Crypto crash, inflation and other things you might have missed this week
- As Americans voted in crucial midterm elections, a crypto crash, inflation report and more happened.
- Here’s a rundown of events you may have missed while you wait to see who will control Congress.
- The events have consequences for the economy, the interest rate and your money.
Mid-term elections grabbed all the attention this week, so you may have missed the other news that could affect your money. And there was a lot of it, including another cryptocurrency crisis, a possible reversal in inflationary trends, layoffs (and surprise, hiring!) to early holiday trends.
While we wait for all the votes to be counted from Tuesday’s election to see if Republicans control all or part of Congress, we’ll review some of the week’s other highlights and what analysts are saying about them.
More importantly, we’ll break it down for what it could mean for the economy, the Federal Reserve, interest rates and your finances, and explain why analysts are saying to proceed with caution.
What happened to crypto?
While people were bracing for Democratic control of Congress to crash, the crash is actually happening elsewhere: in the crypto world.
It started with a report of irregularities on the balance sheet of trading company Alameda Research, which has ties to FTX, one of the largest crypto exchanges and which issues its own FTT token. They are technically separate companies, but are close because both were founded by Sam Bankman-Fried and Alameda runs trades on FTX. The balance showed that Alameda was heavily dependent on FTT.
The report prompted Binance, the largest crypto exchange by volume, to say on Sunday that it would liquidate its FTT token holdings. Although no one knew the exact amount of FTT tokens that would hit the market, it was enough to send FTT into a downward spiral that spread to other digital assets. FTX and Alameda reportedly faced a liquidity crisis as investors pulled their money.
After days of speculation, Binance offered to buy FTX for an undisclosed amount and pending due diligence by the company. Binance didn’t like what it saw. Binance withdrew its offer to buy FTX, and FTX is reportedly under investigation for its handling of customer funds.
FTX sought a capital infusion, but failed and declared bankruptcy on Friday. Bankman-Fried also resigned as CEO. FTX investor Sequoia Capital had already said late Wednesday that it was zeroing out its more than $210 million investment in FTX as the possibility of bankruptcy looms.
Fallout is expected to continue to spread as well.
“I expect we will continue to see credit contagion spread as we learn who had exposure to both FTX and Alameda,” said Cory Klippsten, CEO of Swan.com.
This still won’t kill crypto, but spurs Congress and regulatory agencies to act quickly with much-needed regulation to prevent something like this from happening again, said Ric Edelman, founder of the Digital Assets Council of Financial Professionals.
“It’s similar to the Titanic,” he said. “As tragic as it was, it did not end the cruise industry. Crypto is proving to be no different. We use every event to strengthen the system for the good of all.”
Is inflation under control?
Inflation eased more than expected in October, a promising sign, but economists say they are not getting excited just yet.
Headline annual inflation of 7.7% and 6.3% excluding the volatile food and energy sectors, or the core rate, remains well short of the Federal Reserve’s 2% target.
“The rigid backbone of US inflation finally cracked in October, although one month does not constitute a trend,” said BMO senior economist Sal Guatieri.
In addition, the numbers were skewed lower by how the Bureau of Labor Statistics indirectly calculates health insurance premiums using health insurers’ profits, which lag. In 2020, profits were higher because fewer people used their insurance due to the pandemic. Last year, usage increased, which cut into profits and caused health insurance in the consumer price index to fall.
“It’s either because people are paying less for insurance, not likely, or because insurers are paying out more to doctors, which means inflation should just show up there instead,” said Enduring Investments managing partner Michael Ashton.
“Insurance prices are adjusted once a year; postponement is not expected to last, says Diane Swonk, chief economist at KPMG.
Expenses for shelter:Rents are rising at the fastest rate in 40 years. Why it’s bad for inflation, the Fed and you.
Costs of staying healthy:Healthcare costs are about to skyrocket. Analysts explain the drastic impact of inflation.
Will the Fed stop rate hikes soon?
Not likely.
With inflation still far from the Fed’s 2% target, it will continue to raise its short-term benchmark fed funds rate, but possibly at a slower pace. Instead of the 0.75 point increase we’ve seen the last four times, the Fed may only raise interest rates by half a percentage point when it meets again on the 14th-15th. December.
The Fed needs more than one encouraging report to stop rate hikes, especially with energy prices still a wild card and the labor market still strong.
Higher winter bills:Diesel supply is falling, with few ways to increase it. How this affects the economy and you.
Cost of living increase:Social Security inflation adjustment to increase benefits 8.7% in 2023, largest since 1981
On December 5, the EU, the US and some of their allies plan to put a price cap on Russian oil. Although details are still being hammered out, some economists believe this could take supply out of the market and push prices up. Add in demand uncertainty if the world slips into recession, and energy prices could swing either way, economists said.
Several key economic reports, including the November jobs report on December 2 and the November CPI on December 13, are also due between now and the Fed meeting.
“Nothing can be taken for granted,” said ING International Chief Economist James Knightley.
What does this mean for my finances?
First, don’t expect to pay less for everyday goods, because the prices of necessities like food, shelter and energy made healthy gains.
But there is a silver lining if you like Christmas gifts. Most of the decline in inflation came more from areas of discretionary spending such as air travel, used cars, home furnishings, computers and clothing.
“This overall means that the worst of the supply chain problems are probably over for now,” said John Norris, chief economist at Oakworth Capital Bank. “It also means retailers and wholesalers are sitting on a lot of inventory. Of course, consumers are probably buying less stuff than they were. Taken together, businesses are likely to be discounting like crazy after Thanksgiving.”
Companies are already starting early with “Black Friday” sales.
Price reduction:The best Christmas shopping gift? Inflation relief. Why you can get it – and big discounts.
Consider climbing pains:The Federal Reserve’s rate hikes hurt Americans. But it is our only hope against inflation.
Just remember, though, when you buy all the discounted stuff, your borrowing costs go up. As the Fed continues to raise interest rates, consumer interest rates will follow in a ripple effect.
This week, the average interest rate on credit cards with balances hit 18.43%, the highest since the Fed began tracking in 1994, and is likely to continue rising with Fed Chairman Jerome Powell promising higher rates.
Some of this can be accounted for by higher interest rates on savings, but these interest rates tend to rise more slowly than interest rates on debt. They currently hover around 2% to 3.5%.
What does this mean for the stock markets?
Stock markets cheered the easing of inflation, with the Dow closing Thursday up 3.7%, the Standard & Poor’s 500 up 5.4% and the Nasdaq up nearly 7.4%.
But beyond that one report, analysts warn that the economic outlook is still not good.
“While market optimism is understandable based on the improved data, investors still face another 50 to 100 basis points of rate hikes,” said Mike O’Rourke, JonesTrading’s chief market strategist, who says this will hurt the company’s earnings.
“This is not an environment that will revive social media ad sales, fix Meta Platform’s business model, eliminate Twitter as a Tesla distraction or allow Amazon to grow into its bloated delivery network.”
Holiday worries:Holiday shoppers are wary of spending because of inflation. Small business owners are concerned.
Calm down:The Fed makes another rate hike, but hints at a pullback
What is the outlook for jobs?
Many economists forecast the unemployment rate to rise to 5%-6%, from 3.7% in October, as the Fed induces a recession to stem red-hot inflation. Some estimate that this will mean around 2 million lost jobs.
Companies are already cutting jobs. Salesforce let go several hundred employees on Monday, Coinbase shed 60 workers, Citigroup and Barclays reportedly cut a combined 250 jobs, and Meta still plans to cut 13% of its workforce, or more than 11,000 jobs. Amazon launched a cost-cutting review, which could result in job losses. Twitter CEO Elon Musk has reportedly said the company could go bankrupt if it doesn’t start generating more cash.
The only place that seems to be on a hiring spree is the Internal Revenue Service (IRS), which was given $80 billion in new funding in the Inflation Reduction Act.
“In addition to the more than 4,000 people recently hired to fill critical customer service representative positions, the Internal Revenue Service is now seeking over 700 new employees to assist taxpayers at Taxpayer Assistance Centers across the country,” it said Wednesday.
Medora Lee is a USA TODAY money, markets and personal finance reporter. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
