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Tag: Federal Reserve

A new era

The days of decades-high interest rates are over, as the Federal Reserve is ushering in a new era for financial markets — and, in turn, shaking up some of the advice money managers are offering their clients.

During one of its regularly scheduled meetings in September, the central bank’s Federal Open Market Committee lowered the federal funds rate — the interest rate banks charge each other to borrow money — by half a percentage point. That marked the first time policymakers cut interest rates after embarking on an aggressive strategy to raise the federal funds rate from near zero to as high as 5.5% between 2022 and 2023 in an effort to combat inflation that swelled to levels last seen in the early 1980s.

The U.S. economy is “very strong,” says Dalal Salomon with Salomon & Ludwin. “I don’t believe a recession is really in the cards at this point.” Photo courtesy Salomon & Ludwin

And in early November, the Fed cut its key interest rate again, that time by a quarter-point. Meanwhile, the consumer price index, a key measure of inflation, was 2.6%. That was down from 3.1% for the same period in 2023, a year when the CPI started out at 6.4%. 

Of more significance than the rate cuts was the message they telegraphed to investors: With inflation sufficiently contained, Federal Reserve policymakers will refocus their efforts on achieving maximum employment. The Fed’s goal going forward is to gradually “normalize” interest rates so they’re not so restrictive to economic activity, explains Aashish Matani, a managing director and wealth management advisor with The AHM Wealth Management Group in Norfolk, a division of Merrill Private Wealth Management.

“The rate cuts are precautionary rather than reactionary,” Matani says. “The current economic environment is a point of strength; we’re not running from a recession, and inflation has come down.” 

Understanding that context is important particularly because many people may associate periods of falling interest rates with economic turmoil. The last time policymakers slashed interest rates was during the early days of the COVID-19 pandemic when they took swift action to stabilize the economy.

The Fed’s motivation this time around is different, particularly because the U.S. economy is “very strong,” says Dalal Salomon, founding partner and chief financial officer at Salomon & Ludwin in Richmond. “I don’t believe a recession is really in the cards at this point,” she says. 

While unforeseen shocks to the economy could always cause the Fed to change course, policymakers are currently charting a course of steady rate cuts. The federal funds rate is projected to fall to about 3.4% by the end of 2025 and to 2.9% by the end of 2026, according to the median of year-end forecasts from central bankers.

Given the likelihood that interest rates are headed lower, what should you do with your money now? Matani, Salomon, and other Virginia-based financial advisers say it’s a prime time to reassess investment strategies and holdings.

Control what you can control

This new era of falling interest rates isn’t a reason to overhaul your saving and investing strategies, but it may serve as a good excuse to do a financial checkup. 

“We have no control over how much the Fed will likely cut rates,” says Susan Kim, a private wealth adviser and managing partner of Kim, Hopkins & Associates, a financial advisory practice of Ameriprise Financial Services based in Vienna. “That’s why I tell my clients [to] focus on what you do have control over.”

Just as you prioritize family relationships and physical and mental health, it’s similarly important to think about your financial well-being, Kim says. Things you can easily control include your daily, weekly, and monthly expenses, along with the amount of money you save each pay period. She pushes clients to achieve a personal savings rate of 15% to 20%.

Another way to save money? By looking for opportunities to refinance debt. While central bankers directly control the fed funds rate, other interest rates tend to move directionally in sync — and you may stand to benefit.

Rates for 15- and 30-year mortgages have fallen “significantly” since peaking last year and are likely to come down further as the Fed continues cutting rates, Matani says. That means you should actively monitor how much you’re currently paying on your mortgage or other fixed-rate loans and be ready to refinance at lower rates, he adds: “Make sure you’re taking advantage of areas that you can.”

As the Fed ratcheted up interest rates, savers were benefiting by taking advantage of a variety of low-risk ways to earn 5% (or higher) returns on cash. These once-attractive options have already lost some of their luster.

If you were padding a high-yield savings or money market account with extra cash to earn easy returns, you may want to reconsider that decision now — while, of course, keeping in mind your specific financial goals and cash flow needs. “People are going to have to find a place to put that money, and the obvious place would be equities for long-term investments,” says Ryan Torguson, a wealth adviser, portfolio manager and partner with VWG Wealth Management in Vienna, a division of Hightower Associates. 

Equities, including stocks, historically earn higher returns, albeit with more risk than fixed-income investments like bonds. People pouring money into the stock market could serve as a catalyst, while lower interest rates will reduce borrowing costs for Wall Street companies, which could further boost profits and returns, Torguson notes.

Because a lower interest rate environment will be a major theme for financial markets ahead, investors should consider tweaking their strategies. “This could be a good time to look at your portfolio and reevaluate your tolerance for risk,” Salomon advises.

Before the end of the year, investors also may want to consider selling assets that have outperformed the market, either to invest in areas of the market that have underperformed or to have extra cash on hand, Salomon notes. The stock market has notched one record high after another this year, and an eventual selloff is inevitable, though she urges investors to avoid trying to predict when that could happen and instead react once it has. “If markets are falling, we know that’s a great buying opportunity.”

In fact, the rate-cutting cycle, along with a new president, could result in more market volatility, Matani notes. But that’s no reason to stay on the sidelines. “Long-term investors don’t want to be out of this market,” he says.

Staying invested is also important for retirees or people preparing for retirement. A backdrop of lower interest rates once again makes one area of the stock market more attractive: companies that pay steady or growing dividends. “People who need to have predictable, growing income should invest in dividend-yielding stocks,” Kim says.

Building and maintaining a well-diversified portfolio is a good practice no matter what’s happening in the broader economy, but it’s especially important when a broader market shake-up is underway. 

Matani and his colleagues have been recommending that clients increase their allocations to high-quality stocks that provide reliable cash flow and better growth potential amid lower interest rates and potentially slower economic growth ahead. Likewise, he says, it’s important to include “defensive” investments in your portfolio, such as shares of companies in the utilities, consumer staples and financial services sectors that could provide more resilience and help to cushion portfolios against uncertainty.

Even though there are no indications a recession is imminent, some investors who prefer a tactical approach to managing their portfolios may want to monitor consumer spending to watch for any signs of a slowdown. A more cautious investment strategy may be warranted, particularly as behaviors evolve, because consumer spending accounts for nearly 70% of U.S. economic growth, Matani says: “The resilience of consumers is going to be important.”

Diversify beyond stocks

In addition to reevaluating your stock holdings, now is a good time to assess your broader portfolio diversification. Many investors have become less enamored with a traditional 60/40 portfolio — 60% invested in stocks and 40% in bonds — in favor of investing in a wider array of assets that includes cryptocurrencies and commodities.

There are opportunities to capitalize on lower interest rates beyond the stock market, including investments in commodities, Salomon notes. And lower mortgage rates don’t just benefit homeowners but will also make real estate investments more attractive once again, she adds.

Likewise, Matani has been recommending that clients adjust their portfolios in anticipation of lower interest rates, including allocating to sectors like real assets, including real estate, commodities and precious metals. “We’ve been telling clients: Make sure you’re diversified.”

But just because interest rates are coming down, that doesn’t mean you need to pile into financial markets in a more aggressive way than in the past. Advisers recommend that clients should have an emergency savings fund with three to six months’ worth of living expenses that’s readily available, and your financial situation may warrant having extra cash on hand right now.

For the past six months, Torguson and his colleagues have been advising clients to prepare for falling rates by opting for safe assets with longer duration maturities. That advice still stands — though the sooner you act, the higher rates you’ll secure.

For cash you don’t need in the immediate future, you may want to lock up money for several months — or, potentially, several years. The shortest-duration U.S. Treasury bonds or certificates of deposit (CDs), those that mature as soon as one month out, may offer the highest yields, but investors are better off opting for slightly lower rates in exchange for a longer-term guarantee. 

“People who got into long-term bonds over the summer, with interest rates falling now, are going to appreciate that decision,” Salomon says.

Finally, don’t get so swept up by what the Fed is doing that you neglect some long-standing end-of-year money advice. The clock is ticking on several tasks that must be completed by year-end.

Now is a good opportunity to look at your charitable giving for the year and make any additional contributions, Torguson says. It’s also a popular time of year for tax-loss harvesting or selling any assets that are unprofitable to offset or reduce your capital gains tax burdens. “We’re talking to clients quite a bit about that and how to take advantage of any volatility that comes around the end of the year.”

On the flip side, Salomon says, selling profitable long-term investments may be a good idea if you believe capital gains tax rates are headed higher in the future. What’s more, some provisions of 2017’s Tax Cuts and Jobs Act are set to expire in 2025, so she’s been working with some clients who are doing “pretty significant” estate planning ahead of that. 

If it feels like there’s a lot going on, that’s because there is. As Matani notes, the end of year, coupled with the Fed cutting rates, the presidential election and sunsetting tax provisions is making for a “dynamic environment” in the four pillars of wealth management: financial strategy, investment strategy, tax minimization, and legacy planning. “This is a really important time,” he says, “to sit down and talk with your adviser.”

Ex-Richmond Fed examiner pleads guilty to insider trading

A former Federal Reserve Bank of Richmond examiner on Tuesday pleaded guilty to committing insider trading and making false statements about his trading to the Richmond Fed.

Robert Brian Thompson, 43, of Chesterfield County’s Moseley area, was an examiner and senior manager with supervisory duties for the Richmond Fed, where he worked from 2004 through about May 2024. Thompson used confidential information from about seven publicly traded financial institutions that are under the Richmond Fed’s supervision when executing trades from October 2020 to February 2024, according to a news release from the U.S. Attorney’s Office for the Eastern District of Virginia.

In total, he completed 69 trades through seven institutions, reaping approximately $771,678 in profits.

“This was a clear violation of our well-established and well-communicated policies on ethics and conflicts of interest,” Richmond Fed spokesman Jim Strader said in a statement. “We fully cooperated with the authorities who investigated this matter.”

From October 2023 through this January, Thompson allegedly used “material nonpublic information” to trade in stock and options of McLean-based Capital One Financial and New York Community Bancorp, according to court filings from the Securities and Exchange Commission, which filed a civil case against Thompson in early November.

From 2022 until about May, Thompson was the Fed’s deputy central point of contact for large and foreign banking organizations, managing a team that supervised and examined 18 U.S. banking firms with at least $100 billion in total assets.

In October 2023, Thompson received an email from a Federal Reserve colleague with a preview of Capital One’s third quarter 2023 earnings that showed earnings per share results exceeded analysts’ expectations, according to an SEC case filing.

On Oct. 26, Thompson allegedly purchased 7,500 Capital One shares for an average of $90.40 per share. After the market closed that day, Capital One announced its third quarter earnings. When the market closed the following day, Oct. 27, Capital One shares were trading at $97.74 a share.

The SEC alleges that Thompson sold his stock at an average of $100.98 per share, gaining more than $79,300 in profits.

Between Jan. 18 and Jan. 26, Thompson learned through conversations with other Fed staff members that NYCB would be announcing substantial, unexpected losses related to loans it acquired as part of its March 2023 acquisition of Signature Bank, according to the SEC.

On Jan. 29, Thompson purchased 1,600 out-of-the-money put option contracts that expired Feb. 16, which would earn a profit if NYCB’s stock price fell by the expiration date, for a total cost of almost $14,500, according to the SEC.

On Jan. 31, NYCB released its fiscal 2023 earnings results. By close, its shares were trading for $19.41, a 37% drop from its closing price the previous day.

On Feb. 1, Thompson sold his NYCB put options and gained more than $505,500 in profit, the SEC alleges.

According to court filings related to his plea deal, Thompson also made false statements on his 2020, 2021, 2022, 2023 and 2024 Form Ds, annual forms that require employees to disclose whether they have any assets, including any equity invested in any banks that are members of the Fed system and/or bank holding companies. A federal regulation also prohibits Federal Reserve employees from trading in bank securities altogether to avoid conflicts of interest.

A Federal Reserve Board of Governors spokesperson said in a statement: “There is no place at the Federal Reserve for the misuse of confidential information. We have robust safeguards in place to ensure that those who have access to supervisory information understand their responsibilities and obligations, including the outright prohibition on trading in bank stocks. We require regular training, as well as affirmations by our staff that each person understands and is committed to the highest standards of professional behavior.”

Thompson reported in those Form Ds that he had no equities in any publicly traded financial institutions and that he hadn’t engaged in any activity that would constitute conflicts of interest, violations of Richmond Fed policies or violations of law.

As of the date that Thompson filed his fiscal 2023 form, he allegedly held bank stock and options with a market value of more than $500,000, according to court filings in the SEC case.

Thompson is scheduled to be sentenced in U.S. District Court on March 19, 2025, and faces a maximum penalty of 20 years in prison for one count of insider trading and five years in prison for one count of making false statements.

Thompson’s attorneys did not immediately reply to a request for comment.

Fed’s Fifth District economy grows modestly

Map courtesy Federal Reserve Board

Economic activity in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) grew modestly from early September, according to the latest edition of the Fed’s Beige Book, released Wednesday.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the nation’s 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources. The October release is an update from the Fed’s Sept. 4 report.

Here’s what the most recent Beige Book edition revealed about the direction the economy is taking:

Employment in the Fifth District increased slightly in the most recent reporting period. Although many businesses reported improvements in the labor pool and moderate wage growth, some firms reported continued challenges finding specific types of workers; they increased wages more and used outside help to attract those workers.

One example is a charter bus company that reported better driver availability but said it had to “dramatically” increase wages to attract skilled mechanics. A lighting manufacturer said it raised hourly wages by $2 for production workers.

Additionally, Hurricane Helene’s effects led to a spike in initial unemployment insurance claims in North Carolina in the first week of October.

Price growth in the region continued to ease slightly in recent weeks, according to the Fed. Prices grew at a “modest to moderate rate” year-over-year. The prices that manufacturing firms received grew modestly compared to the previous year, while service providers saw moderate annual price growth. Some consumer-facing businesses said they believed customers wouldn’t accept further price increases.

Manufacturing activity ranged from flat to slightly up for some producers. Some producers reported an increase in orders — a fuse panel manufacturer, for example, reported a backlog going into 2025 because of large recent orders. Nevertheless, some respondents reported delays on new orders because of uncertainty, like a textile manufacturer that reported it expected tepid demand as customers were being cautious ahead of elections.

Fifth District ports reported a slight increase in containerized cargo volumes while they allowed for additional trucking traffic to offload ships in advance of the anticipated International Longshoreman’s Association worker strike on Sept. 30. The strike lasted three days and was suspended until Jan. 15, 2025. The 45,000 union workers involved included 6,000 workers at Fifth District ports.

Port respondents said the three-day strike had little impact on operations because of its brevity. They also expected the resulting wage increases to affect future container rates.

Trucking demand remained flat, and companies expected it to stay muted going into winter. Trucking firms reported that profitability was down because freight spot rates fell.

Consumer spending in the region picked up modestly over the most recent reporting period. Retailers reported an increase in sales and shopper traffic. Some respondents said that revenues were up despite flat transaction volumes because prices were higher.

Hotel and tourism contacts said business travel increased, but leisure travel slowed. One hotel representative attributed the slowdown partly to the active hurricane season. Respondents in western North Carolina were still assessing Hurricane Helene’s damage and impacts, but most said they expected to feel the storm’s impacts for several months.

Fifth District residential real estate had a slight downtick in recent weeks, which many real estate agents attributed to a typical fall slowdown and the hold for rate cuts.

A Virginia agent said housing inventory was rising, particularly with fixer-uppers and less-than-ideal homes coming on the market. According to Virginia Realtors data, in September, Virginia had 19,764 active listings and 11,378 new listings, both year-over-year increases.

Contacts across the Fifth District also mentioned lawsuits and continued uncertainty related to the National Association of Realtors policy changes.

Commercial real estate activity leveled off in the past month, according to the Fed. Although vacancy continued to grow in lower-grade markets, vacancies decreased in prime A spaces. A residential and metal buildings construction company in Virginia said it had fewer potential customers and that clients were having more difficulty affording the company’s work.

Also, Hurricane Helene caused severe destruction of commercial and residential properties in western North Carolina and Virginia, but the extent of the damage isn’t yet clear, the Fed said.

Financial institutions saw a modest increase in loan demand, driven mainly by interest rate cuts. Commercial real estate and first mortgage refinancings were the main drivers of the increased demand. Deposit levels remained stable. Loan delinquency rates remained stable, although lenders reported a continued modest decline in borrowers’ credit quality.

Nonfinancial service providers continued to report little change in demand to the Fed, and their revenues remained stable. One law firm said they anticipated a modest increase in merger, acquisition and real estate deals because of decreasing interest rates. Some contacts reported they thought economic activity was constrained because clients were hesitant to make new investments or business decisions until uncertainty about the presidential election and international conflicts was resolved.

Barkin: Still a waiting game for interest rates’ effect on inflation

The U.S. economy has yet to feel the effects of current interest rates, but it eventually will, Federal Reserve Bank of Richmond President and CEO Tom Barkin predicted Thursday during an event held by the Risk Management Association’s Richmond chapter in the city’s East End.

“I’m optimistic that we’ve gotten rates at a restrictive level today, and that’ll take the edge off demand over time and bring inflation back to target,” said Barkin, who is a 2024 member of the Fed’s policy-making Federal Open Market Committee.

For now, although the economy is moving back to a better balance, Barkin said, the “data rollercoaster” from late 2023 to the most recent numbers shows that inflation isn’t yet stable. The Fed’s target inflation rate is 2%, measuring by the annual change in the Personal Consumption Expenditures price index, which is a U.S. Commerce Department measure of consumer spending on goods and services among households.

The economy finished 2023 relatively healthy, data showed.

“For the final seven months of the year, core PCE inflation on an annualized basis came in just under our 2% target,” Barkin said at the event, held at Triple Crossing Beer’s Fulton neighborhood location. Core PCE excludes food and energy costs. In December 2023, the core PCE was up 2.9% on a yearly basis. Headline inflation, which includes food and energy costs, stood at 2.6% annually.

In the fourth quarter of 2023, the country’s economic growth, as measured by changes in its gross domestic product, was 3.4%. The average unemployment rate for the year was 3.6%.

In early 2024, though, the data pivoted. For the first quarter of 2024, the PCE rose at a 3.4% annualized pace, and the core PCE prices rose at a 3.7% rate.

GDP increased at a 1.6% annualized rate in the first quarter, the U.S. Department of Commerce said in its “advance” estimate on April 25, although in its second estimate released May 30, the department revised the growth rate to 1.3%. The labor market remained strong, though, and the unemployment rate remained below 4%.

“We’ve been at or below 4% unemployment every month for the last 30 months. That’s the first time that’s happened since the late ’60s,” Barkin said.

In another data pivot, the May price index report showed some progress on inflation. The year-over-year increase in the Consumer Price Index — a Labor Department measure of the average change over time in prices that urban consumers paid for a basket of goods and services — at the end of April was 3.4%, but at the end of May, the index rose only 3.3%. The CPI did not show a monthly increase from April to May. The core CPI over the last 12 months rose 3.4%.

In terms of interest rates’ effects, “enough people and enough businesses either paid down their debt or refinanced their debt, that the aggregate interest burden has not actually gotten back to the levels you would expect, given the rapid increase in interest rates. And that suggests to me that the full impact of higher rates is still to come,” Barkin said.

People and companies were able to pay down or refinance debt because of low rates in 2021 and stimulus money, both for consumers and in Paycheck Protection Program loans, Barkin told reporters. The aggregate interest burden will change as people buy houses at higher rates.

Barkin said he does have some concerns about consumer demand supporting price increases: “On inflation, I do hear price-setters increasingly convinced that the era of significant pricing power is behind them, but I do think that the experience of the last couple years has just given people more urge to use price as a lever. … [Businesses] are simply more confident using pricing as a lever, and I anticipate that will be the case until customers or competitors send a strong message that they have no chance.”

In its June 12 meeting, the Fed’s Federal Open Market Committee voted to hold its benchmark interest rate at 5.25% to 5.5% and signaled it expected to make only one cut this year. The FOMC next meets July 30-31.

“My personal view is about, let’s get more conviction before moving — whether that move be a ‘one-time and we’ll see’ cut or multiple cuts — I feel the need for clarity [on inflation] before any of those situations,” Barkin told reporters.

Fed’s Fifth District shows modest economic growth

The economy in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) grew modestly in recent weeks, according to the latest edition of the Federal Reserve’s Beige Book, released May 29.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the nation’s 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources. The May release is an update from the Fed’s April 17 report.

Here’s what the most recent Beige Book edition revealed about the direction the economy is taking:

Employment in the Fifth District grew moderately over the last reporting period. The availability of labor varied between industries. One seasonal outdoor recreational company reported it hadn’t been able to recruit some candidates because of the area’s lack of affordable housing. Many respondents listed a need for “quality” workers, and companies continued to increase wages and offer bonuses as part of their recruitment and retention efforts.

Price growth increased slightly this period, although the year-over-year rate remained moderate, according to the Fed. The growth in prices received by service providers remained high at around 4%, while manufacturers had a roughly 2.5% increase in prices received. Input and labor costs continued to rise for businesses in both sectors. In some cases, customers pushed back on additional price increases, so input costs increased faster than prices businesses received. Companies expected growth in prices received to moderate over the next six months.

Fifth District manufacturing activity was unchanged in recent weeks. Several firms cited increased pressure on margins because of global competition, and future market uncertainty has made several businesses uneasy. One textile company’s clients said they were not making long-term strategic decisions, which makes it difficult for the company to plan for the rest of the year.

Virginia and South Carolina ports reported to the Fed moderate to strong — up to double-digit — increases in imports, beyond the volume they picked up from diverted Baltimore cargo. Exports of commodities like textiles and apparel rose, while exports of agricultural goods flattened or decreased. Freight rates increased, and ocean carriers continued to add surcharges and fees for distance and hazards to compensate.

Inland ports had strong demand for rail transport, continuing the record levels seen this year. Auto, auto part, and agricultural equipment and tools manufacturers have preferred rail because of its lower carbon emissions and supply chain reliability, according to the Fed. Trucking volume in the Fifth District was up slightly, but spot rates continued to “spiral downward” because of oversaturation.

Consumer spending on retail and travel increased moderately this reporting period. Although sales were up, some retailers reported tighter profit margins caused by rising input costs that they weren’t able to completely pass along to customers. New vehicle sales declined slightly.

Restaurant and leisure travel picked up, largely from customers with discretionary income, while low- to moderate-income consumers pulled back on spending or trading down in the goods they bought.

Fifth District residential real estate activity picked up modestly in the past few weeks. Total closed sales increased. The total supply of homes for sale increased as more came onto the market, but supply remained below pre-pandemic levels. Average sales prices rose modestly, and homes sold at a slightly faster rate — particularly low- and mid-priced homes. New construction grew in areas with population growth.

Commercial real estate activity increased slightly. Retail leasing picked up; vacancy rates stayed low, and new inventory was absorbed quickly. Leasing for Class A office buildings increased slightly, but leasing for Class B and C properties declined. Leasing and absorption in new multifamily buildings were strong. Construction of existing projects continued, but developers said few new projects were greenlit because high interest rates and the continued high prices of material and labor made it difficult for deals to be financially viable.

Fifth District financial institutions continued to see a “modest softening” of loan demand, mainly in their commercial real estate and business loan portfolios. Most cited higher interest rates as the reason for softening demand. Deposit levels declined modestly, and competition continued for available balances. Loan delinquency rates remained stable.

Nonfinancial service providers reported that demand for their services and their revenues continued to be stable. Firms noted higher interest rates as a limiting factor for new capital expenditures, and some noted inflation and election-year politics as limiting factors for business expansion and for confidence in the economy. Wages and workforce issues continued to be less of a challenge and to modestly stabilize.

Fed’s Fifth District economy grows slightly

The economy in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) grew slightly in recent weeks, according to the latest edition of the Federal Reserve’s Beige Book, released April 17.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the nation’s 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources. The April release is an update from the Fed’s March 6 report.

Here’s what the most recent Beige Book edition revealed about the direction the economy is taking:

Employment in the Fifth District grew at a moderate pace in the most recent reporting period, according to the Fed. Contacts continued to report difficulty finding workers but noted improvement. Finding skilled trades workers remained difficult. Wage growth remained moderate.

Fifth District prices continued to grow at a moderate annual rate in recent weeks. Prices received by service providers continued to grow at a rate of about 4%, according to survey respondents, and prices received by manufacturers continued to grow at a rate between 2% and 3%. Respondents most cited increased labor costs as the reason price growth remained elevated. Some firms reported that higher borrowing and energy costs have raised operating costs.

Manufacturing activity in the region declined modestly in this reporting period. Several respondents said interest rates negatively affected their businesses. A cabinet manufacturer, for example, reported that clients were canceling projects because they couldn’t wait any longer for interest rates to drop. Manufacturers also mentioned increased cost pressure from nonproduction services, like legal, medical and other insurance services.

Fifth District port activity declined slightly, and the Francis Scott Key Bridge’s March 26 collapse shut down traffic into and out of the Baltimore harbor and the city’s main port terminal. Shipments were diverted to other East Coast ports, including the Port of Virginia.

Overall, loaded container volumes at ports were slightly down. Import volumes increased largely because of retailers restocking consumer goods. Imports and exports of rolling stock, or railway vehicles, were down this reporting cycle. Air freight volumes remained flat, and shipping rates remained low because of overcapacity.

Trucking demand continued to slightly increase as retailers restocked but reflected a seasonal drop in volume. Rates in the truckload segment dropped because the industry is oversaturated, but companies in the less-than-truckload segment said they were able to negotiate flat to slight increases in contract rates due to decreased capacity.

Trucking firms reported no significant backlogs on new equipment, and parts availability improved. Driver turnover remained at the industry average, but some specialized positions, like mechanics, remained difficult to fill.

Retail spending was little changed in this reporting period, according to the Fed. Several retail and restaurant respondents reported unseasonably low customer traffic, although a furniture store and a hardware store saw increased sales and foot traffic, which they attributed to the seasonal pickup in the housing market and yard work. Hotel contacts said occupancy had only slightly increased but noted they had strong future bookings for the next few months.

Residential real estate firms noted it hadn’t been a robust spring market but that the housing sector continued to have pent up demand. Total closed sales dropped month-over-month. Average days on the market increased slightly but stayed below the historic average, while housing inventory remained tight. Although listing prices remained flat, many homes sold above asking price. Increases in construction costs moderated.

Commercial real estate market activity in the Fifth District improved slightly from the last report. Retail and industrial/flex space leasing continued to have higher rental rates and low vacancy rates. The office sector saw greater leasing activity from firms looking for more efficient space and moving to suburban locations.

A growing number of commercial office buildings, however, were unable to qualify for refinancing. Commercial real estate values declined due to slowing sales and negligible capital markets activity. Commercial contractors noted a lack of qualified candidates and rising material and labor costs.

Most Fifth District financial institutions observed a slight increase in loan demand in their business and commercial real estate loan portfolios. Deposit levels continued to modestly decline, and competition for any available deposits remained high. Loan delinquency rates remained stable from the March Beige Book report.

Nonfinancial service providers reported that demand for their services and revenues continued to remain stable. Wages and workforce issues were less of a challenge as they continued to modestly stabilize.

Fed’s Fifth District economy stays the course

Economic activity in the Federal Reserve’s Fifth District was little changed in recent weeks, according to the latest edition of the Federal Reserve’s Beige Book, released March 6.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the nation’s 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources. The March release is an update from the Fed’s Jan. 17 report.

Here’s what the most recent Beige Book edition revealed about the direction the economy is taking:

Employment in the Fifth District grew at a moderate pace in the most recent reporting period, according to the Fed. Firms reported that skilled and trades workers, like engravers and aluminum welders, were more difficult to find than other workers, like advertising firm employees.

Price growth was largely unchanged from the January Beige Book report; year-over-year price growth remained moderately elevated. Prices received by nonmanufacturers grew about 4%, while the growth in prices received by manufacturers remained about 2.5%. Sources in both sectors expected price growth to moderate over the next six months.

Manufacturing activity in the Fifth District softened in recent weeks because of uncertain business conditions. One coffee manufacturer reported that difficulties getting freight through the Red Sea was increasing its production times and future costs. Several firms reported difficulty securing financing, and most contacts cited a shortage of qualified labor as a major issue.

Fifth District ports reported good underlying demand despite disruptions in the Panama and Suez canals that affected shipping schedules. Ports saw a slightly lower volume of loaded imports but an increase in consumer goods imports. Loaded export volumes were unchanged. Spot rates increased sharply as carriers tried to offset the higher costs resulting from longer transit times. The ports reported no stack congestion.

Some trucking freight volumes in the region declined because of winter weather, but underlying trucking demand was good, according to the Fed. In the less-than-truckload segment, companies reported increased demand in the consumer segment resulting from retailers restocking inventory. In the truckload segment, customers pushed to decrease their shipping costs, and rates fell. Although truck drivers were easier to find this period, mechanic and some office positions remained hard to fill.

Retailers in the Fifth District saw a slight decline in sales and customer foot traffic in the most recent cycle. Some firms attributed the decline to bad weather conditions, while a few home improvement and building supply retailers cited a slow real estate market and higher borrowing costs to finance home improvements. Hotel and restaurant respondents also reported a slight slowdown, although hotel revenues in the Northern Virginia market were up as hotels had steady occupancy rates and were able to increase room rates.

Residential real estate activity improved slightly, as pent-up demand remained. Firms reported an increase in listings and buyer activity, but said buyers were tentative because of high mortgage rates. Days on the market increased slightly but were still below historic averages. Construction costs started to moderate, although the market was constrained by difficulty finding land and receiving permitting.

The commercial real estate market activity improved slightly in the most recent reporting period. Firms upgraded their office space and moved away from central business districts, and landlords offered concessions or incentives to potential tenants instead of raising rents. Suburban retail space remained limited, with low vacancy rates and increased rental rates. New construction, especially for office and multifamily projects, was constrained by rising building costs and a lack of available financing.

Loan demand softened modestly, reported Fifth District financial institutions, because of higher interest rates and continued economic uncertainty. Deposit balances began to decline modestly, and competition for deposits remained high. Loan delinquency rates have started showing modest increases, mainly in unsecured personal and auto portfolios.

Overall, nonfinancial service providers in the region saw stable demand and revenues. Wages and the labor market stabilized some, becoming less challenging for nonfinancial firms.

Financial Services: Signs of health

What’s that we hear? Is the economy growing healthier?

It’s getting stronger for sure, Federal Reserve Bank of Richmond President and CEO Tom Barkin said in January during the 2024 Financial Forecast event co-hosted in Richmond by the Virginia Bankers Association and the Virginia Chamber of Commerce.
Inflation was 3.4% in December 2023, inching closer to the central bank’s goal of 2%. As always, the Fed’s leaders are cautious in their wording, but in February, Chair Jerome Powell said the Federal Reserve expects to cut interest rates three times in 2024, starting in May.

Barkin, who serves this year on the powerful Federal Open Market Committee, which sets interest rates and monetary policy, noted in January, “Contrary to most predictions, the economy remains healthy.”

That represents a shift from the previous two years, when Fortune 500 companies’ executives took cover and prepared for a widely predicted recession that didn’t materialize — launching massive layoffs in many cases.

That’s not to say that businesses haven’t encountered several challenges in the past year — including high interest rates, high inflation, continuing supply chain challenges and wars in Gaza and Ukraine. In Virginia, home prices and demand continued to rise amid a tight market, making it difficult for Virginia millennials and Gen Zers to buy or rent. And that, in turn, has kept some businesses from finding employees, Barkin and the state commerce and trade secretary, Caren Merrick, noted during the November 2023 Virginia Governor’s Housing Conference in Hampton.

“We all know housing availability is limiting communities,” Barkin said, urging communities, employers and universities to work together to create more affordable housing.

Meanwhile, in a state where defense funding is crucial to financial outlooks for ports, the military and federal contracting, Congress neared the brink of a federal shutdown twice last year, something that hasn’t happened since 2018. In January, the U.S. House and Senate passed a third stopgap resolution to keep the government operating through March.

If a shutdown does occur, the impact would be harsh on Virginia, where more than 144,000 federal employees work, second only to California. In 2022, the Department of Defense spent $62.7 billion in Virginia — and based on the 2018-19 shutdown, it can take months for contractors to get paid.

Bob McNab, an Old Dominion University economist, notes that $4 out of every $10 generated in Hampton Roads comes from the federal government. If a shutdown occurs, “it is this perfect storm that would really undermine economic activity in Hampton Roads if it continued for a long period of time,” he says.

That said, right now, Virginia looks strong. Employment regionally has grown moderately, and the tight market has
raised wages, according to the Federal Reserve’s Beige Book report released in late January.

In fiscal 2023, 2,520 people lost jobs in layoffs and closures reported by the Virginia Employment Commission, up slightly from the previous year, when 2,182 people were laid off, but a big improvement from fiscal 2021, when 12,281 people lost their jobs.

Factors like inflation, gas prices, job shortages in some fields and overall cost of living expenses have affected consumer sentiment negatively, however. According to McNab and fellow ODU economist Vinod Agarwal, recent consumer sentiment has been at the lowest point since the Great Recession of 2008, but they are hopeful that Virginians’ perceptions will align closer to the data. In February, the ODU economists’ 2024 state economic forecast predicted a third consecutive year of growth.

And with interest rates expected to decrease, it’s hoped moods will brighten in the commonwealth. 

 

Fed’s Fifth District economy sees mild expansion

Economic activity in the Federal Reserve’s Fifth District (a multistate region including Virginia, North Carolina, South Carolina, West Virginia and Maryland) expanded mildly in recent weeks, according to the latest edition of the Federal Reserve’s Beige Book, released Wednesday.

Published eight times per year, the Beige Book is based on anecdotal information about economic conditions gathered from the nation’s 12 Federal Reserve Banks. It is compiled from reports by bank and branch directors, as well as information gathered from business contacts, economists, market experts and other sources. Wednesday’s release is an update from the Fed’s Nov. 29, 2023 report.

Here’s what the most recent Beige Book edition revealed about the direction the economy is taking:

Employment in the Fifth District grew moderately in the past few weeks, although the tight labor market continued to put upward pressure on wages. Some respondents reported operational changes as a result, like a specialized software company that expects to cut investment plans this year because salaries increased by 15% of the firm’s total revenue and the company needs to continue hiring workers to meet customer demand.

Price growth continued to slow slightly, according to the Fed, but year-over-year inflation remained “somewhat elevated.” Service providers saw a 3.8% increase in prices received, down half a percentage point from the previous reporting period. Manufacturers reported a 2.8% increase in prices received, up slightly from the previous report.

Manufacturing activity in the region slowed in recent weeks. While contacts in some industries tied to consumers’ discretionary spending reported declines, like a wine producer who reported a 30% drop in sales, some contacts saw unexpected increases in demand. An automobile fabric manufacturer reported an uptick in new orders, notable because its customers historically have pulled back on spending each December.

Fifth District ports’ trade volumes were down in recent weeks. Imports were lower year-over-year as wholesalers continued to work on reducing high inventory levels. Loaded exports, though, were up. Spot shipping rates to the East Coast increased because carriers had issues at the Panama Canal and the Red Sea. Container dwell times fluctuated.

Freight volumes for trucking firms were slightly lower than in the prior report, and firms did not see a seasonal uptick. In the full truckload segment, food, medical, automotive and retail shipments provided the greatest demand. Trucking companies did not experience significant backlogs on new equipment orders but occasionally had issues receiving some parts.

Retailers in the Fifth District reported steady to slightly increasing demand and revenues. Travel and tourism respondents reported steady to increasing sales, hotel occupancy rates and passenger air travel.

Residential real estate activity declined modestly due to an expected seasonal slowdown. Home prices increased moderately, while days on the market increased slightly but remained below historic averages. Construction costs had moderated, builders reported, but shortages of some building materials and specialty subcontractor labor continued.

Commercial real estate market activity was flat in the previous few weeks. The retail segment remained strong, particularly among fast casual restaurant chains. Class A office space tightened as firms upgraded their space and moved away from central business districts. Construction projects were largely limited to the industrial and multifamily sectors.

In the financial sector, loan demand continued to soften modestly. The biggest slowdown in demand was in residential mortgage lending. Deposit balances remained flat, and institutions continued to see competition for available funds.

Overall revenues and demand for services for nonfinancial service providers in the Fifth District remained stable. Competition put pressure on pricing and maintaining current clients. Firms reported wages and workforce availability were continuing challenges.

Economy healthy but more work is needed, Barkin says

The U.S. economy is showing signs of health, but bringing down inflation remains necessary, Federal Reserve Bank of Richmond President and CEO Tom Barkin said Thursday during the 2024 Financial Forecast event co-hosted in Richmond by the Virginia Bankers Association and the Virginia Chamber of Commerce.

Economic conditions have improved but haven’t quite settled back to baseline levels, Barkin said, using a mathematical analogy: The economy’s health is nearing the bottom of a parabola but hasn’t quite finished its path back to pre-pandemic levels.

The U.S. unemployment rate was 3.7% in December 2023, according to the Bureau of Labor Statistics. That’s historically low, Barkin said. The inflation rate was 2.6% in November, as measured by the Personal Consumption Expenditures price index, a measure of consumer spending on goods and services among households. The Fed’s target rate is 2%.

“Contrary to most predictions, the economy remains healthy … and that’s despite a number of shocks,” Barkin said.

He sees potential for a soft landing in which inflation is controlled but the economy remains healthy. There are still several “flight risks,” however, in the path down.

The first Barkin sees is that the U.S. economy could “run out of legroom.” Although credit and interest have tightened, they haven’t made the economy soft, and the risk that people and companies could pull back on borrowing remains.

Also, economists can’t predict external shocks to the economic system, like a cyber shutdown, and where those shocks would hit and how hard. Some unforeseen events could bring down inflation but have greater costs to the system

Inflation could also level off above the Federal Reserve’s 2% target. Most drops in inflation have resulted from a reversal of pandemic-era price increases, and a goods deflationary cycle could end, Barkin said, while shelter and service prices remain high.

Additionally, a landing could be delayed, he said. Consumer spending is currently high, but strong demand isn’t a solution to inflation.

As measured by the Labor Department’s consumer-price index, inflation rose in December 2023, with the cost of living up 3.4% from the previous year.

“Overall, we’re still seeing, on a year-term basis, a long-term basis, a moderation in the overall levels of inflation, but there’s still this disconnect between goods and services and shelter,” Barkin told reporters, adding a caveat that “you can’t take too much [meaning] out of any one month.”

During its December 2023 meeting, the Fed’s policy-making Federal Open Market Committee reaffirmed its commitment to raising interest rates if necessary but held its benchmark rate in a 5.25% to 5.5% range.

The FOMC will meet Jan. 30-31 and March 19-20. Barkin is a member of the FOMC for 2024.

As to whether he’d support an interest rate cut in March, Barkin said, “Let’s see where the data comes in. … I don’t prejudge meetings. I definitely don’t prejudge the meeting after the next meeting.”

The U.S. isn’t yet in the clear. Fiscal conditions are ever-evolving, and “you gotta respond to conditions, so buckle up,” Barkin said in his address. “As you know, that’s the proper safety protocol, even if you’re on a plane expecting a soft landing.”