start of the pandemic, interest rates were between 0% and 0.25%. Low interest rates may be good news for borrowers, but not so much for investors or the life insurance industry. “The Fed policy makes it crystal clear that we should expect low interest rates for years,” Larry Luxenberg, principal at Lexington Avenue Capital Management, told Market Watch.
AMERICANS SHORE UP FINANCES IN COVID-19’S WAKE
It’s a puzzle: nearly 13 million lost jobs and countless businesses closing, yet Americans’ personal finances remain strong and are getting stronger. A poll from The Associated PressNORC Center for Public Affairs Research found that 45% of Americans say they’re setting aside more money than usual. Twenty-six percent are paying down debt faster than they were before the pandemic. In total, Less Spending, about half of Americans More Saving say they’ve Of those who spent less money during the pandemic: either saved 58% are putting more money more or paid into savings down debt 32% are paying down debt ahead of schedule since the outbreak began. About two-thirds of poll respondents said they are spending less than usual during the pandemic. Since February, there has been a $1.3 trillion jump in money kept in checking accounts — a 56% increase tracked by the Federal Reserve. Yet the financial picture is far from rosy. SOURCE: AP/NORC poll
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tracking this in 2008) in January. When it comes to the economy, consumers are similarly split along political lines. Sixty-eight percent of consumers who identify as liberal said they are highly concerned about the economy, while just 44% of conservatives show this level of concern.
IS THE RECESSION OVER?
Downturn Dampens Consumer Spending
half of economists surveyed said the U.S. KNOW About GDP won’t return to pre-pandemic levels until 2022 or later.
— Ed Yardeni of Yardeni Research
The recession ended in July, according to the Chicago Fed National Activity Index, whose three-month average rebounded sharply in July. But the Chicago Fed is cautious about issuing an all-clear signal on the end of the recession, as U.S. economic activity has been especially volatile in the wake of the COVID-19 pandemic. 1 IN 4 The July surge for this broad VIEWS measure of U.S. economic activECONOMY ity marks the highest reading, by 4 in 10 consumers report the FAVORABLY economic downturn has impacted far, in the index’s 50-year-plus their discretionary spending and Consumers history based on the threetheir ability to save for retirement. continue to be month average. Meanwhile, the SOURCE: LIMRA divided about Philadelphia Fed’s ADS Index how they view the economy and COVID- has signaled for several months that the 19, based on their political ideology, nation’s economy is on the bounce back. LIMRA said. The most recent LIMRA Several predictions on third-quarter Consumer Sentiment Survey showed 78% gross domestic product indicate an upof those who identify as liberals report beat outlook. The Atlanta Fed’s GDPNow a high level of concern about COVID-19, model estimates that Q3 output will whereas only 44% of consumers who surge nearly 26%. But even if these optiidentify as conservatives report this mistic estimates are correct, one quarter level of concern. of strong GDP growth will still leave the Overall, just 25% of Americans had a fa- economy with only a partial recovery afvorable view of the economy in July. This ter the record 32.9% GDP drop in Q2. is up 4 percentage points from March but down 31 percentage points from the all-time high of 56% (since LIMRA began About a quarter of Americans said they’ve been unable to pay at least one bill because of the pandemic, and 17% said they have been unable to pay multiple bills. Overall, about half of those surveyed said they have experienced some type of household income loss.
DID YOU
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All in all, we’re still seeing that economies are recovering pretty well from what was basically a lockdown recession.
Source: LIMRA
Source: National Association for Business Economics
InsuranceNewsNet Magazine » October 2020