Interest Rates, Possible Tariffs, and Rising Premiums: Understanding Potential ...

POLITICAL AND ECONOMIC EVENTS IN RECENT NEWS COULD HAVE A BIG IMPACT on the U.S. market. In a recent Equifax Market Pulse webinar, experts discussed the potential effects of these changes. Equifax Risk Advisor Maria Urtubey and President and Chief Economist of AC Cutts & Associates, Amy Crews Cutts, answered these audience-submitted questions on how and why the market could be impacted.

Q: The Fed has now cut interest rates 75 basis points, but mortgage rates have gone up. Why is there such a disconnect?

Amy Crews Cutts: The market is responding to more than just the Fed. There is global demand for the safety of U.S. Treasury bonds. And as the markets, as people put money in or take money out of those flows globally, we can see market impacts. Also, the inflation numbers did have that pop in the jobs numbers for September. That was a bit of a surprise. We just had the Consumer Price Index number come in a bit higher as well. And that is really the market pricing in that the Fed is not going to be aggressive in lowering their interest rates, and that inflation is going to be perhaps higher than we want for longer, or that there are other impediments in the market. And so what they are pricing is not Fed policy, but rather longer term economic trends.

Q: It has been said that import tariffs on foreign goods would end up hurting us consumers by causing higher prices. Why?

Cutts: That is top of mind for every economist out there. So when a tariff goes in, it is essentially levied on the purchaser, which, in the United States, is the consumer. So if, for example, an importer of wine from France gets a 30% tariff, then it is paid when the bottle of wine is delivered in the U.S. to the customs agent, so that tariff now goes into the pricing of the bottle of the wine at the wine shop where someone might purchase that wine. So, tariffs are a form of taxation, but the consumer may not pay the full 30%. So if it is a 30% tariff, you may not see prices go up a full 30%, depending on how competitive that product is and how many other suppliers in the world who are not subject to that tariff alternate substitutes there. But, in the end, consumers will see higher prices from those tariffs. The fewer the substitutes, the less competitive. And the speed with which it goes in will have a big determination in how much the consumer pays.

Once the tariff is embedded there, then it is somewhat like inflation. You are at a higher new price level, and we kind of get used to it being at that higher price. But in the near term, even if let's say again, French wine was to be taxed at a higher rate, California wine producers are not suddenly going to produce more French quality wine to compete with that. These are things that do not happen very quickly. If we are talking about a cell phone charger from China that is subject to a tariff, then it could be made elsewhere pretty cheaply, and we could see some substitution there. But it is universally a worry of economists now: which items will be tariffed, how high will the tariffs be, how they will be implemented, and what kind of lag will occur between the announcement and the and the effective dates.

Q: How are the markets navigating the insurance price increases which are indirectly increasing the cost of homeownership?

Maria Urtubey: From the consumer perspective, consumers have faced decreasing affordability, particularly in high risk areas impacted by extreme weather events, such as Florida.

Cutts: I think the markets have not fully priced in those risks that we are starting to see in Florida. After the hurricanes, many people felt like they were done and left their previous areas. As a result, prices in some markets in Florida fell immediately after the hurricanes. But there are many more markets at risk, not just those that were recently hit by hurricanes. Many people were thinking that Asheville was climate insulated. However, bad storms can happen just about anywhere, and the costs of these are spread across all the insurance markets.

Just because your home made it through or you are in an area that has not been hit in a long time, it does not mean that you have escaped the expense. We are all bearing that cost. Also, it does have long term implications for zoning and home construction, where, if we want to build homes that are more climate resistant and therefore, lowering the cost of insurance, they cost more to build. So, we are looking for new technologies to help that. There are some interesting things on the horizon. But that is not going to fix the existing stock, and it is certainly not going to be a very short term impact.

The monthly Equifax Market Pulse webinars feature economists, industry experts, and Equifax leaders covering a variety of topics in an hour-long, interactive session. The next webinar will take place on December 5 and will be focused on the analysis of 2024's economic outcomes.