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The Federal Reserve is widely expected to hike rates by a smaller one-quarter of a percentage point at this week’s policy meeting as inflation starts to ease.
Still, another interest rate increase will make borrowing more expensive.
Here’s what that means for your wallet.

The Federal Reserve is widely expected to announce its eighth consecutive rate hike at this week’s policy meeting. 
This time, Fed officials likely will approve a 0.25 percentage point increase as inflation starts to ease, a more modest pace compared with earlier super-size moves in 2022.

Still, any boost in the benchmark rate means borrowers will pay even more interest on credit cards, student loans and other types of debt. On the flip side, savers could benefit from higher yields.
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“The good news is that the worst is over,” said Yiming Ma, an assistant finance professor at Columbia University Business School.
The U.S. central bank is now knee-deep in a rate hike cycle that has raised its benchmark rate by 4.25 percentage points in less than a year.
Although inflation is still above the Fed’s 2% long-term target, pricing pressures have “come down substantially and the pace of rate hikes is going to slow,” Ma said.

The good news is that the worst is over.

assistant finance professor at Columbia University Business School

The goal remains to tame runaway inflation by increasing the cost of borrowing and effectively pump the brakes on the economy.

What the Fed’s rate hike means for you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Whether directly or indirectly, higher Fed rates influence borrowing costs for consumers and, to a lesser extent, the rates they earn on savings accounts.
Here’s a breakdown of how it works:
Credit cards
Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, too, and credit card rates follow suit. Cardholders usually see the impact within a billing cycle or two.
After rising at the steepest annual pace ever, the average credit card rate is now 19.9%, on average — an all-time high. Along with the Fed’s commitment to keep raising its benchmark to combat inflation, credit card annual percentage rates will keep climbing, as well. 
Households are also increasingly leaning on credit to afford basic necessities, since incomes have not kept pace with inflation. This makes it even harder for the growing number of borrowers who carry a balance from month to month.

“Credit card balances are rising at the same time credit card rates are at record highs; that’s a bad combination,” said Greg McBride, chief financial analyst at Bankrate.com.
If you currently have credit card debt, tap a lower-interest personal loan or 0% balance transfer card and refrain from putting additional purchases on credit unless you can pay the balance in full at the end of the month and even set some money aside, McBride advised.
Mortgages
Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
“Despite what will likely be another rate hike from the Fed, mortgage rates could actually remain near where they are over the coming weeks, or even continue to trend down slightly,” said Jacob Channel, senior economist for LendingTree.
The average rate for a 30-year, fixed-rate mortgage currently sits at 6.4%, down from mid-November, when it peaked at 7.08%.

Still, “these relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” Channel added.
Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rises, the prime rate does, as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.65% from 4.11% a year ago.
Auto loans
Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans. So if you are planning to buy a car, you’ll shell out more in the months ahead.
The average interest rate on a five-year new car loan is currently 6.18%, up from 3.96% at the beginning of 2022.

Boonchai Wedmakawand | Moment | Getty Images

“Elevated pricing coupled with repeated interest rate increases continue to inflate monthly loan payments,” Thomas King, president of the data and analytics division at J.D. Power, said in a statement.
Car shoppers with higher credit scores may be able to secure better loan terms or look to some used car models for better pricing.
Student loans
Federal student loan rates are also fixed, so most borrowers won’t be affected immediately by a rate hike. The interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and 2.75% in 2020-21. Any loans disbursed after July 1 will likely be even higher.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers will also pay more in interest. How much more, however, will vary with the benchmark.
For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the Education Department expects to happen sometime this year.
Savings accounts
On the upside, the interest rates on some savings accounts are higher after a run of rate hikes.
While the Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.33%, on average.

Guido Mieth | DigitalVision | Getty Images

Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4.35%, much higher than the average rate from a traditional, brick-and-mortar bank, according to Bankrate.
“If you are shopping around, you are finding the best returns since the great financial crisis. If you are not shopping around, you are still earning next to nothing,” McBride said.
Still, any money earning less than the rate of inflation loses purchasing power over time, and more households have less set aside, in general.
“The best advice is pick up a side hustle to bring in some additional income, even if it’s just temporary, and pay yourself first with a direct deposit into your savings account,” McBride advised. “That’s how you are going to create the pathway to be able to save.” 
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There is pent-up post-pandemic demand for medical technology, which bodes well for the sector’s stocks, says Andrew Graham, founder and managing partner of Jackson Square Capital.
Investors should also watch the alternative energy field, as more governments commit funds.
The usual go-to for investors seeking safety — consumer staples — may be in trouble soon, Graham notes.

Dexcom’s latest continuous glucose monitoring (CGM) system, to launch in February, will be 60% smaller and warm up 75% faster than previous versions such as this one, pictured on April 8, 2019.
Ben Birchall – Pa Images | Pa Images | Getty Images

Last year was tough for most investors. Nearly every sector suffered losses except for energy, while defense contractors and pharmaceutical companies were other examples of outliers.
Fortunately, the first few weeks of 2023 have been better, thanks partly to some encouraging data showing that inflation and wage growth are beginning to decelerate. Yet, as the earnings season continues to play out and corporate layoffs pile up, questions are mounting about the strength of the U.S. economy.

In addition, with policymakers devoted to keeping interest rates “higher for longer,” stocks could come under more pressure in the short term. Yet, at some point, the focus will shift to the future.
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Indeed, while much of the above paints a bleak picture, the outlook is more favorable for select sectors. That includes medical technology and alternative energy, which are being propelled by some beneficial tailwinds.
By contrast, one sector that traditionally holds up during challenging economic times — consumer staples — may struggle over the next few years. Let’s take a closer look.

Pent-up demand for medical technology

During the pandemic, large swaths of technology took off.

Medical technology was not one of them, with hospitals putting many elective procedures and surgeries related to non-life-threatening conditions on hold. That has created a lot of pent-up demand today.
Additionally, many firms in this space could soon benefit from new products that help treat ailments, including diabetes, sleep apnea and arrhythmia, that plague millions of people. It’s also worth noting that higher interest rates are less impactful for medical technology. Unlike other industries that borrow large sums to chase growth, medical technology generally isn’t heavily leveraged.

Names worth considering include Insulet (PODD), whose primary offering is a wearable pod that allows diabetes patients to forgo daily insulin injections. It recently cited strong demand for its newest version of that product.
Dexcom (DXCM) is another company addressing the needs of diabetes patients through a glucose-monitoring device. Its latest model, which is set to launch in February, is 60% smaller and warms up 75% faster than previous versions.
In the meantime, a subsidiary of Inspire Medical Systems (INSP), Inspire Sleep, has what could be a game-changing sleep apnea treatment. It’s a small device that doctors place within the patient, a contrast to how medical professionals dealt with the issue until very recently: with a clunky, awkward and obtrusive CPAP apparatus.

Government support for alternative energy grows

Whether the Inflation Reduction Act will do anything to bring down costs is a matter worth debating. But less arguable is that it is the latest example of the massive amount of policy support that exists from governments around the world for green tech firms focused on producing alternative energy sources.
The U.S. Department of the Treasury is still hammering out the details about who gets what. We’ll likely learn more sometime during the first quarter. But make no mistake, several companies that have been surprisingly resilient during the most recent downturn will have an influx of new capital at their disposal to improve their fortunes even more.
Among those that could do well are Array (ARRY), a utility-scale solar panel producer. Also worth keeping an eye on is SolarEdge (SEDG), which is focused more on the residential market in Europe.

Consumer staples not a best bet anymore

Stocks of Johnson & Johnson, Kimberly-Clarke and Procter & Gamble( — which makes many consumer staple products such as Dawn dish soap — may have hit a valuation ceiling.
Joe Raedle | Getty Images News | Getty Images

Last year, many investors flocked to defensive, income-paying consumer staples. And for the most part, that strategy paid off, with the Vanguard Consumer Staples ETF easily outpacing broad market indexes over the last 12 months, all while providing a dividend of about 2.4%.
However, in recent months, valuations for many of these stocks have become far too rich. In fact, consumer staples are as expensive as they have ever been relative to the S&P 500 Index.
Therefore, anyone investing for growth (versus dividends) should reconsider their defensive holdings. Indeed, the likes of Johnson & Johnson (JNJ) — which makes many consumer staple products despite technically being a health-care stock — Proctor & Gamble (PG) and Kimberly-Clarke (KMB) have likely hit a valuation ceiling.

A Warren Buffett moment?

Expect indexes to give back some of this year’s early gains in the weeks ahead and perhaps test 2022 lows. In general, though, we won’t see a Warren Buffett-type buying moment on the horizon. That’s because sentiment is already bearish and positioning is light, which should limit the downside overall.
Still, a couple of sectors have the potential for outsize returns once the challenges associated with higher interest rates and a challenging economic landscape begin to fade. 
– By Andrew Graham, founder and managing partner of Jackson Square Capital

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Smart Tax Planning

The digital currency industry lost nearly $1.4 trillion in 2022 after a slew of bankruptcies and liquidity issues.
Experts cover what to know about claiming crypto losses on your 2022 tax return.

A worsening macroeconomic climate and the collapse of industry giants like FTX and Terra have weighed on bitcoin’s price this year.
STR | Nurphoto via Getty Images

Crypto losses can offset investment gains

One of the silver linings of plummeting assets is the chance to leverage tax-loss harvesting, or using losses to offset gains.
If you sold crypto at a loss, you can subtract that from other portfolio profits, and once losses exceed gains, you can trim up to $3,000 from regular income, explained Lisa Greene-Lewis, a certified public accountant and tax expert with TurboTax.
Plus, there’s currently no “wash sale rule” for crypto. The rule blocks the tax break if you buy a “substantially identical” asset 30 days before or after the sale.

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You calculate your loss by subtracting your sales price from the original purchase price, known as “basis,” and report the loss on Schedule D and Form 8949 on your tax return. 
If your crypto losses exceed other investment gains and $3,000 of regular income, you can use the rest in subsequent years, Greene-Lewis said. But it’s easy to lose track of carryover losses and miss future opportunities to lower taxes, she warned.

‘Wait and see’ before claiming bankruptcy losses

With several crypto exchange and platform collapses in 2022, you may have lingering questions about reporting losses on your taxes this season.
CPA and tax attorney Andrew Gordon, president of Gordon Law Group, said there are typically two concerns: possibly claiming a loss for missing deposits and reporting income from rewards or interest.

It may make sense to file an extension if you had significant holdings on any of these platforms to see if there’s further clarity.

Andrew Gordon
President of Gordon Law Group

In some cases, you may be able to claim a capital loss, or bad debt deduction, and write off what you spent on the asset. But it must be a “complete loss” to claim it, Gordon said. If you wind up getting, say, 10% back after claiming a bad debt deduction, that 10% becomes regular income. 
While there are several options for 2022, he’s generally telling clients to “wait and see” what happens. “It may make sense to file an extension if you had significant holdings on any of these platforms to see if there’s further clarity,” he said.

You must report crypto — even if you don’t get tax forms

Since 2019, the IRS has included a yes-or-no question about crypto on the front page of the tax return. The agency has also pursued customer records by sending court orders to several exchanges.
“The IRS has over five years of information on taxpayers,” Losi said, so if they find out you have crypto and you haven’t been reporting, you may be targeted, he said. More

Political consequences for Democrats. A historic rise in delinquencies.
Here’s what experts predict will happen if the Supreme Court rules against Biden’s student loan forgiveness plan and the relief never materializes.

Bloomberg Creative | Bloomberg Creative Photos | Getty Images

‘Historically large’ hike in delinquencies and defaults

U.S. Department of Education Undersecretary James Kvaal said in a recent court filing that if the government isn’t allowed to provide debt relief, there could be a “historically large increase in the amount of federal student loan delinquency and defaults as a result of the COVID-19 pandemic.”
Despite student loan borrowers being offered forbearances during previous natural disasters, Kvaal wrote, default rates still skyrocketed when payments resumed.

The pandemic-era relief policy pausing federal student loan payments has been in effect since March 2020, and payments aren’t scheduled to resume until after the litigation over the president’s plan is resolved or at the end of August — whichever comes sooner.
″[T]he one-time student loan debt relief program was intended to avoid” skyrocketing default rates, Kvaal added.

The borrowers most in jeopardy of defaulting are those for whom Biden’s student loan forgiveness plan would have wiped out their balance entirely, Kvaal said.
The administration estimated its policy would do so for around 18 million people.
“These student loan borrowers had the reasonable expectation and belief that they would not have to make additional payments on their federal student loans,” Kvaal said. “This belief may well stop them from making payments even if the Department is prevented from effectuating debt relief.”

‘Severe’ political consequences

Astra Taylor
Source: Isabella De Maddalena

Restarting federal student loan payments without delivering forgiveness would lead to “severe” political consequences for Democrats, said Astra Taylor, co-founder of the Debt Collective, a union for debtors.
“[Biden] will be launching his 2024 reelection campaign as America’s debt collector,” she said.
If the “ultra-conservative U.S. Supreme Court” blocks the president’s plan, Taylor said, Biden must explore other legal ways to deliver relief to borrowers.
She pointed to the possibility of the president using a different law to justify his plan, such as the Higher Education Act of 1965, which states that the Education Department can “enforce, pay, compromise, waive, or release any right, title, claim, lien” related to federal student loans.

Currently, the Biden administration is using the Heroes Act of 2003 to argue that it has the authority to cancel student debt.
That law allows the Education Department to make modifications to federal student loan programs during national emergencies. Critics accuse the administration of using the coronavirus pandemic to fulfill a campaign promise and say the relief is not targeted to those who have suffered financially because of Covid.
Another path the president could take would be to try to indefinitely extend the pandemic-era pause on federal student loan payments, said higher education expert Mark Kantrowitz.
That move, Kantrowitz said, is “more likely to survive legal challenge.”

‘A disastrous blow to Black Americans’

The country’s $1.7 trillion student loan crisis has hit Black Americans especially hard.

Black student loan borrowers owe $7,400 more, on average, at graduation than their white peers, a Brookings Institution report found.
That inequity only gets worse with time: Black college students owe, on average, more than $52,000 four years after graduation, compared with around $28,000 for the average white graduate.
If Biden’s student loan forgiveness fell through, it would be a “disastrous blow to Black Americans,” said Wisdom Cole, national director of the youth and college division at the NAACP.
“The racial wealth gap will widen, and the vicious cycle of economic inequality will continue,” Cole said. “If our leaders truly believe that Black lives matter, they should understand that failure is not an option.”

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A logo of Meta Platforms Inc. is seen at its booth, at the Viva Technology conference dedicated to innovation and startups, at Porte de Versailles exhibition center in Paris, France June 17, 2022.
Benoit Tessier | Reuters

As the earnings season rolls on, many companies are hinting at a challenging year ahead.
Meanwhile, it can be intimidating to invest in such a stressful environment. To ease the process, here are five stocks chosen by Wall Street’s top analysts, according to TipRanks, a platform that ranks analysts based on their past performances. 

related investing news

an hour ago

Alphabet 

After languishing in the stock market last year due to numerous factors affecting the tech sector, Alphabet (GOOGL) will report its seasonally weakest quarter of the year on Thursday. From relatively low digital ad spending and regulatory crackdowns on digital ads to increasing costs and interest rates, Google endured it all. Needless to say, the company expects sequential growth deceleration in the fourth quarter. 
Nonetheless, Monness, Crespi, Hardt, & Co. analyst Brian White expects the results to be in line with his expectations. The analyst anticipates a 10% sequential sales increase, implying a quarter-over-quarter deceleration in growth. This is notably lower growth than what is usually expected of a typical Alphabet fourth-quarter report (17% on average in the past four December quarters).  
However, although Google Advertising revenue growth was significantly hurt by the slowdown in digital ad spending, White notes that “Alphabet proved more resilient than Meta and Snap that were   disproportionately impacted by Apple’s privacy initiatives, most notably App Tracking Transparency, along with other factors.” 
The analyst expects year-over-year digital ad spending comps to improve in the second half of the year. Also, White’s estimates suggest that Google Ad revenues should return to growth in the second quarter of 2023. (See Alphabet Blogger Opinions & Sentiment on TipRanks) 
White reiterated a buy rating on the stock with a price target of $135. The analyst holds the 66th position among almost 8,300 analysts followed on TipRanks. His ratings have been profitable 64% of the time, and each rating has generated an 18% average return.

Meta Platforms 

Another technology name in Brian White’s list is Meta Platforms (META), which is scheduled to report its fourth-quarter earnings on Wednesday “after taking a savage beating in 2022,” according to the analyst’s words. 
The headwinds that the company faced last year, including Apple’s privacy initiatives with App Tracking Transparency, the slowdown in advertisement spending, exorbitant investments in the metaverse, and regulatory scrutiny, are not expected to entirely dissipate in 2023. (See Meta Platforms Website Traffic on TipRanks) 

Over the past 52-weeks, Meta shares were cut nearly in half. Gains in early 2023, are helping to trim last year’s losses.

However, a leaner cost structure, thanks to its significantly downsized business and other initiatives, as well as softening challenges, will be a relief this year. Additionally, in the long run, White expects Meta to benefit from the secular digital ad trend and innovations in the metaverse.  
“With sales up 34% per annum over the past five years, EPS turning in a 32% CAGR and generating an   attractive operating margin, we believe Meta Platforms should trade at a premium to the market and tech sector in the long run; however, we expect the current macroeconomic and geopolitical environment will weigh on advertising spending in the coming quarters,” observed White, who reiterated a buy rating on the stock with a price target of $150. 

WNS 

India-based business process management company WNS (WNS) is next on our list. The company’s solid sales pipeline reflects a healthy demand environment that overshadows economic headwinds. This gives Barrington analyst Vincent Colicchio the “confidence in its ability to generate solid revenue and adjusted EPS growth in fiscal 2023 and beyond.” 
The company recently reported its quarterly earnings, where it beat Street estimates, thanks to the strong demand for its services and products. “As of the close of fiscal Q3/23, the company’s sales pipeline was strong and at record levels and sales cycles declined sequentially, reflecting strong demand. Sales cycles have declined in recent quarters as clients accelerated decisions to improve efficiency ahead of a potential recession,” observed Colicchio. (See WNS Stock Chart on TipRanks) 
The analyst was encouraged by the fact that WNS did not realize any meaningful pressures from the economic headwinds that have hung heavily on peers. Challenges like volume pressures, productivity issues, delays and cancelations, etc., did not deter the business from its growth path. 
Colicchio reiterated a buy rating on the stock with a price target of $97 and even raised his fiscal 2023 and fiscal 2024 earnings-per-share forecasts to $3.86 and $4.14 from $3.78 and $4.12, respectively. 
The analyst currently stands at #282 among almost 8,300 analysts tracked by TipRanks. Moreover, 62% of his ratings have been profitable, each generating a 13.1% average return. 

BRC 

BRC (BRCC) is a unique company. The operator of the Black Rifle Coffee Company is founded and led by military veterans. The company was built to serve premium coffee, content and merchandise to active military, veterans and first responders. 
BRC has been on Tigress Financial Partners analyst Ivan Feinseth’s buy list in recent weeks. The analyst has a $19 price target on the company. (See BRC Insider Trading Activity on TipRanks) 
Feinseth is confident that the company is a solid emerging high-growth lifestyle investment opportunity, serving a loyal and niche customer base and offering meaningful growth opportunities through product innovation and a digitally native omnichannel distribution strategy. 
BRCC recently announced that it will “shift focus from the near-term buildout of restaurants (Outpost) and DTC (Direct-to-consumer) sales to a faster growth and higher return opportunity in the expansion of the sales of its RTD (Ready-to-drink) beverages packaged and premeasured (k-cup) coffee through an increasing FDM (food drug and mass-market) focus,” explained the TipRanks-rated 5-star analyst. 
Feinseth’s convictions can be trusted, given his 185th position among nearly 8,300 analysts in the TipRanks database. This apart, his track of 63% profitable ratings, each rating delivering 12.1% average returns, is also worth considering. 

Starbucks 

The world’s largest specialty coffee chain retailer Starbucks (SBUX) is also one of Ivan Feinseth’s favorite stocks for this year. The company continues to put its numerous growth drivers into action. This includes new product development, a global coffee alliance and ongoing store growth. Starbucks also enjoys strong brand equity and a committed customer base, which will help drive its new reinvention plan for long-term growth, according to the analyst’s observations. 
“SBUX continues to improve operating efficiencies and customer experience by leveraging ongoing   innovation, new technologies, and new store formats,” said Feinseth, reiterating a buy rating on Starbucks with a price target of $136.  
Moreover, the company’s focus on expanding its product portfolio to include new health and wellness beverages, teas, and core food offerings can boost customer traffic during later hours. (See Starbucks’ Dividend Date & History on TipRanks) 
Staying up to date with the changing industry trends, Feinseth noted that Starbucks is investing in new   digital initiatives to improve customer service, supply-chain management, its loyalty program, and mobile ordering and e-commerce capabilities.  

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The U.S. unemployment system buckled in the early days of the Covid-19 pandemic.
Historically, high claims ran headlong into the reduced resources of state workforce agencies, but in this case they have also had to beat back elevated unemployment fraud and new CARES Act programs.
The system hasn’t fully recovered — 78% of first benefit payments were issued in a “timely” manner in December, down from about 97% in March 2020.

People wait in line to attend a job fair at SoFi Stadium on Sept. 9, 2021, in Inglewood, California.
Patrick T. Fallon | Afp | Getty Images

These days the U.S. unemployment system is somewhat of an anomaly.
Almost three years after the Covid-19 pandemic caused the worst jobless crisis in the U.S. since the Great Depression, unemployment has recovered to near-historic lows. Applications for unemployment insurance have been at or below their pre-pandemic trend for the better part of a year.

Yet Americans who need jobless benefits aren’t getting them quickly — a dynamic at odds with an apparent lack of stress on the system.
The federal government considers a first payment “timely” if states issue funds within 21 days of an initial claim for benefits. In March 2020, 97% of payments were timely; today, the share is 78%, on average, according to U.S. Department of Labor data.
The Labor Department views an 87% share as the barometer of success for first-payment timeliness.

The result is worse for workers who file an appeal over a benefit decision. For example, less than half — 48% — of hearings in a lower appeals circuit are resolved within 120 days. The pre-pandemic share was almost 100%, according to Labor Department data.
To be sure, delays aren’t as bad as they used to be. At the pandemic-era nadir, just 52% got a “timely” first payment of unemployment insurance, for example. They also vary significantly between states, which administer benefits to laid-off workers, and the delays are getting shorter.

But the delays are still “significant,” the Government Accountability Office said in a June report.
They can have real-world effects: deferred bills, postponed rent, accrued credit card debt, raided retirement savings, loans from family and friends for living costs, and a reliance on community food pantries to subsist before payments arrive, the GAO said.

Unemployment experts chalk up the discrepancy — i.e., longer delays despite fewer claims to process — to vestiges of the pandemic and state agencies that were already running on financial fumes heading into the crisis.
“Even though new claims are low, states are still digging out from the workload during the pandemic,” said Nick Gwyn, an unemployment insurance consultant for the Center on Budget and Policy Priorities and a former staff director for the House Ways and Means subcommittee overseeing jobless benefits.

Pandemic pushes system ‘out of whack’

It’s “hard to exaggerate” the amount of work state unemployment agencies had to do in the months and years after February 2020, Gwyn said.
Unemployment claims spiked as businesses closed amid stay-at-home orders to contain the virus’ spread. By early April, workers were filing about 6 million claims in a single week. Before this, the prior record was 695,000 claims in 1982. By the end of 2020, 40 million people had received benefits.

Meanwhile, the CARES Act created new programs to enhance the safety net: a $600-a-week bump in typical benefits, an extension of benefits to gig workers and others who are typically ineligible for aid, and an increase in the duration of assistance.
These programs were reupped and morphed many times between March 2020 and Labor Day 2021.
States were initially doing all this work — managing a deluge of claims, fielding worried calls from applicants, implementing and tweaking new programs, and issuing an unprecedented amount of funding — with bare-bones staffing and resources.
More from Personal Finance:Amid big firm layoffs, tech jobs are still hot in 2023What workers need to know about filing for unemployment benefitsDespite a wave of layoffs, it’s still a good time to get a job
Administrative funding for state unemployment systems fell by 21% between fiscal years 2010 and 2019, according to the GAO. (The decline was an even larger [32%] after accounting for inflation.)
Federal funding for these programs ultimately hit lows dating to the 1970s in the run-up to the pandemic, said Andy Stettner, deputy director for policy at the Labor Department’s Office of Unemployment Insurance Modernization.
Funding declined 21% in the most recent fiscal year, to $2.6 billion in 2022 from $3.3 billion in 2021, Stettner said.

The downward trend over this time reflects an underlying tension in the system’s structure. States get funding based on their administrative workload, like the volume of claims states are paying.
At present — as in the years after the “great recession” — states are getting lower relative levels of federal funding due to more muted jobless claims. About 186,000 people filed an initial claim for benefits in the week ended Jan. 21, according to the Labor Department, fewer than the roughly 200,000 or so who filed a weekly claim at the outset of the pandemic.
That reduced funding is running headlong into a morass of leftover administrative work, some of which was sidelined as states rushed to implement CARES Act programs.
It’s a topsy-turvy situation that’s “out of whack” from the norm, Stettner said.

“The states were very threadbare going into the pandemic, which left them very unprepared,” Stettner said. “One reason this backlog built up: [States] had to put off certain work when all the new claims were coming in, and they’re just trying to catch up to it now.”
Part of the current administrative burden is a kind of forensic accounting of funding issued during the pandemic, said Michele Evermore, a senior fellow and unemployment expert at The Century Foundation.
For example, states are assessing the extent to which they may have overpaid benefits, she said.
That’s especially true for one CARES Act program, Pandemic Unemployment Assistance. Some state agencies didn’t realize they had to reassess — on a weekly basis — a worker’s qualifying reason for benefits, whether it be illness, caring for an ill individual, child care, or a disruption in gig work and self-employment. Now, they’re asking PUA recipients to verify they are indeed qualified for all the benefits they received, Evermore said.

Criminals ‘got hooked’ on unemployment fraud

There have been other complicating factors, experts said.
States also have encountered historic levels of fraud. Organized crime rings and con artists hacked state systems to take advantage of the mayhem with hopes of getting access to relatively rich levels of federal aid.
“Fraudsters had a huge role in making things harder and slower,” Evermore said.

Much of that was via identity theft whereby criminals stole personal data to claim benefits in others’ name.
In fiscal year 2021, “improper” benefit payments were estimated to increase over nine-fold, to about $78.1 billion, from $8 billion the prior year, according to the GAO. The multiyear sum may exceed $163 billion or more, the Labor Department said.  
Criminals are still attacking the system, experts said. They’ve adopted new tactics, too, such as “bank account hijacking,” in which hackers identify claimants receiving unemployment insurance and funnel their weekly cash infusion into a new, fraudulent bank account, Evermore said.

“There are some criminals that kind of got hooked on this and they’ll continue to try,” Stettner said of the fraud.
States have clamped down by implementing various fraud controls like better identity verification. In some cases, those controls have delayed legitimate claims from being issued in a timely manner. A claim flagged for any reason generally must be vetted by a human at the state workforce agencies.
This all amounts to a delicate balancing act: Protecting funds from flowing to criminals or preventing claimants from getting too much money, while also trying to get assistance to people who need it quickly.

What happens to the UI system if we do have another recession? It’s a very troubling question.

unemployment insurance consultant for the Center on Budget and Policy Priorities

Agencies have also had to shift personnel to handle backlogs in the appeals process, for example, reducing resources to ensure that first payments are delivered on time, Stettner said.
The Labor Department has been working with states to automate procedures, where possible, to boost efficiency, Stettner said.
“There are many states that continue to struggle to meet that acceptable level of performance,” he added. “It’s not a situation we want to see.”
However, he said he believes “we’re moving to the latter stages” of the delays.

A system unprepared for another recession

Gwyn agrees that things are moving in the right direction. But amid concerns of another economic downturn looming — accompanied by the threat of higher joblessness — the unemployment system isn’t in a good position to respond if that does happen in the near term.
That outcome isn’t a given, of course.
The Federal Reserve is raising borrowing costs for consumers and businesses in an attempt to pump the brakes on the U.S. economy to tame high inflation. The central bank sees a pathway to a so-called soft landing that averts recession.
 “What happens to the UI system if we do have another recession?” Gwyn said. “It’s a very troubling question.
“You put all that together and it’s a system that’s nowhere close to ready for another recession,” he added.

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The Salesforce West office building in San Francisco, California, on Wednesday, Jan. 25, 2023.
Marlena Sloss | Bloomberg | Getty Images

Company: Salesforce (CRM)

Business: Salesforce is a global leader in customer relationship management (“CRM”) technology that brings companies and their customers together. It was founded in 1999 and is a pioneer in the cloud software space. It started as a tool to help sales teams to increase their productivity while also improving the end customer experience. Over the last 20 years, they have expanded into other areas to help companies connect with and better serve customers, including Sales Cloud, Marketing & Commerce Cloud, Platform & Other, Integration Cloud, Analytics Cloud and Service Cloud.
Stock Market Value: $164.5B ($164.52 per share)

related investing news

Activist: ValueAct Capital

Percentage Ownership: n/a
Average Cost: n/a
Activist Commentary: ValueAct has been a premier corporate governance investor for over 20 years. The firm’s principals are generally on the boards of half of ValueAct’s core portfolio positions and have had 55 public company board seats over 22 years. ValueAct has previously commenced activist campaigns at 25 information technology companies and has had an average return of 45.98% versus 18.70% for the S&P 500 over the same period.

What’s Happening

On Jan. 27, Salesforce announced that it is appointing three new directors to the board, one of whom is Mason Morfit, CEO and CIO of ValueAct Capital.

Behind the Scenes

This is a very interesting activist situation. Four major activists in the same company at once: ValueAct, Starboard Value, Inclusive Capital and Elliott Management. Marc Benioff needs a CRM just to keep track of the activists in his stock. Adding Morfit to the board of Salesforce makes a ton of sense regardless of the activist environment.

ValueAct has extensive experience in technology companies like Salesforce, most notably Microsoft and Adobe. Morfit was on the board of Microsoft from March 2014 through the end of 2017 as the company transformed into a cloud-based enterprise software business. During that transition, the board set cloud targets for management and tied them to a unique executive compensation plan that paid out at stretch goals for the cloud. Microsoft blew away those cloud targets and annual cloud revenue went from approximately $1 billion in 2013 to over $100 billion today. The company’s market value went from approximately $250 billion to $1.8 trillion. At Adobe, ValueAct took a board seat as the company transformed from a package software provider to a subscription cloud service. Adobe went from a $14 billion market cap when ValueAct invested to $168 billion today. ValueAct also presently has positions in Insight Enterprises (NSIT), one of the largest software distribution companies where ValueAct partner Alex Baum is on the board, and Trend Micro, a cloud cybersecurity company. When you get a ValueAct partner on the board, you get the whole ValueAct team and the collective experience of the 55 public company board seats they have taken to work on strategy, succession, compensation, financial planning and analysis, M&A, capital allocation and cost reduction.
Salesforce’s transformation has the potential to be as notable as many of ValueAct’s other successful investments, even if the playbook is customized. Salesforce has a leading market position and has historically had strong annual top line growth. But, as Starboard noted in its presentation on the company, Salesforce has underperformed peers, the technology sector and broader market over the past three years and is valued significantly below the peer median multiple on forward revenue (3.8x vs. 6.7x for peers) and free cash flow expectations (18.7x vs. 22x for peers). This valuation discount can be largely attributed to Salesforce’s subpar mix of profitability and growth, which has come down significantly from its historic levels. As shown in Starboard’s detailed presentation, Salesforce peers are operating at a “rule of 50” – the average revenue growth plus adjusted operating margins of peers equals 49.4. Salesforce currently has a revenue growth rate of 17.0% and 20.4% operating margins, which brings it to 37.4 combined. Morfit has experience helping management increase both growth and margins from a board level, and both can be improved at Salesforce.
The looming question is whether he will initially be doing this with an activist cloud hanging over the company’s head in the form of a proxy fight by one of the other activists involved. We have followed every activist campaign over the past 17 years. We strongly believe that appointing Morfit to the board certainly decreases the chance of another activist being successful in a proxy fight, but to be clear, that is not why the company appointed him. Based on ValueAct’s history and philosophy, the firm would not take a board seat unless it had a large investment, and the firm would not make a large investment until it evaluated the company for many months. It likely had been engaging with Salesforce management for several months, and this appointment may have happened just as a threatened proxy fight was reported. Moreover, there is no way a company the size of Salesforce would appoint an activist to their board without previously having deep discussions with him or for the primary purpose of heading off a potential proxy fight.  
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Squire is also the creator of the AESG™ investment category, an activist investment style focused on improving ESG practices of portfolio companies.

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There’s a lot of speculation about whether a recession is coming in 2023.
Some economists say the country is already experiencing a “rolling recession,” rather than a broad contraction to come later.
There are certain steps Americans can take now to prepare for successive downturns.

By most measures, the U.S. economy is in solid shape.
Although the first half of 2022 started off with negative growth, a strong labor market and resilient consumer helped turn things around and give hope for the year ahead.

Gross domestic product, which tracks the overall health of the economy, rose more than expected in the fourth quarter, and the Federal Reserve is widely expected to announce a more modest rate hike at next week’s policy meeting as inflation starts to ease.
More from Personal Finance:Almost half of Americans think we’re already in a recessionIt’s still a good time to get a job, career experts sayIf you want higher pay, your chances may be better now
Still, some portions of the economy, such as housing, manufacturing and corporate profits, have shown signs of a slowdown, and a wave of recent layoffs fueled fears that a recession still looms. 
“There’s no scarcity of economists with strong opinions,” said Tomas Philipson, a professor of public policy studies at the University of Chicago and former acting chair of the White House Council of Economic Advisers. “There’s a lot of scarcity of economists with the right opinion.”

A ‘rolling recession’ may already be underway

Rather than an abrupt contraction Americans need to brace for, a “rolling recession” is already in progress, according to Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics. “This means some parts of the economy take turns suffering rather than simultaneously.”

In fact, the worst may even be over, he said.
A large portion of the reaction to the Fed’s moves has worked its way through the economy and the financial markets. Businesses trimmed inventories and cut jobs in some areas, and consumers refinanced their homes ahead of rising rates.
“It is time to think about an exit strategy,” Sohn said.

This cycle has proven so many of our traditional theories wrong.

assistant finance professor at Columbia University Business School

“Expectations about a recession have been pretty inaccurate,” added Yiming Ma, an assistant finance professor at Columbia University Business School.
“This cycle has proven so many of our traditional theories wrong,” Ma said.
In fact, this could be the soft landing Fed officials have been aiming for after aggressively raising interest rates to tame inflation, she added.

What this means for consumers

But regardless of the country’s economic standing, many Americans are struggling in the face of sky-high prices for everyday items, such as eggs, and most have exhausted their savings and are now leaning on credit cards to make ends meet.
Several reports show financial well-being is deteriorating overall.
“For consumers, there’s a lot of uncertainty,” Philipson said. For now, the focus should be on sustaining income and avoiding high-interest debt, he added.
“Don’t plan any major future expenses,” he said. “No one knows where this economy is going.”

How to prepare your finances for a rolling recession

While the impact of inflation is being felt across the board, every household will experience a rolling recession to a different degree, depending on their industry, income, savings and job security.  
Still, there are a few ways to prepare that are universal, according to Larry Harris, the Fred V. Keenan Chair in Finance at the University of Southern California Marshall School of Business and a former chief economist of the Securities and Exchange Commission.
Here’s his advice:

Streamline your spending. “If they expect they will be forced to cut back, the sooner they do it, the better off they’ll be,” Harris said. That may mean cutting a few expenses now that you just want and really don’t need, such as the subscription services that you signed up for during the Covid pandemic. If you don’t use it, lose it.
Avoid variable-rate debts. Most credit cards have a variable annual percentage rate, which means there’s a direct connection to the Fed’s benchmark, so anyone who carries a balance has seen their interest charges jump with each move by the Fed. Homeowners with adjustable-rate mortgages or home equity lines of credit, which are pegged to the prime rate, have also been affected.
Stash extra cash in Series I bonds. These inflation-protected assets, backed by the federal government, are nearly risk-free and are currently paying 6.89% annual interest on new purchases through this April, down from the 9.62% yearly rate offered from May through October last year.Although there are purchase limits and you can’t tap the money for at least one year, you’ll score a much better return than a savings account or a one-year certificate of deposit. Rates on online savings accounts, money market accounts and CDs have all gone up, but those returns still don’t compete with inflation.

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