2022-2023 School Year Opens on October 1 for FAFSA
Financial aid kickoff season begins in October. Incoming and returning college students can start filing the Free Application for Federal Student Aid, or FAFSA, for the next academic year. The FAFSA is a prerequisite for federal student loans, grants, and work-study, and may be required by colleges before they distribute their own institutional aid to students.
How do I submit the FAFSA?
The FAFSA for the 2022-2023 school year opens on October 1, 2021. Here are some tips for filing it.
- The fastest and easiest way to submit the FAFSA is online at studentaid.gov. The site contains resources and tools to help you complete the form, including a list of the documents and information you’ll need to file it. The online FAFSA allows your tax data to be directly imported from the IRS, which speeds up the overall process and reduces errors.
- Before you file the FAFSA online, you and your child will each need to obtain an FSA ID (federal student aid ID), which you can also do online by following the instructions. (Once you have an FSA ID, you can use the same one each year.)
- The FAFSA can also be filed in paper form. But it will take much longer for the government to process it.
- You don’t need to complete the FAFSA by October 1. But it’s a promising idea to file it as early as possible in the fall because some federal aid programs operate on a first-come, first-served basis. Colleges typically have a priority filing date for both incoming and returning students; the priority filing date can be found in the financial aid section of a college’s website. You should submit the FAFSA before that date.
- Students must submit the FAFSA every year to be eligible for financial aid (along with any other college-specific financial aid form that may be required, such as the CSS Profile). Any colleges you list on the FAFSA will also get a copy of the report.
- There is no cost to submit the FAFSA.
How does the FAFSA calculate financial need?
The FAFSA looks at a family’s income, assets, and household information (for example, family size) to calculate what a family can afford to pay. This figure is known as the EFC or expected family contribution. All financial aid packages are built around this number.
Tip: Starting with the 2023-2024 FAFSA (which will be available next year starting October 1, 2022), the EFC will be renamed the SAI, or student aid index.
When counting income, the FAFSA uses information in your tax return from two years earlier. This year is often referred to as the “base year” or the “prior-prior year.” For example, the 2022-2023 FAFSA will use income information in your 2020 tax return, so 2020 would be the base year or prior-prior year.
When counting assets, the FAFSA uses the current value of your and your child’s assets. Some assets are not counted and do not need to be listed on the FAFSA. These include home equity in a primary residence, retirement accounts (e.g., 401k, IRA), annuities, and cash-value life insurance. Student assets are weighted more heavily than parent assets; students must contribute 20% of their assets vs. 5.6% for parents.
Your EFC remains constant, no matter which college your child attends. The difference between your EFC and a college’s cost of attendance equals your child’s financial need. Your child’s financial need will be different at every school.
After your EFC is calculated, the financial aid administrator at your child’s school will attempt to craft an aid package to meet your child’s financial need by offering a combination of loans, grants, scholarships, and work-study. Keep in mind that colleges are not obligated to meet 100% of your child’s financial need. If they don’t, you are responsible for paying the difference. Colleges often advertise on their website and brochures whether they meet “100% of demonstrated need.”
Should I file the FAFSA even if my child is unlikely to qualify for aid?
Yes, probably. There are two good reasons to submit the FAFSA even if you don’t expect your child to qualify for need-based aid.
First, all students attending college at least half-time are eligible for unsubsidized federal student loans, regardless of financial need or income level. (“Unsubsidized” means the borrower, rather than the federal government, pays the interest that accrues during school and during the grace period and any deferment periods after graduation.) If you want your child to be eligible for this federal loan, you’ll need to submit the FAFSA. But don’t worry, your child won’t be locked in to taking out the loan. If you submit the FAFSA and then decide your child doesn’t need the student loan, your child can decline it through the college’s financial aid portal before the start of the school year.
Second, colleges typically require the FAFSA when distributing their own need-based aid, and in some cases as a prerequisite for merit aid. So, filing the FAFSA can give your child the broadest opportunity to be eligible for college-based aid. Similarly, many private scholarship sources may want to see the results of the FAFSA.
Too Hot to Handle: What’s Ahead for the U.S. Housing Market?
The U.S. housing market, already strong before the pandemic, has heated up to record levels in 2021. The Case-Shiller U.S. National Home Price Index, which measures home prices in 20 major metropolitan areas, reported a 12-month increase of 18.6% in June 2021, the largest year-over-year gain in data going back to 1987.1
The National Association of Realtors (NAR), which provides more current data, reported that the national median price of an existing home was $359,900 in July, down from a record $362,800 in June. Even so, this was the 113th consecutive month of year-over-year price increases. The June to July price relief was due in part to increased supply. Total inventory of new and existing homes increased 7.3% over June but was still down 12.0% from a year ago.2
The July 2021 NAR data suggests that the red-hot market may be cooling slightly, but prices are still extremely high, and industry experts expect them to remain high for the foreseeable future. Here’s a look at some key factors behind the current trend and prospects for future direction.
Low Supply, Surprise Demand
The housing supply has been low for more than a decade. The housing crash devastated the construction industry, and a variety of factors, including labor shortages, tariffs, limited land, and restrictive permit processes, have kept the supply of new homes below historical averages, placing more pressure on existing homes to meet demand.3
The pandemic exacerbated labor problems and led to supply-chain issues and high costs for raw materials that held back construction, while demand exploded despite the economic downturn. With the shift to remote work and remote education, many people with solid jobs looked for more space, and low interest rates made higher prices more affordable.4
At the same time, homeowners who might have seen high prices as an opportunity to sell were hesitant to do so because of economic uncertainty and the high cost of moving to another home. Refinancing at low rates offered an appealing alternative and kept homeowners in place. Government mortgage forbearance programs have helped families from losing their homes but also kept homes that might have otherwise foreclosed off the market.5
Health concerns also played a part. The pandemic made it less appealing to have strangers entering a home for an open house. And older people who might have moved into assisted living or other senior facilities were more likely to stay in their homes.6
Taken together, these factors produced a perfect storm of low supply and high demand that drove already high prices to dizzying levels and created desperation among buyers. All-cash sales accounted for 23% of transactions in July, up from 16% in July 2020. The average home stayed on the market for just 17 days, down from 22 days last year. Almost 90% of homes sold in less than a month.7
Freezing Out First-Time Buyers
Recent inventory gains have been primarily in more expensive houses, and there continues to be a critical shortage of affordable homes. First-time buyers accounted for just 30% of purchases in July 2021, down from 34% the previous year.8 A common formula for home affordability is to multiply income by three — i.e., a couple who earns $100,000 might qualify to buy a $300,000 house. A study of 50 cities found that home prices in Q2 2021 were, on average, 5.5 times the local median income of first-time buyers, putting most homes out of reach.9
The lack of affordable housing for first-time buyers also helps to drive rents higher. People with higher incomes who might be buying homes are willing and able to pay higher rents. Rents on newly signed leases in July were 17% higher than what the previous tenant paid, the highest jump on record. After dropping while many young people lived with parents during the pandemic, occupancy of rental units hit a record high of 96.9%.10
Is This a Bubble?
From 2006 to 2012, the housing market plummeted 60%, taking the broader U.S. economy with it.11 Mortgage requirements were made much stricter after the housing crash, and homeowners today are more likely to afford their homes and to have more equity from larger down payments. The housing market has always been cyclical, so it’s likely that prices will turn downward at some point in the future, but less likely that prices will collapse the way they did during the Great Recession.12
What’s Next?
Prices are so high that some buyers are backing off, but demand remains strong and will outstrip housing supply for the foreseeable future. Some near-term relief might come if high prices inspire more homeowners to sell, and if the end of government programs puts more foreclosed homes on the market. There are more single-family homes under construction than at any time since 2007, but it will take months or years for those homes to increase the housing supply.13
The housing market tends to be seasonal, with demand dying down in the fall and the winter. That didn’t happen last year, because pent-up demand was so strong that it pushed through the seasons. With the supply/demand tension easing, the seasonal slowdown may be more significant this year.14 The Federal Home Loan Mortgage Corporation (Freddie Mac) projects that home prices will grow by 12.1% in 2021, lower than the current pace, and drop further to 5.3% growth in 2022.15
Location, Location
Although national trends reflect broad economic forces, the housing market is fundamentally local. The West is the most expensive region, with a median price of $508,300 for an existing home, followed by the Northeast ($411,200), the South ($305,200), and the Midwest ($275,300).16 Within regions, there are dramatic price differences among states, cities, and towns. The trend to remote work, which helped drive prices upward, may help moderate prices in the long term by allowing workers to live in more affordable areas.
1) S&P Dow Jones Indices, August 31, 2021
2, 7, 8, 16) National Association of Realtors, August 23, 2021
3, 4, 6) The New York Times, May 14, 2021
5) NBC News, July 6, 2021
9) The New York Times, August 12, 2021
10) Bloomberg Businessweek, August 18, 2021
11) NPR, August 17, 2021
12) The Wall Street Journal, March 15, 2021
13) Bloomberg, August 19, 2021
14) CNN Business, August 23, 2021
15) Freddie Mac, July 2021
IRS Releases 2022 Key Numbers for Health Savings Accounts
The IRS has released the 2022 contribution limits for health savings accounts (HSAs), as well as the 2022 minimum deductible and maximum out-of-pocket amounts for high-deductible health plans (HDHPs). An HSA is a tax-advantaged account that’s paired with an HDHP. An HSA offers several valuable tax benefits:
- You may be able to make pre-tax contributions via payroll deduction through your employer, reducing your current income tax.
- If you make contributions on your own using after-tax dollars, they’re deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not.
- Contributions to your HSA, and any interest or earnings, grow tax deferred.
- Contributions and any earnings you withdraw will be tax-free if used to pay qualified medical expenses.
Health Savings Accounts
Annual contributions:
2022 Self-only coverage $3,650, $50 increase from 2021
2022 Family coverage $7,300, $100 increase from 2021
High-deductible health plan: self-only coverage:
2022 Annual deductible: minimum $1,400, the same as 2021
2022 Annual out-of-pocket expenses required to be paid (other than premiums) can’t exceed $7,050,
$50 increase from 2021
High-deductible health plan: family coverage:
2022 Annual deductible: $2,800, the same as 2021
2022 Annual out-of-pocket expenses required to be paid (other than premiums) can’t exceed $14,000,
$100 increase from 2021
Catch-up contributions:
2022 Annual catch-up contributions limit for individuals age 55 or older $1,000, the same as 2021
Student Loan Payment Pause Extended Through January 2022
On August 6, 2021, the U.S. Department of Education announced an extension of the pause on federal student loan payments to January 31, 2022. The payment moratorium, currently in effect for millions of federal student loan borrowers, was set to end on September 30, 2021.
The Department noted that this extension would be the last one. U.S. Secretary of Education Miguel Cardona stated: “As our nation’s economy continues to recover from a deep hole, this final extension will give students and borrowers the time they need to plan for restart and ensure a smooth pathway back to repayment.”1
How many payment pauses have there been?
There have been four pauses to federal student loan repayment since the start of the coronavirus pandemic. The first pause was instituted in March 2020 for six months (through September 2020) when Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The second and third pauses came via presidential executive order and extended the payment pause through January 2021 and through September 2021, respectively. The fourth and “final” extension is now scheduled through January 31, 2022. This means federal student loan payments will resume beginning February 1, 2022.
The Department of Education will begin notifying borrowers about this final extension in the coming days, and it will release resources and information about how to plan for repayment as the end of the pause approaches.
Does interest continue to accrue during the moratorium period?
No, interest does not accrue during the moratorium period. Essentially, the interest rate is set at 0%.
Can borrowers make payments if they want to during this time?
Yes. Borrowers can choose to keep making their monthly student loan payments during the moratorium period if they wish. The full amount of a borrower’s payment will be applied to principal. Borrowers can also choose to make partial payments during this time.
Do private student loans qualify for the payment pause?
No, private student loans aren’t eligible. Only student loans held by the federal government are eligible. This includes Federal Direct Loans (which includes PLUS Loans), along with Federal Perkins Loans and Federal Family Education Loan (FFEL) Program loans held by the Department of Education.
Is student loan forgiveness likely when the payment pause ends?
Probably not. While some legislators have gone on record in favor of forgiving a certain amount of federal student loan debt per borrower, the Biden administration has not taken any steps in this direction and has given no indication that it will do so. Borrowers should be ready to start repaying their loans when the pause ends on January 31, 2022. In the case of continued financial hardship at that time, borrowers should contact their loan servicer to inquire about requesting an individual deferment or forbearance.
For more information, visit the Federal Student Aid website.
1) U.S. Department of Education, 2021
Mid-Year Is a Good Time for a Financial Checkup
The first half of 2021 is behind us. As life emerges from the pandemic to a “new normal,” a mid-year financial checkup may be more important than ever this year. Here are some ways to make sure that your financial situation is continuing the right path.
Reassess your financial goals
At the beginning of the year, you may have set financial goals geared toward improving your financial situation. Perhaps you wanted to save more, spend less, or reduce your debt. How much progress have you made? If your income, expenses, and life circumstances have changed, you may need to rethink your priorities. Review your financial statements and account balances to determine whether you need to make any changes to keep your financial plan on track.
Look at your taxes
Completing a mid-year estimate of your tax liability may reveal new tax planning opportunities. You can use last year’s tax return as a basis, then factor in any anticipated adjustments to your income and deductions for this year. Check your withholding, especially if you owed taxes or received a large refund. Doing that now, rather than waiting until the end of the year, may help you avoid owing a big tax bill next year or overpaying taxes and giving Uncle Sam an interest-free loan. You can check your withholding by using the IRS Tax Withholding Estimator https://www.irs.gov/individuals/tax-withholding-estimator . If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer. Be sure to factor any Advance Child Tax Credit Payments if you are receiving or expect to receive any. https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
Check your retirement savings
If you’re still working, look for ways to increase retirement plan contributions. For example, if you receive a pay increase this year, you could contribute a higher percentage of your salary to your employer-sponsored retirement plan, if available. For 2021, the contribution limit is $19,500, or $26,000 if you’re age 50 or older. If you are close to retirement or already retired, take another look at your retirement income needs and whether your current investment and distribution strategy will provide the income you will need.
Evaluate your insurance coverage
What are the deductibles and coverage limits of your homeowners/renter’s insurance policies? How much disability or life insurance coverage do you have? Your insurance needs can change over time. As a result, you’ll want to make sure your coverage has kept pace with your income and family/personal circumstances. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased.
Ask questions
Some questions you should also ask yourself as part of your mid-year financial checkup:
• Do you have enough money set aside to cover unexpected expenses?
• Do you have money left in your flexible spending account?
• Are your beneficiary designations up to date?
• Have you checked your credit score recently?
• Do you need to create or update your will?
• When you review your portfolio, is your asset allocation still in line with your financial goals, time horizon, and tolerance for risk? Are any changes warranted?
Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
New Global Tax Accord Takes Shape
After more than four years of international negotiations taking place mostly behind the scenes, 132 countries — representing more than 90% of worldwide gross domestic product (GDP) and including the Group of 20 (G20) large economies — recently agreed to a new plan to reform international tax laws in an effort to “ensure that multinational enterprises pay a fair share of tax wherever they operate.”1
The negotiations, overseen by the Paris-based Organisation for Economic Co-operation and Development (OECD), represent the most significant attempt in over a century to overhaul the global tax system and bring international tax policy into the modern digital age. The accord has the potential to reshape global commerce.2
What is the crux of the new global tax agreement?
The global agreement has two main pillars. The first would require large, multinational enterprises (including digital companies) to pay taxes in countries where their goods or services are sold and where they earn profits, even if they have no physical presence there. This provision is aimed primarily at large U.S. tech companies that sell their goods and services abroad, and is intended to supercede attempted regulation by other countries that are already in the process of trying to collect taxes on these companies.3
The second pillar, proposed by the United States, calls for a 15% global minimum corporate tax rate in an effort to prevent multinational companies from shopping for a country or jurisdiction with the lowest tax rates, a phenomenon U.S. Treasury Secretary Janet Yellen described as a “race to the bottom.”4
President Biden added: “With a global minimum tax in place, multinational corporations will no longer be able to pit countries against one another in a bid to push tax rates down and protect their profits at the expense of public revenue.”5
The OECD estimated that raising the global minimum corporate tax rate to 15% would generate an estimated $150 billion in additional global tax revenues each year. It stated that the “package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-COVID recovery.”6
What countries are on board?
All the G20 economies, representing over 75% of global trade, have endorsed the deal. They include the United States, Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and most countries of the European Union.7 In all, 132 countries are in favor.
However, several countries with low corporate tax rates that currently operate as tax havens have not agreed to the deal, including Ireland, several Caribbean countries, Hungary, Estonia, Kenya, Nigeria, Peru, and Sri Lanka.8 These smaller nations are attempting to secure a better deal to enable them to compete with larger countries and make up for the potential loss of any tax advantage. The refusal of Ireland, Hungary, and Estonia to sign on to a global corporate tax rate is a potential roadblock because of the European Union’s requirement for unanimity on tax issues. 9
Undoubtedly, there is a significant amount of work to be done to bring “holdout” nations on board. The Biden administration has pushed Congress to approve a new tax rule that would punish companies that operate in the United States but have headquarters in those holdout countries by significantly increasing their tax liabilities. The president has also pushed Congress to increase the minimum tax on revenue earned by U.S. companies outside the United States in an effort to help fund the $4 trillion infrastructure and economic agenda he hopes to pass this year.10
Has the new global tax agreement been enacted yet?
No. There are still significant, complex technical and policy details that need to be worked out, including how the plan will be executed and which U.S. multinational companies will be subject to the new rules on digital tax.
In addition, the plan needs to be approved by Congress and the national legislatures of participating countries. In the United States, each pillar of the plan could be considered separately. According to Treasury Secretary Yellen, the provision for a 15% global minimum corporate tax rate could be included in a budget bill headed to Congress later in 2021, while the provision on digital taxation of multinational companies might be ready for Congress in the spring of 2022. A further wrinkle is that if the digital tax provision is considered an international treaty, it will require two-thirds approval in the Senate.11
In any event, the global tax accord is due to be finalized by G20 leaders at their next meeting in Rome in October 2021, with G20 finance ministers anticipating global implementation in 2023.12
1, 3, 6) OECD.org, 2021
2, 4-5, 8, 10) The New York Times, July 8, 2021
7) G20.org, 2021
9, 11-12) Bloomberg, July 11, 2021
Should You Be Concerned About Inflation?
If you pay attention to financial news, you are probably seeing a lot of discussion about inflation, which has reared its head in the U.S. economy after being mostly dormant for the last decade. In May 2021, the Consumer Price Index for All Urban Consumers (CPI-U), often called headline inflation, rose at an annual rate of 5.0%, the highest 12-month increase since August 2008.1
The CPI-U measures the price of a fixed market basket of goods and services purchased by residents of urban and metropolitan areas — about 93% of the U.S. population. You have likely seen price increases in some of the goods and services you purchase, and if so it’s natural to be concerned.
The larger question is whether these price increases are temporary, caused by factors such as supply-chain issues and labor shortages that will be resolved as the economy continues to emerge from the pandemic, or whether they indicate a fundamental imbalance that could cause widespread long-term inflation and hold back economic growth.
Most economists — including Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen — believe the current spike is primarily due to transitory factors that will fade in the coming months. One example of this, cited by Powell in a recent press conference, is the price of lumber.2–3
Supply and Demand
Early in the pandemic, many lumber mills shut down or cut back on production because they expected a major slowdown in building. In fact, demand for housing and home renovation increased during the pandemic, as many people who worked from home wanted more space, a different location, or improvements to their current homes. Low supply and high demand sent lumber prices soaring.4
Sawmills geared up as quickly as they could and were reaching full capacity just as demand began to ebb, with builders cutting back due to high prices and homeowners using their discretionary income to buy other goods and services. Suddenly the supply exceeded demand, and prices began to drop. Wholesale lumber prices are still higher than before the pandemic, and it takes time for price drops to filter down to the retail level, but it’s clear that the extreme inflation was transitory and has been reversed. The lumber story also suggests that consumers and businesses will cut back on spending for a product that becomes too expensive rather than spend at any price and feed an inflationary spiral.5
Chips and Cars
Another example of pandemic-driven imbalance between supply and demand is used car and truck prices, which have skyrocketed almost 30% over the last 12 months and represent a substantial portion of the overall increase in CPI. Used vehicles are hard to find in large part because fewer new cars are being built — and fewer new cars are being built because there is a shortage of computer chips. A single new car can require more than 1,000 chips, and when auto manufacturers were forced to close their factories early in the pandemic and new vehicle sales plummeted due to lack of demand, chip manufacturers shifted from producing chips for cars to producing chips for high-demand consumer electronics such as webcams, phones, and laptops.6–8
As the economy reopened and the demand for cars increased, chip producers were unable to shift and increase production quickly enough to meet the needs of auto manufacturers. The chip shortage is expected to reduce global auto production by 3.9 million vehicles in 2021, a drop of 4.6%. Unlike lumber, the chip shortage may take some time to resolve, because chip manufacturing is a long, multi-step process and most chips are manufactured outside the United States. The federal government has stepped in to encourage U.S. manufacturers to build new facilities and increase production.9
Fundamental Forces
Imbalances between supply and demand are to be expected as the economy reopens, and most such imbalances should work themselves out in the marketplace. But other forces could fuel more extensive inflation. Massive federal stimulus packages have provided consumers with more money to spend, while ongoing stimulus from the Federal Reserve has increased the money supply and made it easier to borrow.
Although unemployment is still relatively high at 5.9%, millions of jobs remain open as workers are hesitant to return to positions they consider unsafe in light of the pandemic, are unable to work due to lack of child care, and/or are rethinking their careers in a post-pandemic world.10–11This may change in September as extended unemployment benefits expire and children return to school, but the current imbalance is forcing many businesses to raise wages, especially in lower-paying jobs.12
The increases so far are primarily “catching up” after many years of low wages and should be absorbed by businesses or passed on to consumers with moderate price increases.13 However, if wages and prices increase too quickly and consumers earning higher wages are willing to spend regardless of rising prices — because they expect prices to rise even higher — the wage-price inflation spiral could be difficult to control.
Reading the Economy
When considering the current situation, it’s helpful to look at other measures of inflation.
Base effect. On a purely mathematical level, high 12-month CPI increases in March, April, and May 2021 reflect the fact that the CPI is being compared with those months in 2020, when prices decreased as the economy closed in response to the pandemic. This comparison to unusually low numbers is called the base effect. To avoid this effect, it’s helpful to look at annualized inflation over a two-year period, comparing prices now with prices before the pandemic. By that measure, current inflation is about 2.5%, a little higher than the average over the last decade but not nearly as concerning as a 5.0% level.14
Core inflation. Prices of some items are more volatile than others, and food and energy are especially volatile categories that can change quickly even in a low-inflation environment. For this reason, economists tend to look more carefully at core inflation, which strips out food and energy prices and generally runs lower than CPI-U. Core CPI rose at an annual rate of 3.8% in May 2021, which sounds better than 5.0% until you consider that it is the highest core inflation since June 1992. The good news is that the 0.7% monthly increase from April to May was lower than the 0.9% rise from March to April, suggesting that core inflation may be slowing down. (The CPI-U increase also slowed in May, rising 0.6% for the month after a 0.8% increase in April.)15
Sticky prices. Another helpful measure is the sticky-price CPI, which sorts the components of the CPI into categories that are relatively slow to change (sticky) and those that change more rapidly (flexible). The sticky price CPI increased just 2.7% over the 12-month period ending in May 2021. By contrast, the flexible component of the CPI increased 12.4% over the year.16 This suggests that a variety of factors — such as problems with supply chains, labor, and extreme weather — may be moving prices on flexible items, but that underlying economic forces are moving more stable prices at a relatively moderate rate.
The Fed’s Arsenal
The Federal Open Market Committee (FOMC), an arm of the Federal Reserve, is charged with setting economic policy to meet its dual mandate of fostering maximum employment while promoting price stability. The Fed’s primary economic tools are the benchmark federal funds rate, which affects many other interest rates, and its bond-buying program, which injects liquidity into the economy. Put simply, the Fed lowers the funds rate and buys bonds to stimulate the economy and increase employment, and raises the rate and stops buying bonds or sells bonds to put the brakes on inflation.
The federal funds rate has been at its rock-bottom range of 0.0% to 0.25% since March 2020, when the Fed dropped it quickly in the face of the pandemic, and the Federal Reserve is buying $120 billion in government bonds every month, much less than it did early in the pandemic but still a substantial and steady injection of money into the economy.17 (Unlike an individual or a regular bank that must spend money to purchase bonds, the central bank buys bonds by creating an electronic deposit in one of its member banks, thus creating “new money” that can be used to lend and circulate into the economy.)
Some inflation is necessary for economic growth — without it, an economy is stagnant — and in 2012, the FOMC set a 2% target for healthy inflation, based on a measure called the Personal Consumption Expenditures (PCE) Price Index. The PCE price index uses much of the same data as the CPI, but it captures a broader range of expenditures and reflects changes in consumer spending.
More specifically, the FOMC focuses on core PCE (excluding food and energy), which remained below the 2% target for most of the last decade. In August 2020, the FOMC changed its policy to target an average PCE inflation rate of 2% and indicated it would allow inflation to run higher for some time to balance the time it ran below the target. This is the current situation. Core PCE increased at a 12-month rate of 3.4% in May 2021, but so far the Fed has shown little inclination to take action in the short term.18 The FOMC projects PCE inflation to drop to 3.1% by the end of the year and to 2.1% by the end of 2022.19
At its June meeting, the FOMC did indicate an important shift by projecting the federal funds rate would increase in 2023 to a range of 0.5% to 0.75%, effectively two quarter-point steps. (In March, the projection had been to hold the rate steady at least through 2023.) Fed Chair Powell also indicated that the FOMC has begun “talking about talking about” reducing the monthly bond purchases.20 Neither of these signals suggests any immediate action or serious concern about inflation. However, the fact that the funds rate remains near zero and that the Fed continues to buy bonds gives the central bank powerful “weapons” to employ if it believes inflation is increasing too quickly.
The next few months may indicate whether inflation is slowing down or changes in monetary policy are necessary. Unfortunately, prices do not always come down once they rise, but it may be helpful to keep in mind that prices of many goods and services did decline during the pandemic, and the higher prices you are seeing today might not be far out of line compared with prices before the economic slowdown. As long as inflation begins trending downward, it seems likely that the current numbers reflect growing pains of the recovery rather than a long-term threat to economic growth.
U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, bonds could be worth more or less than the original amount paid. Projections are based on current conditions, are subject to change, and may not come to pass.
1, 6, 10, 14) U.S. Bureau of Labor Statistics, 2021
2, 17, 19–20) Federal Reserve, 2021
3) Bloomberg, June 5, 2021
4–5) The New York Times, June 21, 2021
7) CBS News, June 22, 2021
8–9) Time, June 28, 2021
11) CNBC, June 8, 2021
12–13) CNBC, May 22, 2021
15) The Wall Street Journal, June 22, 2021
16) Federal Reserve Bank of Atlanta, 2021
18) U.S. Bureau of Economic Analysis, 2021
Hostage Data: Ransomware and Protecting Your Digital Information
On May 7, 2021, the Colonial Pipeline, which carries almost half of the East Coast’s fuel supply from Texas to New Jersey, shut down operations in response to a ransomware attack. Colonial paid a $4.4 million ransom not long after discovering the attack, and the pipeline was reopened within a week. While there was enough stored fuel to weather the outage, panic buying caused gasoline shortages on the East Coast and pushed the national average price of gasoline over $3.00 per gallon for the first time since 2014.1
Ransomware is not new, but the Colonial Pipeline incident demonstrated the risk to critical infrastructure and elicited strong response from the federal government. Remarkably, the Department of Justice recovered most of the ransom, and the syndicate behind the attack, known as DarkSide, announced it was shutting down operations.2
The Department of Homeland Security issued new regulations requiring owners and operators of critical pipelines to report cybersecurity threats within 12 hours of discovery, and to review cybersecurity practices and report the results within 30 days.3 On a broader level, the incident increased focus on government initiatives to strengthen the nation’s cybersecurity and create a global coalition to hold countries that shelter cybercriminals accountable.4
Malicious Code
Ransomware is malicious code (malware) that infects the victim’s computer system, allowing the perpetrator to lock the files and demand a ransom in return for a digital key to restore access. Some attackers may also threaten to reveal sensitive data. There were an estimated 305 million ransomware attacks globally in 2020, a 62% increase over 2019. More than 200 million of them were in the United States.5
The recent surge in high-profile ransomware attacks represents a shift by cybercriminal syndicates from stealing data from “data-rich” targets such as retailers, insurers, and financial companies to locking data of businesses and other organizations that are essential to public welfare. A week after the Colonial Pipeline attack, JBS USA Holdings, which processes one-fifth of the U.S. meat supply, paid an $11 million ransom.6 Health-care systems, which spend relatively little on cybersecurity, are a prime target, jeopardizing patient care.7 Other common targets include state and local governments, school systems, and private companies of all sizes.8
Ransomware gangs, mostly located in Russia and other Eastern European countries, typically set ransom demands in relation to their perception of the victim’s ability to pay, and high-dollar attacks may be resolved through negotiations by a middleman and a cyber insurance company. Although the FBI discourages ransom payments, essential businesses and organizations may not have time to reconstruct their computer systems, and reconstruction can be more expensive than paying the ransom.9
Protecting Your Data
While major ransomware syndicates focus on more lucrative targets, plenty of cybercriminals prey on individual consumers, whether locking data for ransom, gaining access to financial accounts, or stealing and selling personal information. Here are some tips to help make your data more secure.10
Use strong passwords and protect them. An analysis of the Colonial Pipeline attack revealed that the attackers gained access through a leaked password to an old account with remote server access.11 Strong passwords are your first line of defense. Use at least 8 to 12 characters with a mix of upper- and lower-case letters, numbers, and symbols. Longer and more complex passwords are better. Do not use personal information or dictionary words.
One technique is to use a passphrase that you can remember and adapt. For example, Jack and Jill went up the hill to fetch a pail of water could be J&jwuth!!2faPow. Though it’s tempting to reuse a strong password, it is safer to use different passwords for different accounts. Consider a password manager program that generates random passwords, which you can access through a strong master password. Do not share or write down your passwords.
No easy answers. Be careful when establishing security questions that can be used for password recovery. It may be better to use fictional answers that you can remember. If a criminal can guess your answer through available information (such as an online profile), he or she can reset your password and gain access to your account.
Take two steps. Two-step authentication, typically a text or email code sent to your mobile device, provides a second line of defense even if a hacker has access to your password.
Think before you click. Ransomware and other malicious code are often transferred to the infected computer through a “phishing” email that tricks the reader into clicking on a link. Never click on a link in an email or text unless you know the sender and have a clear idea where the link will take you.
Install security software. Install antivirus software, a firewall, and an email filter — and keep them updated. Old antivirus software won’t stop new viruses.
Back up your data. Back up regularly to an external hard drive. For added security, disconnect the drive between backups.
Keep your system up-to-date. Use the most recent operating system that can run on your computer and download security updates. Most ransomware attacks target vulnerable operating systems and applications.
If you see a notice on your computer that you have been infected by a virus or that your data is being held for ransom, it’s more likely to be a fake pop-up window than an actual attack. These pop-ups typically have a phone number to call for “technical support” or to make a payment. Do not call the number and do not click on the window or any links. Try exiting your browser and restarting your computer. If you continue to receive a notice or your data is really locked, contact a legitimate technical support provider.
For more information and other tips, visit the Cybersecurity & Infrastructure Security Agency website at us-cert.cisa.gov/ncas/tips.
1–2, 11) Vox, June 8, 2021
3) U.S. Department of Homeland Security, May 27, 2021
4) The Washington Post, June 4, 2021
5) 2021 SonicWall Cyber Threat Report
6) The Wall Street Journal, June 9, 2021
7) Fortune, December 5, 2020
8) Institute for Security and Technology, 2021
9) The New Yorker, June 7, 2021
10) Cybersecurity & Infrastructure Security Agency, 2021
Shortages and Bottlenecks Expose Weak Links in U.S. Supply Chains
U.S. consumers won’t soon forget the troubling shortages of personal protective equipment during the early days of the pandemic, or when the first stay-at-home orders spurred panic buying and stress-inducing shortages of toilet paper, cleaning products, and food.
Now, as the economy reopens fully and all at once, consumers are again experiencing a wide array of shortages. Businesses are having trouble hiring workers as well as acquiring sufficient supplies of raw materials and key components needed for manufacturing.
Businesses that shut down or cut back when the economy was closed could not ramp up quickly enough to meet a flood of demand in the spring of 2021. The speedy rollout of widespread COVID-19 vaccinations unleashed this pent-up demand faster than expected, catching many businesses off-guard. At the same time, the flow of goods ordered from overseas was slowed by shipping bottlenecks.
Some of these supply disruptions were triggered or worsened by extraordinary calamities, and panic buying by consumers and businesses intensified the more serious shortages.
Here’s a look at some of the events that have stressed corporate supply chains and impacted the economy — regionally, nationally, and globally — in the first half of 2021.
Gas crisis
In mid-May, a ransomware attack led to the multi-day shutdown of a 5,500-mile pipeline responsible for supplying 45% of the fuel on the East Coast. Existing stockpiles might have held up, but news of the outage caused a run on gasoline, and states of emergency were declared by the governors of North Carolina, Georgia, Virginia, and Florida. The average price of a gallon of gasoline spiked to a six-and-a-half-year high, but increases were larger in states that rely heavily on the pipeline.1-2
Trade disrupted
Longer delivery times caused shortages of some raw materials and many types of consumer goods purchased from overseas. Congestion in the busiest West Coast ports left dozens of huge container ships from all over the world anchored off the California coast, waiting to unload. These log jams peaked in February 2021, when imports surged. Now that port workers can be vaccinated, operators are aiming to clear the backlog by the summer.3 In March, a six-day blockage of the Suez Canal by a grounded cargo ship caused massive disruption in international trade. Globally, container ship capacity is stretched and demand is high, so costs could remain elevated for some time.4
Texas freeze
In mid-February, a brutal winter storm knocked out the power grid in Texas, shut down numerous chemical plants, and froze the production of plastics used for packaging and materials needed to make many goods, including auto parts, computers, PVC piping, and paint. This resulted in global shortages, production delays, and higher costs for manufacturers and homebuilders, which will likely be passed on to buyers.5
The same storm closed major chicken-processing plants. Large losses of chicks and eggs, on top of COVID-19–related staffing problems, caused a nationwide chicken shortage and price hikes for restaurants.6
Lumber and housing
When the pandemic hit, many U.S. lumber mills were closed, and the expectation was that housing demand would falter. However, after a brief pause, demand for homes and home remodeling took off, surprising builders and domestic lumber producers. The price of lumber was already rising due to tariffs, but it has skyrocketed more than 300% since April 2020 and caused the price of a new single-family home to increase by nearly $36,000.7
Chips and cars
A global shortage of semiconductors, or computer chips, is limiting the production of all kinds of goods, including home appliances, cars, PCs, gaming systems, servers, and 5G equipment. The effects of the chip shortage are far-reaching but most evident in the market for new and used cars. Auto makers have been forced to cut production of more than 1.2 million vehicles in North America. Dealer inventories are strained, and new and used car prices are causing sticker shock.8-9
The U.S. Senate is debating a bipartisan bill that would invest $100 billion in research, commercialization, and training programs to boost critical technologies, including the domestic production of semiconductors.10
Labor concerns
Some employers report having difficulty finding workers who are willing to take lower-paying jobs, and staffing issues are a contributing factor in the shortages. Some workers may be reluctant to accept jobs because the enhanced unemployment benefits provide more income than they would normally earn through work. For others, opportunities to participate in the workforce are more limited due to lack of child care or skill gaps. To attract much-needed workers, some large employers in the retail and restaurant industries have raised entry-level wages. At least 22 states plan to end the $300 federal benefit by this summer in a bid to spur more people to seek jobs.11
Hard lessons
Since the pandemic began, businesses have had to make difficult decisions amidst great uncertainty. Some supply constraints could ease in the coming months, but other problems, like the chip shortage, could take longer to resolve. Recent events also serve as a reminder that critical energy-control systems and infrastructure are vulnerable to cyberattacks and weather events, and that the damage can ripple throughout the economy when energy providers are knocked offline.
In April 2021, inflation shot up 4.2% over the previous year, the highest rate since 2008. Mismatches between supply and demand are pushing up consumer prices, which is one reason many economists believe the spring rise in inflation will be mostly “transitory.”12 Regardless, prices rarely fall once they have risen, which means even short-lived bursts of inflation can be painful for consumers.
The longer-term path of inflation is still unclear and could depend on economic policy decisions yet to be made. Moreover, the nation’s economic prospects will largely be determined by how U.S. businesses react to the challenges they are facing, and whether corporate leaders can reshape their strategies and invest in ways that strengthen their supply chains for the future.
1-2, 12) The Wall Street Journal, May 13, 2021
3) Bloomberg, May 16, 2021
4) Bloomberg, May 3, 2021
5) The Wall Street Journal, March 17, 2021
6) Associated Press, April 25, 2021
7) CNBC.com, April 30, 2021
8-9) The Wall Street Journal, April 19 and May 13, 2021
10) Reuters, May 17, 2021
11) The Wall Street Journal, May 20, 2021
Crisis Averted? Financial Help for Struggling Renters and Landlords
By one estimate, U.S. landlords were owed about $57 billion in unpaid back rent at the beginning of 2021. The average household that fell behind owed about four months of rent, or $5,600. Altogether, more than 10 million U.S. families were facing the possibility of eviction.1
Many landlords, including those who depend on rent payments for retirement income, have experienced financial difficulties in lockstep with their heavily impacted tenants. Although multi-family apartment complexes are often owned by large corporations, about 90% of single-family rentals are owned by small investors who are facing the risk of mortgage default, bankruptcy, or forced property sales.2
Fortunately, the March 2021 federal stimulus bill added almost $22 billion in housing assistance to the $25 billion previously allocated by Congress.3 In many cases, payments are being sent directly to landlords through new or existing local programs on behalf of renters who meet certain eligibility requirements.
Program parameters
Under the Emergency Rental Assistance Program (ERAP), the U.S. Treasury has distributed grants to states, cities, and counties with populations greater than 200,000 to be used for back-due rent and utility bills accrued after March 13, 2020. Eligibility is limited to households that earn less than 80% of the area’s median income, as defined by the Department of Housing and Urban Development.
Applicants must document their incomes, prove they qualified for unemployment benefits or suffered financial hardship due to COVID-19 that impacted their ability to pay rent, and submit unpaid bills or notices that demonstrate they are at risk of becoming homeless.
What can landlords do?
Tenants and landlords generally apply for the funds together, but the application process and guidelines differ from program to program. In some states, landlords may be asked to forgive a percentage of the rental arrears in exchange for larger rent payments.
If you are a landlord, you might reach out to tenants who are behind on rent and encourage them to explore any potential opportunities for financial assistance. Check the websites of your state and local housing agencies to find the status and requirements of various housing programs and how to apply. Of course, many higher-earning households won’t be eligible for help, and in areas with lots of lower-income renters, local programs could run dry quickly.
Evicting tenants can be a painful and expensive process. If you have tenants who fell behind but are trying to catch up, it may be advantageous to work out a payment program instead to help keep them in place.
1) Moody’s Analytics, 2021
2) RealtyTrac, 2021
3) The Wall Street Journal, March 11, 2021