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Federal Reserve Chair Jerome Powell made it clear on Friday that the U.S. central bank would not shy away from pivoting to interest rate cuts in the final weeks of a presidential election campaign and that protecting the job market was now its top priority.
'DO EVERYTHING WE CAN'
'SOFT LANDING'
Why are grocery prices so high? Is it corporate greed, or market forces at work? Kamala Harris is betting on greed. The Democratic presidential nominee "has laid the blame for high food prices at the feet of businesses," said The Wall Street Journal, and vows to tackle "price gouging" in the grocery sector if elected. "My plan will include new penalties for opportunistic companies that exploit crises and break the rules," she said. The measure is aimed at voters angry about the rising cost of a gallon of milk.
"Harris hasn't provided much detail" about how the plan would work, Axios said. Her opponent, Donald Trump, charged her with proposing "Soviet-style price controls," and other critics have raised the specter of "black markets and hoarding" in response. But most states already have price-gouging bans that prohibit businesses from jacking up their profits during a crisis like a hurricane or pandemic. If Harris' proposed federal ban is like those state laws, "only triggered by emergencies and targeted to specific firms," her proposal might not affect day-to-day grocery prices all that much.
Stores 'raising prices faster than costs'
'Kamunism?'
The Justice Department filed an antitrust lawsuit Friday against real estate software company RealPage Inc., accusing it of an illegal scheme that allows landlords to coordinate to hike rental prices.
The lawsuit, filed alongside attorneys general in states including North Carolina and California, alleges the company is violating antitrust laws through its algorithm that landlords use to get recommended rental prices for millions of apartments across the country.
Rents across the U.S. saw a huge spike in 2021 and 2022, and though their growth has since tapered off, they remain stubbornly high for many tenants, thanks in part to a huge lack of housing supply.
Justice Department officials allege that RealPage is another reason for the high rents since the algorithm allows landlords to align their prices and avoid competition that would otherwise keep rents down.
“Americans should not have to pay more in rent simply because a company has found a new way to scheme with landlords to break the law,” Attorney General Merrick Garland told reporters.
In a statement, RealPage said the Justice Department’s claims were “devoid of merit and will do nothing to make housing more affordable.”
“We are disappointed that, after multiple years of education and cooperation on the antitrust matters concerning RealPage, the DOJ has chosen this moment to pursue a lawsuit that seeks to scapegoat pro-competitive technology that has been used responsibly for years,” the company said.
In an interview with the Associated Press, Dom Beveridge, a longtime expert in the revenue management field who is not connected to the lawsuit, gave a detailed, vociferous defense of revenue management software and said prosecutors have fundamentally misunderstood how such products work.
“If it were true that the software enabled price-fixing, I would 100% be on the side of the lawsuits — but it’s simply not what the software does,” said Beveridge, who briefly worked for RealPage when his company’s software was acquired by the firm in 2017. “These algorithms are only functionally capable of optimizing one property at a time. They can’t say, ‘I’m going to take property A, B, and C and figure out collectively what they should do together,’ which is the allegation being made.”
He emphasized that property managers are incentivized to maximize revenue, which means keeping occupancy high, rather than constraining supply, as critics have alleged. Rather than being like an Uber “surge price,” revenue management tools help apartment managers align their inventory as if it were a game of Tetris, thereby actually increasing the supply available, Beveridge said.
RealPage came under scrutiny after a 2022 ProPublica investigation into the company’s practice suggested that it could be to blame for some of the rapid increases in rents. Since then, RealPage has drawn the ire of Democratic lawmakers, including Sen. Amy Klobuchar of Minnesota, who in February introduced a bill to bar companies from using algorithms to collude and fix prices.
White House National Economic Advisor Lael Brainard said the White House had no comment on the lawsuit, but added that President Joe Biden’s administration “has made clear that no one should pay higher prices because of corporate lawbreaking and continues to support fair and vigorous enforcement of the antitrust laws to prevent illegal collusion.”
RealPage is not the only company that offers an algorithmic tool to help property managers set prices. But the lawsuit says the company is by far the biggest in the industry, controlling 80% of the market.
The use of data to help property managers set their rents isn’t new or, on its face, illegal. But officials argue that RealPage is different.
According to lawsuits filed in the past year by the attorneys general for Arizona and Washington, D.C., RealPage doesn’t just use publicly available data — it uses confidential data that RealPage’s clients have agreed to privately share to help RealPage’s software to determine the highest price.
That amounts to cartel-like illegal price collusion, authorities say. Only this time, instead of cartel members meeting inside a proverbial “smoke-filled room,” the price-fixing is done by AI, they say.
The Justice Department points to RealPage executives’ own words about how their product maximizes prices for landlords. One executive said, “There is a greater good in everybody succeeding versus essentially trying to compete against one another in a way that actually keeps the entire industry down.”
RealPage has noted that landlords are free to reject the price recommendations generated by its software. But the Justice Department alleges that doing so often requires a series of steps, including a conversation with a RealPage pricing adviser who can “stop property managers from acting on emotions.”
Beveridge argued that property managers’ adherence to the RealPage algorithm is not actually very high — about 40-50% of the rents that ultimately get posted fall within 1% of the algorithm’s recommendation, prosecutors said.
“That’s essentially a coin flip,” he said. “You should want people to be accepting about 90% of your recommendations because most price recommendations are really small.”
The case is the latest example of the Biden administration’s aggressive antitrust enforcement.
The Justice Department sued Apple in March and in May announced a sweeping lawsuit against Ticketmaster and its owner, Live Nation Entertainment. Antitrust enforcers have also opened investigations into the roles Microsoft, Nvidia and OpenAI have played in the artificial intelligence boom.
Among those celebrating the lawsuits against Realpage is Lee Hepner, legal counsel for the American Economic Liberties Project, an organization that advocates for government action against business concentration.
“There’s a temptation for courts to turn a blind eye to this harm because algorithms tend to conceal the existence of an agreement between competitors,” Hepner said. “It’s not as straightforward as an email between competitors agreeing to fix prices. I think it is very important that our courts address the use of these software algorithms as if it is any other form of price-fixing.”
The Federal Reserve is poised to cut its benchmark interest rate next month from its 23-year high, with consequences for consumers when it comes to debt, savings, auto loans, and mortgages. Right now, most experts envision three quarter-point Fed cuts — in September, November, and December — though even steeper rate cuts are possible.
“The time has come” for the Fed to reduce interest rates, Powell said Friday in his keynote speech at the Fed’s annual economic conference in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Based on Powell’s remarks and recent economic data, the central bank is expected to cut its key rate by a quarter-point when it meets next month and to carry out additional rate cuts in the coming months.
Here’s what consumers should know:
What would the Fed’s rate cuts mean for savers?
According to Greg McBride, chief credit analyst for Bankrate, savers should lock in attractive yields right now, before the expected rate cuts begin.
“For those who might be looking at Certificates of Deposit or bonds — you want to jump on that now,” he said. “There is not a benefit to waiting because interest rates are going to be moving lower.”
McBride stressed that anyone closer to retirement has a good opportunity to lock in CDs at the current relatively high rates.
“If you do so, you’ll provide yourself a predictable flow of interest income at rates that should outpace inflation by a pretty healthy margin,” said McBride.
How would the rate cuts affect credit card debt and other borrowing?
“Your credit card bill is not going to plunge the day after the next Fed meeting,” cautions LendingTree chief credit analyst Matt Schulz. “Nobody should expect miracles.”
That said, the declining benchmark rate will eventually mean better rates for borrowers, many of whom are facing some of the highest credit card interest rates in decades. The average interest rate is 23.18% for new offers and 21.51% for existing accounts, according to WalletHub’s August Credit Card Landscape Report.
Still, “it’s really important for people to understand that rates probably aren’t going to fall that quickly,” Schulz said.
He said it’s important to take steps such as seeking a 0% interest balance transfer or a low-interest personal loan. You can also call your credit card issuer to see if you can negotiate a better rate.
“In the short term, those things will have a much bigger effect than falling interest rates,” Schulz said.
How about mortgages?
The Federal Reserve’s benchmark rate doesn’t directly set or correspond to mortgage rates, but it does have an influence, and the two “tend to move in the same direction,” said LendingTree senior economist Jacob Channel.
In recent weeks, mortgage rates have already declined ahead of the Fed’s predicted cut, he pointed out.
“It goes to show that even when the Fed isn’t doing anything and just holding steady, mortgage rates can still move,” Channel said.
Melissa Cohn, the regional vice president of William Raveis Mortgage, echoed this, saying that the most important thing is what signal the Fed is sending to the market, rather than the rate change itself.
“I’ve heard from a lot of people who locked in (their mortgage rate) over the course of the past 18 months, when rates were at their peak, already asking whether it’s time to refinance and what savings they could have,” she said. “I think that the outlook is good, and hopefully that spills into the real estate market, and we get more buyers in the market.”
Channel said that the majority of Americans have mortgages at 5%, so rates may have to fall further than their current average of 6.46% before many people consider refinancing.
And auto loans?
“With auto loans, it’s good news that rates will be falling, but it doesn’t change the basic blocking and tackling of things, which is that it’s still really important to shop around and not just accept the rate that a car dealer would offer you at the dealership,” said Bankrate’s McBride. “It’s also really important to save what you can and be able to try to put as much down on that vehicle as you can.”
McBride does predict that the beginning of rate cuts and the avoidance of a recession will lead to lower auto loan rates in 2024 — at least for borrowers with strong credit profiles. For those with lower credit profiles, double-digit rates will likely persist for the remainder of the year.
What’s going on with inflation and the job market?
Last week, the government reported that consumer prices rose just 2.9% in July from a year ago, the smallest increase in over three years. Employment data, however, gives some economists pause. New data has shown hiring in July was much less than expected and the jobless rate has reached 4.3%, the highest in three years — one measure of a weakening economy. That said, robust retail sales have helped quell fears of a recession.
The rate at which the Fed continues to cut rates after September will depend in part on what happens next with inflation and the job market, in the coming weeks and months.
Federal Reserve Chair Jerome Powell all but proclaimed victory in the fight against inflation and signaled that interest rate cuts are coming in a much-anticipated speech Friday in Jackson Hole, Wyoming.
Under Powell, the Fed raised its benchmark rate to the highest level in 23 years to subdue inflation that two years ago was running at the hottest pace in more than four decades. Inflation has come down steadily, and investors now expect the Fed to start cutting rates at its next meeting in September — an expectation that essentially got Powell’s endorsement Friday.
Powell declares victory over inflation
“My confidence has grown that inflation is on a sustainable path back to 2%,” Powell said in his keynote speech at the Fed’s annual economic conference in Jackson Hole.
He noted that inflation, according to the Fed’s preferred gauge, had fallen to 2.5% from a peak of 7.1% two years ago. Measured by the better-known consumer price index, inflation has dropped from a peak of 9.1% in mid-2022 to 2.9% last month. Both are edging closer to the Fed’s 2% target.
Powell sounded confident that the Fed would achieve a so-called soft landing — containing inflation without causing a recession. “There is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market,’' he said.
Higher rates contributed to progress against inflation, as did the easing of supply chain bottlenecks and worker shortages that caused shipping delays and higher prices as the economy bounded back with unexpected strength from COVID-19 lockdowns.
Rate cuts are coming
Powell suggested Friday that rate cuts are all but inevitable. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he said.
Last year, the Fed had predicted that it would trim rates three times this year. But the cuts kept getting pushed back as the progress against inflation faltered early in 2024. Since then, the steady drop in inflation has resumed, giving the Fed more confidence that victory was in sight.
Fed misjudged inflation
Powell acknowledged that he and his Fed colleagues misjudged the inflationary threat when it emerged in early 2021. At the time, they expected the flareup of higher prices to be short-lived — the temporary consequence of pandemic-related supply chain disruptions. The pressure, they thought, would fade “fairly quickly without the need for a monetary policy response — in short, that the inflation would be transitory.’'
They weren’t alone in their optimism. “The good ship Transitory was a crowded one,’' Powell said, ”with most mainstream analysts and advanced-economy central bankers on board.’'
But the word “transitory″ came back to haunt the Fed as inflation proved more intractable than expected. It spread from goods that were subject to supply chain backlogs into services, where it is harder to dislodge without raising rates and risking severe economic pain in the form of layoffs and higher unemployment. The Fed proceeded to raise rates 11 times in 2022 and 2023.
Unpredictable economy leaves policymakers humble
Powell admitted that policymakers and economists have struggled to understand and respond to an economy that has been unpredictable since COVID-19 hit in early 2020. First, the pandemic shut down commerce and companies collectively slashed millions of jobs. Then the economy roared with unexpected vigor, setting off inflationary pressures that have been dormant since the early 1980s. When the Fed belated responded with aggressive rate hikes, economists predicted the hiring borrowing costs would cause a painful recession. But it didn’t.
“The limits of our knowledge — so clearly evident during the pandemic — demand humility and a questioning spirit focused on learnings lessons from the past and applying them flexibly to our current challenges,’' Powell said.