Government Acts to Blunt Financial Impact of Global Pandemic
On March 11, the novel coronavirus (COVID-19) was officially declared a global pandemic by the World Health Organization, and two days later President Trump declared a national emergency.1 The unknowns surrounding a new virus make it difficult to predict the potential human and economic toll, but unprecedented steps are being taken to help slow the spread of the disease and prepare medical facilities to treat a rising number of cases. Businesses are suffering losses as they spend more to help keep workers and customers safe and/or have closed their doors to the public.
The economy — in the United States and globally — has been interrupted as abruptly as our daily routines, and a downturn is looming. This jarring reality triggered the first bear market for U.S. stocks in 11 years.2 Many people are now working from home, but a record number of workers (3.3 million) filed for unemployment in one harrowing week.3
The financial impact of the health crisis is likely to be more severe for some households, businesses, and industries than others. With lives and livelihoods at risk, the Federal Reserve, state governments, and the federal government have responded with a full slate of emergency measures.
Central bank in action
The Federal Reserve moved swiftly in recent weeks to support the U.S. economy and help alleviate stress in the financial markets. On March 3, the Fed dropped the target range for the benchmark federal funds rate by one-half percentage point to 1.00% to 1.25%, stating that the coronavirus posed evolving risks to the economic outlook.4
Following an emergency session on Sunday, March 15, the Fed slashed the rate to near zero (0% to 0.25%) and committed to at least $700 billion in debt purchases. This policy was later expanded to essentially unlimited debt purchases “in amounts needed to support smooth market functioning.” The U.S. central bank is also extending currency swaps with foreign central banks to keep high-demand U.S. dollars flowing freely around the world.5
Citing emergency powers, the Federal Reserve launched a number of lending facilities to keep credit flowing to households and businesses. These operations required permission from the Treasury Secretary and are protected from losses with Treasury funds.6
The Commercial Paper Funding Facility ensures that companies retain access to an important source of short-term credit (IOUs) often used to fund regular expenses including payroll and rent. The Primary Dealer Credit Facility provides funding to financial institutions that trade directly with the Fed and serve as market makers for U.S. Treasuries.7
The Money Market Mutual Fund Liquidity Facility will help ensure that funds can meet investor demand for redemptions. This backstop was originally limited to prime funds, which invest in short-term corporate debt, but was expanded to include funds with municipal debt. A crisis-era lending facility used to support the consumer and business credit market has also been revived.8
Two facilities have been added to support corporate debt markets. One will provide four-year bridge financing to companies with investment-grade ratings, and the other will purchase highly-rated U.S. corporate bonds. A Main Street Business Lending Program for small employers is also in the works.9
Chairman Powell has said the Fed will do everything in its power to help stabilize the markets, so lending programs could be added or expanded.10
Relief on the way
The federal tax filing deadline has been delayed to July 15, so taxpayers have extra time to file their tax returns and make payments without interest or penalties. Many states have decided to match the new federal deadline.11
An initial relief bill passed in early March provided $8.3 billion in emergency healthcare funding. A phase two relief package, the Families First Coronavirus Response Act, includes free coronavirus testing and increased funding for food security programs, Medicaid, and unemployment insurance.12
This bill also provides two weeks of paid sick leave and up to 12 weeks of family and medical leave for workers at companies with 500 or fewer employees who are affected by the virus. This includes those caring for children whose schools are closed. Small and midsize employers will be reimbursed with tax credits for wages paid to affected workers.13
The $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the most generous stimulus package in U.S. history. Many households will receive cash payments ($1,200 per adult and $500 per child) from the IRS within weeks if their incomes fall under certain thresholds. Unemployment insurance was prolonged from 26 to 39 weeks and will provide an extra $600 per week for four months. This benefit was extended to self-employed individuals, gig workers, and independent contractors who would not have qualified under the old rules.14
A $500 billion lifeline could backstop trillions in bridge loans and offer some direct aid for hard-hit cities, states, and large employers. The government can seek company equity in extreme cases. Another $349 billion will fund loans for small businesses (under 500 employees); eligible employers can borrow up to $10 million for working capital through an existing Small Business Administration program. Many paperwork requirements have been waived, and amounts paid for mortgage interest, rent, utilities, and payrolls could be forgiven if workers are retained.15
The scope of losses may ultimately depend on how quickly the spread of the virus is controlled and effective treatments and/or a vaccine are developed so the economy can reopen. But there is hope that the government policy response will save lives and help mitigate the economic effects.
Although these times are stressful for everyone, it may help to keep in mind that the U.S. economy is much like the people who live here — resourceful and resilient. We have endured shocks and recovered from serious crises before, and we can do so again.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
1) The White House, March 18, 2020
2) Yahoo! Finance, 2020 (data for the period 3/9/2009 to 3/12/2020)
3) The Wall Street Journal, March 26, 2020
4-10) Federal Reserve, March 2020
11) Bloomberg.com, March 20, 2020
12-13) Bloomberg.com, March 18, 2020
14-15) The Wall Street Journal, March 25-26, 2020
CARES Act Provides Relief to Individuals and Businesses
On Friday, March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. This $2 trillion emergency relief package is intended to assist individuals and businesses during the ongoing coronavirus pandemic and accompanying economic crisis. Major relief provisions are summarized here.
Unemployment provisions
The legislation provides for:
- An additional $600 weekly benefit to those collecting unemployment benefits, through July 31, 2020
- An additional 13 weeks of federally funded unemployment benefits, through the end of 2020, for individuals who exhaust their state unemployment benefits
- Targeted federal reimbursement of state unemployment compensation designed to eliminate state one-week delays in providing benefits
- Unemployment benefits through 2020 for many who would not otherwise qualify, including independent contractors and part-time workers
Recovery rebates
Most individuals will receive a direct payment from the federal government. Technically a 2020 refundable income tax credit, the rebate amount will be calculated based on 2019 tax returns filed (2018 returns in cases where a 2019 return hasn’t been filed) and sent automatically via check or direct deposit to qualifying individuals. To qualify for a payment, individuals generally must have a Social Security number and must not qualify as the dependent of another individual.
The amount of the recovery rebate is $1,200 ($2,400 if married filing a joint return) plus $500 for each qualifying child under age 17. Recovery rebates are phased out for those with adjusted gross income (AGI) exceeding $75,000 ($150,000 if married filing a joint return, $112,500 for those filing as head of household). For those with AGI exceeding the threshold amount, the allowable rebate is reduced by $5 for every $100 in income over the threshold.
While details are still being worked out, the IRS will be coordinating with other federal agencies to facilitate payment determination and distribution. For example, eligible individuals collecting Social Security benefits may not need to file a tax return in order to receive a payment.
Retirement plan provisions
- Required minimum distributions (RMDs) from employer-sponsored retirement plans and IRAs will not apply for the 2020 calendar year; this includes any 2019 RMDs that would otherwise have to be taken in 2020
- The 10% early-distribution penalty tax that would normally apply to distributions made prior to age 59½ (unless an exception applies) is waived for retirement plan distributions of up to $100,000 relating to the coronavirus; special re-contribution rules and income inclusion rules for tax purposes apply as well
- Limits on loans from employer-sponsored retirement plans are expanded, with repayment delays provided
Student loans
- The legislation provides a six-month automatic payment suspension for any student loan held by the federal government; this six-month period ends on September 30, 2020
- Under already existing rules, up to $5,250 in payments made by an employer under an education assistance program could be excluded from an employee’s taxable income; this exclusion is expanded to include eligible student loan repayments an employer makes on an employee’s behalf before January 1, 2021
Business relief
- An employee retention tax credit is now available to employers significantly impacted by the crisis and is applied to offset Social Security payroll taxes; the credit is equal to 50% of qualified wages up to a certain maximum
- Employers may defer paying the employer portion of Social Security payroll taxes through the end of 2020 and may pay the deferred taxes over a two-year period of time; self-employed individuals are able to do the same
- Net operating loss rules expanded
- Deductibility of business interest expanded
- Provisions relating to specified Small Business Administration (SBA) loans increase the federal government guarantee to 100% and allow small businesses to borrow up to $10 million and defer payments for six months to one year; self-employed individuals, independent contractors, and sole proprietors may qualify for loans
Prior legislative relief provisions
Signed into law roughly two weeks prior to the CARES Act, the Families First Coronavirus Response Act (FFCRA) also included relief provisions worth noting:
- Requirement that health plans cover COVID-19 testing at no cost to the patient
- Requirement that employers with fewer than 500 employees generally must provide paid sick leave to employees affected by COVID-19 who meet certain criteria, and paid emergency family and medical leave in other circumstances
- Payroll tax credits allowed for required sick leave as well as family and medical leave paid
There is likely to be a steady stream of guidance forthcoming with details relating to many of these provisions, so stay tuned for more information. We’re here to help and to answer any questions you may have.
New Medicare cards are coming
New Medicare cards are coming
Medicare is mailing new Medicare cards to all people with Medicare now. Find out more about when your card will mail.
10 things to know about your new Medicare card
- Your new card will automatically come to you. You don’t need to do anything as long as your address is up to date. If you need to update your address, visit your mySocial Security account.
- Your new card will have a new Medicare Number that’s unique to you, instead of your Social Security Number. This will help to protect your identity.
- Your Medicare coverage and benefits will stay the same.
- Mailing takes time. Your card may arrive at a different time than your friend’s or neighbor’s.
- Your new card is paper, which is easier for many providers to use and copy.
- Once you get your new Medicare card, destroy your old Medicare card and start using your new card right away.
- If you’re in a Medicare Advantage Plan (like an HMO or PPO), your Medicare Advantage Plan ID card is your main card for Medicare—you should still keep and use it whenever you need care. And, if you have a Medicare drug plan, be sure to keep that card as well. Even if you use one of these other cards, you also may be asked to show your new Medicare card, so keep it with you.
- Doctors, other health care providers and facilities know it’s coming and will ask for your new Medicare card when you need care, so carry it with you.
- Only give your new Medicare Number to doctors, pharmacists, other health care providers, your insurers, or people you trust to work with Medicare on your behalf.
- If you forget your new card, you, your doctor or other health care provider may be able to look up your Medicare Number online.
Watch out for scams
Medicare will never call you uninvited and ask you to give us personal or private information to get your new Medicare Number and card. Scam artists may try to get personal information (like your current Medicare Number) by contacting you about your new card. If someone asks you for your information, for money, or threatens to cancel your health benefits if you don’t share your personal information, hang up and call us at 1-800-MEDICARE (1-800-633-4227). Learn more about the limited situations in which Medicare can call you.
How can I replace my Medicare card?
If you need to replace your card because it’s damaged or lost, sign in to your MyMedicare.gov account to print an official copy of your Medicare card. If you don’t have an account, visit MyMedicare.gov to create one.
If you need to replace your card because you think that someone else is using your number, let us know.
How do I change my name or address?
Medicare uses the name and address you have on file with Social Security. To change your name and/or address, visit your online my Social Security account.
Medicare is managed by the Centers for Medicare & Medicaid Services (CMS). Social Security works with CMS by enrolling people in Medicare.
New Medicare Cards Are Coming
If you receive Medicare, you will be getting a new Medicare card in the mail. To help prevent fraud and fight identity theft, Medicare is removing Social Security Numbers from Medicare cards. Your new card will have a new Medicare Number that’s unique to you.
When are new cards being mailed?
Medicare will be mailing new red, white, and blue paper Medicare cards between April 2018 and April 2019. Card mailings will be staggered, so the timing will depend on your geographical location.
Newly eligible people will begin receiving the new cards starting in April. The following table from the Centers for Medicare & Medicaid Services shows when Medicare will be mailing cards to existing Medicare recipients. You can check the status of card mailings in your area on medicare.gov/newcard.
| Wave | States Included | Cards Mailing |
| 1 | Delaware, District of Columbia, Maryland, Pennsylvania, Virginia, West Virginia | Beginning May 2018 |
| 2 | Alaska, American Samoa, California, Guam, Hawaii, Northern Mariana Islands, Oregon | Beginning May 2018 |
| 3 | Arkansas, Illinois, Indiana, Iowa, Kansas, Minnesota, Nebraska, North Dakota, Oklahoma, South Dakota, Wisconsin | After June 2018 |
| 4 | Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont | After June 2018 |
| 5 | Alabama, Florida, Georgia, North Carolina, South Carolina | After June 2018 |
| 6 | Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Texas, Utah, Washington, Wyoming | After June 2018 |
| 7 | Kentucky, Louisiana, Michigan, Mississippi, Missouri, Ohio, Puerto Rico, Tennessee, Virgin Islands | After June 2018 |
Some tips on using your new Medicare card
The following tips are from the Medicare website, medicare.gov.
- Your new card will be mailed to you automatically. You don’t need to do anything as long as your address is up-to-date. If you need to update your address, contact Social Security at https://www.ssa.gov/myaccount/ or 1-800-772-1213.
- Once you receive your new Medicare card, destroy your old Medicare card and start using your new card right away.
- Doctors, other health-care providers, and facilities will ask for your new Medicare card when you need care, so carry it with you.
- If you’re in a Medicare Advantage Plan (like an HMO or PPO), your Medicare Advantage Plan ID card is your main card for Medicare — you should still keep and use it whenever you need care. However, you also may be asked to show your new Medicare card, so you should carry this card, too.
- Medicare will never call you uninvited and ask you to give out personal or private information to get your new Medicare Number and card.
- Scam artists may try to get personal information (like your current Medicare Number) by contacting you about your new card. If so, hang up and call 1-800-Medicare.
November 1 Begins Open Enrollment for Health Insurance Marketplaces
Beginning on November 1, 2017, individuals (including their families) may apply for new health insurance or switch to a different health-care plan through a Health Insurance Marketplace under the Affordable Care Act (ACA). The open enrollment period for 2018 health coverage ends on December 15, 2017.
Individuals can use Health Insurance Marketplaces to compare health plans for benefits and price and to select a plan that fits their needs. Individuals have until December 15, 2017, to enroll in or change plans for new coverage to start January 1, 2018. For those who fail to meet the December 15 deadline, the only way to enroll in a Marketplace health plan is by qualifying for a special enrollment period, which is the 60-day period following certain life events that involve a change in family status (for example, marriage or birth of a child) or loss of other health coverage. Job-based plans must provide a special enrollment period of 30 days. The Department of Health and Human Services (HHS) extended the open enrollment period to December 31, 2017 for victims of Hurricanes Irma and Harvey who resided in one of the counties that the Federal Emergency Management Agency (FEMA) declared eligible for individual or public assistance.
Changes to open enrollment
New HHS regulations included changes to the open enrollment period and requirements for individuals looking to purchase health insurance through Health Insurance Marketplaces. Here is a summary of the changes, effective for 2018:
- The open enrollment period for 2018 is cut in half and runs from November 1 through December 15, 2017. Open enrollment during prior years extended from November 1 to January 31.
- Individuals attempting to enroll during special enrollment periods must provide verification through documentation of a qualifying event. Previously, individuals merely had to attest to changing circumstances that made them eligible to apply during special enrollment periods.
- Some states have elected to extend open enrollment in light of the regulation. In these states, which run their own insurance marketplaces, open enrollment begins on November 1 and extends beyond December 15 as follows: California (1/31/2018); Colorado (1/12/2018); District of Columbia (1/31/2018); Massachusetts (1/23/2018); Minnesota (1/14/2018); New York (1/31/2018); Rhode Island (12/31/2017); and Washington (1/15/2018).
Other changes to the ACA
Some of the significant changes made to the ACA by the Trump administration include the following:
- Insurers are now permitted, but not required, to collect unpaid premiums for prior health insurance coverage before enrolling an applicant in a new health plan.
- Under the ACA, health plans are identified as bronze, silver, gold, and platinum based on the amount of coverage offered and the plan cost. For example, a silver plan was designed to cover at least 70% of a typical person’s medical expenses, while a gold plan would cover 80%. Plans could vary by 2%. The new regulation expands the coverage variation, such that a silver plan can cover between 66% and 72% of an individual’s medical costs.
- Employers are exempt from the mandate requiring birth control coverage in health insurance plans based on the employer’s sincerely held religious beliefs or on moral convictions. Employers that do not provide coverage only need to notify their employees of their decision.
- The President has indicated that the federal government will cease making cost-sharing reduction payments to insurers to reimburse them for discounts they give policyholders with incomes under 250% of the federal poverty level. However, attempts to extend funding by congressional action are being considered.
More changes to come?
The situation regarding health care, particularly the ACA, is very fluid and changing. Attempts to repeal and replace the ACA have failed to date. The President, via executive order, has outlined plans to allow access to association health plans, where small businesses and individuals can group together to buy plans across state lines; expand short-term limited duration health insurance not subject to ACA benefit requirements; and expand the use of health reimbursement arrangements (HRAs) by employers to provide workers with tax-free funds to pay for health-care costs, primarily deductibles and copays. Whether and how these proposals come to fruition remains to be seen.
Medicare Open Enrollment Begins October 15
What is the Medicare open enrollment period?
The Medicare open enrollment period is the time during which people with Medicare can make new choices and pick plans that work best for them. Each year, Medicare plans typically change what the plans cost and cover. In addition, your health-care needs may have changed over the past year. The open enrollment period is your opportunity to switch Medicare health and prescription drug plans to better suit your needs.
When does the open enrollment period start?
The Medicare open enrollment period begins on October 15 and runs through December 7. Any changes made during open enrollment are effective as of January 1, 2018.
During the open enrollment period, you can:
- Join a Medicare Prescription Drug (Part D) Plan
- Switch from one Part D plan to another Part D plan
- Drop your Part D coverage altogether
- Switch from Original Medicare to a Medicare Advantage Plan
- Switch from a Medicare Advantage Plan to Original Medicare
- Change from one Medicare Advantage Plan to a different Medicare Advantage Plan
- Change from a Medicare Advantage Plan that offers prescription drug coverage to a Medicare Advantage Plan that doesn’t offer prescription drug coverage
- Switch from a Medicare Advantage Plan that doesn’t offer prescription drug coverage to a Medicare Advantage Plan that does offer prescription drug coverage
What should you do?
Now is a good time to review your current Medicare plan. As part of the evaluation, you may want to consider several factors. For instance, are you satisfied with the coverage and level of care you’re receiving with your current plan? Are your premium costs or out-of-pocket expenses too high? Has your health changed, or do you anticipate needing medical care or treatment?
Open enrollment period is the time to determine whether your current plan will cover your treatment and what your potential out-of-pocket costs may be. If your current plan doesn’t meet your health-care needs or fit within your budget, you can switch to a plan that may work better for you.
What’s new in 2018?
The initial deductible for Part D prescription drug plans increases by $5 to $405 in 2018. Also, most Part D plans have a temporary limit on what a particular plan will cover for prescription drugs. In 2018, this gap in coverage (also called the “donut hole”) begins after you and your drug plan have spent $3,750 on covered drugs — a $50 increase over the 2017 initial coverage limit. It ends after you have spent $5,000 out-of-pocket, after which catastrophic coverage begins. However, part of the Affordable Care Act gradually closes this gap by reducing your out-of-pocket costs for prescriptions purchased in the coverage gap. In 2018, you’ll pay 35% of the cost for brand-name drugs in the coverage gap (65% discount) and 44% (56% discount) of the cost for generic drugs in the coverage gap. Each succeeding year, out-of-pocket prescription drug costs in the coverage gap continue to decrease until 2020, when you’ll pay 25% for covered brand-name and generic drugs in the gap.
Medicare beneficiaries who file individual tax returns with income that is greater than $85,000, and beneficiaries who file joint tax returns with income that is greater than $170,000, pay an additional monthly premium or Income-Related Monthly Adjustment Amount (IRMAA) for their Medicare Part D prescription drug plan coverage. In 2018, some of these beneficiaries will see their IRMAA increase by as much as 58%, while other beneficiaries may actually see their IRMAA drop. For more information, visit the Centers for Medicare & Medicaid Services website, https://www.cms.gov/.
Where can you get more information?
Determining what coverage you have now and comparing it to other Medicare plans can be confusing and complicated. Pay attention to notices you receive from Medicare and from your plan, and take advantage of help available by calling 1-800-MEDICARE or by visiting the Medicare website, https://www.medicare.gov/.
October Is National Disability Employment Awareness Month
Observed each year in October, National Disability Employment Awareness Month (NDEAM) is led by the Department of Labor’s Office of Disability Employment Policy (ODEP). The purpose of NDEAM is to build awareness about disability employment issues and celebrate the many and varied contributions of workers with disabilities. This year’s theme is “InclusionWorks.”
Employers, associations, and unions in all industries are encouraged to participate. To help organizations build awareness of this important initiative, the DOL has developed a number of resources, which can be accessed at dol.gov/odep/topics/ndeam/.
What is NDEAM?
National Disability Employment Awareness Month dates back to 1945, when Congress enacted a law declaring the first week in October “National Employ the Physically Handicapped Week.” In 1962, the word “physically” was removed to acknowledge the employment needs and contributions of individuals with all types of disabilities. In 1988, Congress expanded the week to a month and changed the name to National Disability Employment Awareness Month.
“By fostering a culture that embraces individual differences, including disabilities, businesses profit by having a wider variety of tools to confront challenges,” said Jennifer Sheehy, deputy assistant secretary of labor for disability employment policy. “Our nation’s most successful companies proudly make inclusion a core value. They know that inclusion works. It works for workers, it works for employers, it works for opportunity, and it works for innovation.”
How can organizations participate?
The DOL’s suggestions range from simple promotional activities, such as putting up a poster, to comprehensive programs, such as implementing a disability education program for all employees or organization members. Resources available on the website include press releases, posters, a sample proclamation for organizational and government leaders, articles for internal publications, sample social media content, and tips for improving social media accessibility.
What is the ODEP?
The Office of Disability Employment Policy is the only nonregulatory federal agency that promotes policies and coordinates with employers and all levels of government to increase workplace success for people with disabilities. Recognizing the need for a national policy to ensure that people with disabilities are fully integrated into the 21st century workforce, the Secretary of Labor delegated authority and assigned responsibility to the Assistant Secretary for Disability Employment Policy. ODEP is a subcabinet-level policy agency in the Department of Labor.
For more information on ODEP, visit dol.gov/odep/.
IRS warning about fake emails(CP2000) relating to the Affordable Care Act
Confronting the latest scheme to target taxpayers, the IRS and its Security Summit partners warned Thursday that scammers have sent fake emails purportedly containing CP2000 notices, which are used in the IRS’s Automated Underreporter Program. The IRS emphasized that it never sends these notices by email, and instead uses the U.S. Postal Service (IR-2016-123).
The notices contain an IRS tax bill supposedly related to the Patient Protection and Affordable Care Act and 2014 health care coverage. They use an Austin, Texas, post office box and request payments to the “I.R.S.” at the “Austin Processing Center.” The email also contains a payment link. The fraudulent email lists the letter number as “105C.”
The IRS explains that its procedures for taxpayers who owe additional tax require taxpayers to write checks payable to the “United States Treasury,” not the “I.R.S.,” as in the fake notice. It also advises taxpayers that they can check a notice’s validity on the IRS’s website by doing a search, and they can see sample notices at Understanding Your IRS Notice or Letter.
IRS impersonation scams take many forms: threatening telephone calls, phishing emails and demanding letters. Learn more at Reporting Phishing and Online Scams.
Taxpayers who receive this scam email should forward it to phishing@irs.gov and then delete it from their email account.
Taxpayers should always beware of any unsolicited email purported to be from the IRS or any unknown source. They should never open an attachment or click on a link within an email sent by sources they do not know.
The British Are Leaving! Why the Brexit Matters to Investors
Here’s an overview of the economic issues surrounding the Brexit, and what this historic
decision could mean for the United Kingdom, world trade, and international investors.
On June 23, citizens of the United Kingdom (England, Scotland, Wales, and Northern
Ireland) voted to leave the European Union by a margin of 52% to 48%.1 Though pre-election
polls suggested that public opinion was evenly divided, when the election results became
clear, financial markets around the world reacted swiftly to concerns about potential economic
ramifications of a British exit—or Brexit—from the EU.
On June 24, the British pound plunged more than 10% against the dollar to its lowest point
since 1985, before recovering slightly to settle nearly 8% lower at the end of the day.2 European
stocks suffered the worst sell-off since 2008, with the Stoxx Europe 600 Index tumbling 7%, and
the Japanese Nikkei Index posted a one-day drop of 7.9%.3–4 In the United States, the S&P 500 Index fell 3.6%, reversing year-to-date gains.5
Here’s an overview of the economic issues surrounding the Brexit, and what this historic
decision could mean for the United Kingdom, world trade, and international investors.
The EU and the Referendum
The European Union was formed after World War II to help promote peace through
economic cooperation. Over time, it became a common market, allowing goods and people to
move freely around 28 member states as if they were one country. The U.K. joined the trading
bloc in 1973, when there were only 9 member states.
In 2012, Prime Minister David Cameron rejected calls for a referendum on EU membership
but later agreed to hold one if the Conservative party won the 2015 election.6 The leaders of
all five major political parties campaigned to remain in the EU, including Cameron, warning
voters that leaving the EU was a leap into the unknown that could damage the U.K.’s economy
and weaken national security.7
Brexit supporters said leaving the EU allows the nation to take back control over business,
labor, and immigration regulations and policies. They also claimed the money being
contributed to the EU budget (a net contribution of 9.8 billion pounds in 2014) would be better
spent on infrastructure and public services in the U.K.8
Economic Expectations
The negative outlook for the U.K. economy depends on the terms of trade deals yet to
be negotiated with the EU and other nations. For example, the International Monetary Fund
(IMF) projects that U.K. gross domestic product could decline about 1.5% by 2021, assuming
the United Kingdom is granted access to the EU market quickly. Under a more adverse
scenario (which assumes trade defaults to World Trade Organization rules), the IMF projects a
precarious decline in GDP of about 4.5%.9
The U.K.’s departure strikes a serious blow to the EU, which has been beleaguered by debt
crises, a Greek bailout, the influx of millions of refugees, high unemployment, and weak GDP
growth. If trade activity and business conditions in the region deteriorate, it’s possible that the
U.K. and the EU could fall back into recession.
Next Steps
Once Article 50 of the Lisbon Treaty is invoked, the formal process of leaving the EU will
begin, opening up a two-year window of negotiations on the terms of the exit. The U.K. will
remain a member of the EU until it officially departs.10
The U.K. is the first nation to break away from the EU, but a larger concern is that anti-EU
factions in other nations could be empowered to follow suit. Moreover, Scotland could seek
independence from the U.K. in order to remain in the EU, and Northern Ireland might consider
reunification with the Republic of Ireland.11
What About Us?
The EU is the largest trading partner of the United States, so the Brexit complicates
pending trade negotiations and will require adjustments to existing agreements. It may also
take time to forge new deals with the U.K.12
U.S. companies with a significant presence in the U.K. could take a hit. With the British
pound weakening against an already strong dollar, U.S. exports become more expensive,
reducing foreign sales. The U.S. economy is not as vulnerable as the EU, but the U.S. Federal
Reserve may be more likely to delay its decision to raise interest rates until the consequences
of the Brexit on U.S. and global markets can be assessed.13
Brexit-related anxiety could continue to spark market volatility until the details are finalized
and the economic fallout is better understood, possibly for several years. Having a sound
investing strategy that matches your risk tolerance could prevent you from making emotional
decisions and losing sight of your long-term financial goals.
Investments are subject to market fluctuation, risk, and loss of principal. Investing internationally
carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic
and political risk unique to a specific country. This may result in greater share price volatility.
Shares, when sold, may be worth more or less than their original cost. The performance of an unmanaged
index is not indicative of the performance of any specific security. Individuals cannot invest in any
index.
1-2, 7, 10-11) BBC News, June 24, 2016
3, 5) Bloomberg.com, June 24, 2016
4) Reuters, June 24, 2016
6) The New York Times, June 25, 2016
8) CNNMoney, June 2, 2016
9) International Monetary Fund, 2016
12-13) The Wall Street Journal, June 24, 2016
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
Fed Rate Hike: What Does It Mean?
Federal funds rate raised
On Wednesday, December 16, 2015, the Federal Reserve raised the federal funds target rate, the interest rate at which banks lend funds to each other (typically overnight) within the Federal Reserve System. Since December 2008, the Fed had kept the range at a previously unheard-of level of 0% to 0.25% to help ensure that credit would be available to promote economic recovery. With this change, the target range will be 0.25% to 0.50%. In announcing its decision, the Federal Open Market Committee explained that the economy has been expanding moderately and is expected to continue expanding at a similar pace. The Committee also stated that it expects labor market conditions will continue to strengthen and that inflation will rise to 2% over the medium term.
Since the federal funds rate is a short-term rate that banks pay to borrow money, it is a factor in how banks set their own rates. The federal funds rate also serves as a benchmark for many short-term rates, such as saving accounts, money market accounts, and short-term bonds.
Additional increases ahead?
According to the Committee, “[i]n determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.” (Source: Federal Reserve Press Release, December 16, 2015) The Committee stated that it expects economic conditions will result in only gradual increases to the federal funds rate. This means that it’s possible there will be additional small increases in the coming year, though it is unlikely there will be a large jump.
What does it mean for you?
First, it’s important to put things in perspective. Despite all the headlines, by any measure this is a small increase. And the increase itself is a reflection of an improving economy.
The federal funds rate does have an effect on interest rates in general, though. So, here are some things to consider:
- Bond prices tend to fall when interest rates rise. Longer-term bonds may feel a greater impact than those with shorter maturities. That’s because when interest rates are rising, bond investors may be reluctant to tie up their money for longer periods if they anticipate higher yields in the future; and the longer a bond’s term, the greater the risk that its yield may eventually be superceded by that of newer bonds. Of course, while bonds redeemed prior to maturity may be worth more or less than their original value, if you hold a bond to maturity, you would suffer no loss of principal unless the issuer defaults.
- Rising interest rates can affect equities as well, though not as directly as bonds. For example, companies that have borrowed heavily in recent years to take advantage of low rates could see borrowing costs increase, which could affect their bottom lines. And if interest rates continue to rise to a level that’s more competitive with the return on stocks, investor demand for equities could fall.
- Rising interest rates could eventually help savers who have money in cash alternatives. Savings accounts, CDs, and money market funds are all likely to provide somewhat higher income. The downside, though, is that if higher rates are accompanied by inflation, these cash alternatives may not keep pace with rising prices.
- The prime rate, which commercial banks charge their best customers, is typically tied to the federal funds rate. Though actual rates can vary widely, small-business loans, adjustable-rate mortgages, home-equity lines of credit, credit cards, and new auto loans are often linked to the prime rate, which means that when the federal funds rate increases, the rates on these types of loans tend to go up as well.
- Although a number of other factors come into play, increases in the federal funds rate may also put some upward pressure on new fixed home mortgage rates.
The bottom line? Don’t overreact. But do take this opportunity to think about how rising interest rates could affect you, and consider discussing your overall situation with your financial professional.
All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund or from your financial professional. Read it carefully before investing.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.
There is no assurance that working with a financial professional will improve investment results. However, a financial professional who focuses on your overall objectives can help you consider strategies that could have a substantial effect on your long-term financial situation.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
This graph represents the effective federal funds rate from 1981 through 2014. Source: Board of Governors of the Federal Reserve System (www.federalreserve.gov), December 16, 2015