Next week’s Federal Open Market Committee meeting will kick off an extraordinary two months of policy decisions by the Federal Reserve in which we expect the central bank to hike its policy rate by 100 basis points.

These rate increases, starting with a 50 basis-point increase on Wednesday. will occur as the Fed simultaneously embarks on the long-awaited reduction in its balance sheet, which we think will shrink by nearly $3 trillion through the end of 2024, from $8.93 trillion today.

The Fed has prepared investors and the public for this moment, which has partially resulted in the yield on the 10-year Treasury to increase by roughly 75 basis points to the current 2.87%.

We anticipate that the Federal Reserve by the end of the year will have increased its policy rate to at least 2.5%, which in our estimation is restrictive terrain and will result in a slowing in overall economic growth back toward its long-term trend of 1.8%.

As for the drawdown, the Fed has indicated that it will reach $60 billion per month in Treasury securities and $35 billion per month and mortgage-backed securities.

While we would be a bit more aggressive and push the drawdown to at least $100 billion per month over three years, the Fed will almost surely phase in its drawdown starting midyear. This process will most likely start with monthly caps of approximately $40 billion for Treasury bills and $25 billion for mortgage-backed securities.

In addition, the Fed, sensitive to inflation, will retain the flexibility to increase or decrease the monthly caps contingent on economic and employment dynamics.

Various members of the Fed have implied that a drawdown of roughly $3 trillion should equate to an increase of 50 basis points in long-term rates.

Their comments have already resulted in rising rates along the maturity spectrum and higher 30-year mortgage rates, so there should not be more than the traditional knee-jerk reaction in longer-term rates following Wednesday’s announcement and release of its policy statement.

We also anticipate a modest change to the paragraph in the Fed’s statement that concerns growth, which in March led off the policy announcement.

Instead of saying, “Indicators of economic activity and employment have continued to strengthen,” the committee will most likely alter that language to state something like: “Indicators of economic activity remain solid despite the contraction in growth during the first three months of the year even as employment remains strong.”

Elsewhere in the policy statement, we do not anticipate much change, including the paragraph acknowledging risk to the outlook linked to the Russian invasion of Ukraine.

---

This article was written by Joseph Brusuelas and originally appeared on 2022-04-29.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/fomc-preview-rate-hikes-and-balance-sheet-reduction-are-up-next/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

The three priorities for financial services companies are IT needs, cybersecurity and technological innovation.

You may have heard of the 50-20-30 rule. It’s a money-management technique that divides your paycheck into three categories: 50% for the essentials, 20% for savings and 30% for everything else.

This guideline of personal finance can be a great model for financial services companies as well, especially when it comes to information technology. However, the categories for IT spending look a little different. The three priorities for financial services companies are IT needs, cybersecurity and technological innovation. And while the exact percentages that organizations allocate to each category can vary—based on the company’s structure and business environment— the goal is to balance these three pillars to create the basis for a successful, thriving culture.

Read our new eBook, “Balancing the three pillars of IT,” to unlock the full potential of your IT platform and achieve balance in your company.

Pillar #1: Keeping the lights on

Keeping the lights on, from an IT perspective, is about maintaining a stable, reliable and high-performing IT environment.

Pillar #2: Securing IT

At its core, cybersecurity is about keeping a financial services company’s data from falling into the wrong hands.

Pillar #3: Innovation

Studies have shown that organizations that grew during the last recession were technologically superior and recognized the importance of innovation.

RSM can provide experienced resources to address your information technology, cybersecurity, risk and governance needs. 

Balancing the three pillars of IT

---

This article was written by RSM US LLP and originally appeared on Apr 29, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/managed-services/balancing-the-three-pillars-of-it-e-book.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

U.S. pending home sales fell 1.2% in March, declining for the fifth month in a row, as demand continued to slow due to high home prices and rising mortgage rates.

The National Association of Realtors’ index for pending home sales is a proxy for future sales of existing homes as about 80% of pending sales will be finalized within two months.

The index dropped to 103.7 in March, the lowest since July 2020, and is now back to its 2019 pre-pandemic level. That means existing sales in the next two months will likely drop further. It would not be a surprise if the housing market moves back pre-pandemic levels of sales volume in the second half of the year, given the rapid increases in mortgage rates in recent months.

While home prices remained high, the sharp pullback in demand is expected to ease price escalation, while also curbing the incentive for builders to build more homes. But housing prices often take quite long to come down even when demand cools. On top of that, inflation is expected to remain above the Federal Reserve’s 2% target rate until 2024, putting more pressure on prices and builders’ costs.

The data suggests that a ‘worst-of-both-worlds scenario’ might likely be on the horizon over the next two years: low sales and elevated prices.

Therefore we strongly believe that it is crucial for the government to step in early with targeted housing policies that help Americans who have been priced out of the home buyers’ market and forced to deal with rising rents as a result of skyrocketing home prices.

---

This article was written by Tuan Nguyen and originally appeared on 2022-04-27.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/pending-home-sales-fell-back-to-pre-pandemic-level-amid-rising-rates/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Policy by the central bank, interest rate differentials and a risk haven move into U.S. dollar-denominated assets are driving up the dollar against major trading currencies.

This is a welcome development as the Federal Reserve continues to prepare investors for a significant increase in the federal funds rate that may move from its current range between zero and 25 basis points to above the Fed’s estimate of the neutral policy rate of 2.5% by the end of the year.

On the margin, a stronger dollar tends to decrease the price of imports, which would weigh on U.S. inflationary pressures through the consumption channel.

At the same time, it would cause foreign purchasers to switch from more expensive dollar-based goods to cheaper alternatives produced elsewhere.

That would dampen the demand for U.S. exports while assisting the shift in policy toward bringing inflation back down around the central bank’s 2% target, even at the expense of slower growth and possibly higher unemployment next year.

State of play

The dollar continues to trade higher against the major currencies in what is now a 12-month rally. The dollar has appreciated by 11% against the euro since April 2021 and 12% versus the Japanese yen in just the past six weeks.

This most recent burst of dollar strength is most likely because of expectations of a more aggressive U.S. monetary policy relative to the eurozone and Japan.

The forward markets anticipate the Federal Reserve will accelerate its interest-rate normalization program with 10 additional rate hikes that will push the federal funds rate to 2.8% by year end.

In contrast, expectations are for the European Central Bank to be slower off the mark with rate hikes, pushing the policy only 25 basis points above zero by the end of the year.

We expect the dollar to hold onto its short-term gains—due to higher returns available for holding U.S. short-term assets and the transaction demand for dollar—and for the dollar to continue its role as a store of value.

As such, U.S. businesses and consumers should benefit from the reduced cost of intermediate products imported from Europe, while the U.S. export sector might have difficulty holding onto market share.

Moreover, should there be an intensification of the war in Ukraine or a policy shift in the European Union toward cutting off oil and natural gas imports, one should anticipate further appreciation of the greenback against the euro and yen in the near term.

Long-term undercurrents

We expect the dollar to continue to benefit from its status as a safe haven for international investors and commercial interests, particularly considering the more precarious position of Europe’s economy.

Since 2015, the dollar index—a composite of exchange rates of our major trading partners—has mean-reverted around its 50-year average as a free-floating currency in this modern era of international investment.

This is just the fifth time that the dollar index has reached its current value of 100 in the past five years, suggesting perhaps a maturation of the global economy.

After decades of a postwar roller coaster for currency costs, there is an argument that the distribution of production, consumption and wealth among our trading partners in the developed economies might have reached a steady state.

A more likely explanation for the current equilibrium is that after two decades of low-cost production in Asia, inflation had been squeezed out of the equation for determining the value of an exchange rate.

The absence of global inflation resulted in uniformly compressed interest rates among the international markets and—more important for currency determination—the reduction in interest-rate differentials among the developed economies. There just wasn’t much difference in the modest return on your currency position, no matter if you invested in dollars or yen or euros.

Unlike the emerging markets, growth in the developed economies has been consistently unspectacular in the aftermath of the 2008-09 global financial crisis. And once the base-year effects on real gross domestic product growth during the immediate recovery from the pandemic have diminished, expectations are for annual growth to return to a 2% pace in 2023-24.

U.S. long-term securities

While the restoration of policy stability and the prospect of economic growth provided the foundation for this most recent episode of dollar strength, we expect the demand for the guaranteed, higher returns of U.S. securities will underpin dollar strength in the months ahead.

February’s data from the Treasury International Capital reporting system, also known as TIC, indicates continued demand for U.S. financial assets and the increased confidence in the economic recovery.

There has been a 139% increase in net purchases of long-term U.S. securities since February 2020, the month before the pandemic. We attribute this both to commercial demand—parking proceeds from import sales in higher-yielding U.S. securities—and to growing confidence in the U.S. recovery and its re-emergence in world affairs and trade.

International demand for U.S. securities is a relatively new factor in determining the level of interest rates, growing from the mid-1990s onward. Net TIC flows have dropped in times of economic and financial distress when investors are more likely to hold onto their cash. Those periods of distress include the financial crisis in 2008-09, the European debt crisis in 2011, the commodity price collapse of 2014-16; and the trade war and pandemic in 2018-20.

We anticipate increasing demand for U.S. securities. That would apply downward pressure on U.S. long-term interest rates even as they move higher in response to increases in inflation.

That would help the Federal Reserve’s efforts to moderate the cost of investment as it draws down its portfolio of long-term Treasury securities at the same time it pushes short-term rates higher to keep a lid on inflation.

Foreign direct investment

The restoration of demand for U.S. financial assets is mirrored in the resurgence of investment in the U.S. economy. Foreign direct investment growth appears to have recovered from its 2017-20 downtrend, with levels breaking above the trend line established during the post-financial crisis recovery.

If the geopolitical situation in Eastern Europe deteriorates further, one should anticipate a move toward parity against the euro and dollar strength against the major trading currencies until those tensions abate.

---

This article was written by Joseph Brusuelas and originally appeared on 2022-04-22.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/why-the-u-s-dollar-is-strengthening/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

What’s trending in acquisitions, investing and more?

At a health care private equity and finance conference co-hosted by McGuireWoods and RSM US LLP earlier this year, panelists and speakers shared insights on the investment climate in various health care subsectors and related topics. From dental to dermatology, what’s trending in 2022 in terms of challenges, impact, acquisitions, investing and more? Here is a snapshot of key takeaways.

Behavioral health

• Digital and telehealth access can be a powerful tool for behavioral health services, but some subsectors—such as speech pathology and intellectual disability—may not benefit.
• Value-based care is more difficult to achieve in behavioral health due to the complexity of determining outcomes and provider compensation.
• Because of its impact on patient care and loyalty, organizational culture may play an increased role in the pricing of some transactions.
• In geographic areas with a limited pool of professionals, the only way to grow is to acquire an existing practice rather than establish a new, or de novo, operation.
• Due to its broad spectrum of services, the behavioral health space needs more refined evaluation of investments and metrics than do other subsectors.

De novo expansion

• De novo expansion in any health care subsector should include the development of a playbook that outlines roles, budget, timelines, risk profile, ability to scale and more.
• The playbook and other growth strategies should be continually assessed and updated.

Dental

• Dental services operations will likely continue to multiply and consolidate, driven partly by the increased number of dentistry graduates. However, given the amount of debt these graduates are accruing, it may be harder for them to start their own practices.
• Organizational culture and fit are extremely important when looking at acquisitions. Finding the right dentist is key, too. Identifying dentists’ strengths and weaknesses outside of dentistry will help in determining how to best utilize them within the organization.

Dermatology

• Privatization is still big in this subsector, presenting significant opportunity for consolidation. Multiples are ticking up and the number of megadeals is growing.
• Stable reimbursement rates make the area ripe for increased investment from outside firms. For example, currently telemedicine reimbursement rates are often the same as in-person visit rates; however, it’s unclear how long this will continue.
• Outside firms can help implement technology to make founder-owned practices more efficient and increase revenues.
• Downsides include the low number of dermatology residents, creating a provider shortage. In addition, private equity firms are relatively new to the subsector, limiting the historical data available to potential investors.

Gastrointestinal

• Investors are incentivized to create value for future generations by establishing a practice model as attractive for a new doctor as it was for an original doctor. As the key owners in this subsector, physicians require a flexible model.
• A major focus for investments in GI and ancillary practices is planning for long-term sustainability. Prior to investment, it is important to ensure an appropriate fit, confirm a target practice’s desire for a long-term partnership, and have a clearly defined path to partnership for doctors. This approach makes it easier to bring additional doctors into the practice in the future.
• Strong communication and transparency around expectations both during and after deal execution are key to establishing a successful relationship with physicians. Their word-of-mouth references to peers are the most effective resource for driving future investments.

Hospice and home health

• The subsector is sensitive to regulatory payment reforms.
• One of the biggest opportunities in the space is transportation of patients to ancillary follow-up services.
• Workforce supply is a constraint within this subsector, which is fundamentally dependent on clinicians and support staff to drive growth, quality and clinical efficacy.
• Housing is a key factor, with senior-housing retrofitting accounting for the highest level of real estate activity in the country. Generally, there is not enough housing to serve the aging population.

Physical therapy/occupational therapy

• New sponsors will be aggressive in acquisitions in this space.
• Mergers and acquisitions are potential sources of material growth, but require industry eminence and sufficient qualified personnel to deliver services. Weakness in leadership and lack of resources and infrastructure drive down value.
• Platform assessment needs to focus on quality of patient outcomes. Partnering with an organization that maintains a strong clinical focus can drive quality, retention and earnings.
• Return on investment in physical therapy is attractive. Future growth potential can be demonstrated by having a repeatable playbook for the operating clinic and delivering quality services to patients.
• A rising number of new therapy graduates is creating a surplus of physical therapists, which may drive rightsizing in the market.
• Telehealth is important for flexibility and as a tool during potential future pandemics; however, it will not replace in-person treatment. Virtual screening and triage points are a good fit for this subsector.

Representations and warranties insurance (RWI)

• RWI helps protect both the buyer and the seller in an M&A transaction in the event of a breach of representation or warranty in the purchase or sale agreement.
• Proposal packaging is key to moving beyond a prospective insurer’s initial review, when the insurer is looking for reasons to reject it. Transactions with reputable buyers who know what they are doing are perceived as less risky. It is important to speak to the target practice’s insurance team regarding cybersecurity.
• Insurance carriers sometimes require practices to have stand-alone coverage for cyber breaches apart from RWI. Whichever approach is taken, insurers will look for a robust cybersecurity compliance program.

Women’s health

• This subsector is still seeing very high multiples, which appear to be inflated. Investors need to understand the cash flows and return on investment for new or ancillary services. In the fertility space higher multiples are realistic since the supply of providers is limited.
• Value-based care is top of mind for ob-gyn practices. Bundling services into a model similar to Medicare is key.
• Vertical rather than horizontal integration characterizes this subsector.
• Nursing shortages across the board need to be addressed through traditional and alternative educational avenues.

Conference panelists and RSM health care senior analysts, Matt Wolf, director, and Rick Kes, partner, shared their parting thoughts about the industry investment climate.

“Health care is a $4 trillion cottage industry with a lot of white space for investment,” said Wolf. “New funds continue to raise record amounts of capital as investors seek to consolidate and innovate throughout the continuum of care. As the ecosystem faces new challenges, such as digital disruption and labor market challenges, sophisticated sponsors will be well-positioned to create value.”

“Health care continues to be a very attractive industry for private equity investment,” Kes added. “With concepts like value-based care and the continued emergence of Medicare Advantage, the strategy and sophistication needed to achieve success will only increase.”

Get additional private equity insights by reading our latest outlook.

---

This article was written by RSM US LLP and originally appeared on Apr 22, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/industries/health-care/investment-trends-to-watch-in-health-care-subsectors.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Auto finance lenders come in many shapes and sizes, giving rise to a complex, dynamic regulatory framework. While indirect auto lending has long been a priority among regulators concerned about fair lending practices, recent CFPB data and enforcement priorities suggest a broader push for enhanced scrutiny. Indicators include:

• New CFPB concerns related to affordable credit for auto loans given the increasing cost of vehicles
• Possible incentives for auto lenders to seize and illegally repossess certain vehicles due to the competitive used-car market
• The CFPB’s recent push for public commentary regarding general junk fees, including fees associated with auto loans

Given the impact of the pandemic, the increased costs of vehicles and the CFPB’s general push to limit junk fees, the auto lending space is ripe for significant regulatory change and increased enforcement action.

Factors to consider

Your auto lending compliance program should include robust monitoring to ensure your risk management efforts are operating effectively and are nimble enough to respond to regulatory change. Factors to consider include:

• Complaint trending analysis:
  • Is your consumer complaint data complete and accurate?
  • Do you have a centralized mechanism for reviewing complaints in the aggregate so that management can adopt and implement appropriate procedural changes?
• Regulatory change management:
  • Have you assessed the impact of recent state-level enforcement actions?
  • Are you actively monitoring ongoing CFPB efforts, including those related to any of your fees that could be deemed junk fees?
  • How does your organization assess and escalate its response to regulatory changes?
• Effective risk assessment:
  • Your auto finance and compliance risk assessment should be uniquely tailored to your auto lending model. If you are using a blanket approach without regard for the complexity of your model, you may be missing the mark.
  • Auto lending risks and priorities are constantly changing. How often do you refresh your method of risk assessment?
• Third-party/vendor risk management:
  • How robust is your review of key vendors and third parties involved in auto loan origination and servicing?
  • Are you confident your debt collectors are complying with recent changes to the Fair Debt Collection Practices Act?
  • Have you considered whether you or your debt collectors may have illegally repossessed vehicles while trying to remain competitive in the current used-car market?

Next steps for auto lenders

Auto lenders should look to enhance compliance monitoring to account for ongoing regulatory changes. Additionally, it’s important to rightsize your compliance program to fit the unique needs of your business. Working with a partner that can improve your compliance risk assessment, review your relationships with third-party vendors, and provide data and analyses around your auto lending operations can help tremendously in navigating the auto lending compliance landscape.

---

This article was written by Pete Hoglund, Courtney Nowlan and originally appeared on Apr 22, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/risk-fraud-cybersecurity/auto-lending-compliance-is-changing-course-how-to-prepare.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

5 post-merger integration considerations that shouldn’t be ignored

When evaluating the post-merger integration benefits and value-creation initiatives, be sure to incorporate these critical considerations. Discover how to:

• Distinguish between ongoing resource needs versus one-time, deal-specific expertise
• Take advantage of windows of opportunity when teams are primed for change
• Ensure smooth integration of people, departments, and cultures
• Learn to identify and deploy the right resources to streamline processes
• Build a unified culture that’s focused on the future

Today’s hot mergers and acquisitions market clearly shows that these growth strategies have the potential to maximize synergies, realize cost savings and increase profits. Yet integrating two businesses into a single entity comes with some key hurdles and considerations that may not be obvious at the outset.

Through integration advisory insights and case studies, this e-book highlights some key issues that management teams sometimes overlook during the post-merger integration process and provides concrete ways to overcome them.

Download the ebook

---

This article was written by RSM US LLP and originally appeared on Apr 21, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/merger-acquisition/optimizing-post-merger-integration.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

The Federal Reserve has started to normalize interest rates, lifting the short-term transaction cost off the zero bound following two years of crisis policy.

The result has been a 100-basis point increase in the yield on 10-year Treasury bonds, which have increased from just under 2% to nearly 3% in a little more than 60 days. If rates do not stabilize in the near term, we will have to lift our provisional forecast for the 10-year Treasury to end this year at 2.95%.

The initial impetus for the policy shift was growing strength in an economy now able to support higher interest rates and the gradual deflation of asset bubbles that formed during the low-for-long interest rate policy during the trade war and the pandemic.

Because of the persistence of inflation, the bond market now anticipates an acceleration of Fed rate increases and a drawdown of the Fed’s accumulation of long-term Treasury bond purchases.

We anticipate 50 basis-point increases in the policy rate at both the May and June meetings and the central bank to draw down its balance sheet by roughly $3 trillion over the next three years.

In our estimation, the expectations of rate hikes and the Fed’s emerging balance sheet strategy have resulted in the shape of the 2-10 yield curve, which now has a positive upward slope after inverting in early to mid-March.

For the time being, the increase in the bond yields along the curve is attributed to expectations of increases in the path of short-term interest rates as the Fed normalizes policy.

But the decrease in the term premium—the compensation for the risk of holding a bond over its maturity—is signaling concern for long-term growth. This concern is most likely because of Fed action to constrain inflation and because of the risks presented to the global economy by Russia’s invasion of Ukraine.

Inflation expectations remain subdued

Model-based estimates of inflation expectations point to inflation rates less than 3% in 12 months and 2.3% in 10 years. This roughly conforms to consumer expectations of 3% inflation over the next five to 10 years and by expectations derived from the forward markets.

This speaks to the confidence of the public and the markets in the Fed’s ability to control inflation.

Interest-rate normalization program

It is important for the Fed to restore normal levels of interest rates to extend the range of future policy options and to restore balance among the returns in the financial markets. But the sharp increase in 10-year Treasury yields from 2% to 3% might better have occurred more gradually and under less stressful circumstances.

The persistence of inflation because of past policy, continued shortages of energy and housing and now the war in Ukraine required a swift response from the world’s central banks.

Real yields remain negative

Because of the sharp increase in inflation, real yields remain negative across all maturities despite the increase in nominal yields. This implies a level of accommodation for long-term investors who will pay back the loans in deflated dollars.

While the yield curve is no longer inverted, it remains too flat in our estimation, signaling uncertainty about the ability of the economy to support higher rates of return and to continue growing.

We expect growth to arrive at or below 1% in the first quarter, rebound strongly in the second and third quarters, and then enter a subdued period as higher rates of interest and inflation take effect on consumer spending.

Thirty-year and five-year Treasury yields

You would expect 30-year bond yields to reflect the greater risk of holding a security over that length of time, with the prospect of event risk disrupting economic growth at some point. Instead, we find five-year Treasury yields rising above 30-year yields and the yield spread becoming negative.

We attribute the increase in the five-year yield to the larger impact of monetary policy on short-term securities. And while we expect a more subdued impact of monetary policy on bonds 30 years out, there is also concern that the economy has yet to make significant improvements in its potential growth.

We attribute that to the absence of infrastructure spending, which was delayed until after the midterm election to get bipartisan support. As such it may take at least another year for the bond market to assess the prospect of an economy more advanced than the stagnant, low-growth economy of the years before the pandemic.

Mortgage rates have responded

The average mortgage rate calculated by Freddie Mac shows that new homeowners are facing a 5% cost of carry, substantially higher than the less-than 3% rates of the pre-pandemic era. We expect those rates to put a crimp in the demand for housing which, because of its weight in determining the consumer price index, will have a large impact on the inflation rate.

In addition, the 30-year fixed mortgage rate of around 5.5% resting above the 30-year jumbo rate of 4.4% will almost certainly cool demand for housing for anyone who cannot or is not willing to put down more than 20% to purchase a home.

---

This article was written by Joseph Brusuelas and originally appeared on 2022-04-20.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/interest-rate-update-confidence-in-the-fed-but-uncertainty-over-long-term-growth/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Sales of existing homes fell by 2.7% to 5.77 million in March, the lowest since July 2020, as rising mortgage rates dampened demand. The median home price, however, hit a record high at $375,300, pointing to persistent housing shortages, according to data the National Association of Realtors released on Wednesday.

Given the potential of multiple 50 basis-point rate hikes by the Federal Reserve starting this May and the Fed’s overall hawkish tone, demand for housing is expected to cool down further this year. In addition, increasing supplies of new houses in recent months have helped ease some of the demand for existing homes.

Looking at pending home sales—which typically become existing home sales within two months—we would not be surprised if existing home sales return to the pre-pandemic level of around 5.3 million annualized rate as the credit market is brought back to neutral.

In the meantime, buyers are trying to bypass rising rates with all-cash purchases. The share of all-cash buyers in March rose to 28%, up from 25% in February and the highest rate since 2014.

The share of first-time buyers remained steady at 30% as they looked to lock in current mortgage rates before they go higher.

As a result, homes are still selling fast compared to the industry’s long-term sustainable pace of around six months of supply. The current selling pace in March left inventory low at only two months.

Sales declined in three of the four major regions except for the West, where existing home sales were flat on the month.

---

This article was written by Tuan Nguyen and originally appeared on 2022-04-20.
2022 RSM US LLP. All rights reserved.
https://realeconomy.rsmus.com/chart-of-the-day-u-s-home-prices-hit-record-in-march-despite-decline-in-sales/

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Evolving consumer preferences and a tight labor market are among the challenges 2022 is serving up.

Restaurant operators have been on a roller coaster since the start of the pandemic. Faced with restrictions, shutdowns, reopenings and then further restrictions, the industry now appears to be adjusting to a new normal. Some restaurants failed, some flourished and most limped along with the help of government programs. Nonetheless, the pain the industry has felt these past two years has created opportunity for survivors as we emerge into a new operating environment. To capitalize on those opportunities, operators have much to consider.

Managing agility

The pandemic tested the flexibility and agility of consumers and operators. Evolving pre-pandemic consumer preferences were disrupted and accelerated. Operators with robust off-premises platforms grew out of necessity and many flourished, while others adapted operations to keep units open.    

As we continue to emerge, many of the buying behaviors developed over the past several months will likely continue. Many on-premises diners forced to off-premises platforms during the pandemic grew accustomed to the convenience of mobile ordering and payment, drive-throughs, and curbside pickup, and operators who previously resisted off-premises concepts learned they could produce a quality off-premises product.

Quick-serve concepts will need to adapt operating models and physical footprints to accommodate more throughput during peak hours. Traditional on-premises operators will need to enhance their on-premises experience to capitalize on pent-up demand for social dining, while trying to maintain the off-premises business they grew during the height of the pandemic. Temptation to revert to pre-pandemic models should be resisted, as operating flexibility and agility will be the keys to success in this new environment.

Leveraging technology

The importance of technology was made abundantly clear during the height of the pandemic. Businesses with established digital platforms were able to operate at a high level and continue to grow. Others began to build out platforms and introduce technology in key areas of their operations. As operators adapt operating models to meet changing consumer preferences, technology infrastructure should also be assessed and new technologies introduced where appropriate. Data analytics will become increasingly important to evaluate operations and better understand customer preferences and buying behaviors. As technology is added, cybersecurity should also be assessed and enhanced for operating units, corporate offices and remote employees.

Addressing labor challenges

Labor will be a significant challenge for restaurant operators in 2022 and beyond. Costs will continue to rise, but labor shortages will likely have a greater impact on operations and may limit growth. Successful businesses will leverage technology and data across their operations. Understanding traffic patterns and buying behaviors will allow operators to deploy resources more effectively. The use of mobile apps for payment will become the norm in quick-service restaurants and fast casual, and hand-held technology for servers in on-premises establishments will facilitate effective service with fewer employees. Operators will also need to employ creative recruiting and retention strategies to attract and retain the staff they have, as labor shortages in other industries will continue to draw people away from them.

Considering inflation

Inflation is already having an impact on the restaurant industry. As prime costs continue to rise, operators will have no choice but to raise prices and adapt menus. While pent-up demand will provide some price elasticity, the cost of rent, fuel and other consumer necessities will diminish disposable income and affect buying behaviors. Quick-serve concepts with low to moderate price points typically benefit when consumers need to stretch their disposable income. On-premises concepts will need to reengineer menus to provide greater value and enhance the overall dining experience.

Investing for growth

Despite the significant challenges of the past 24 months, there is room for optimism. Demand for food away from home remains high, and changing consumer preferences and restaurant closures have created opportunity for growth across the industry. Expect investment in the industry to continue to ramp up in 2022 as on-trend, tech-enabled concepts expand their operating footprints and distressed brands look for financial partners to help them survive and evolve their operating models to accommodate shifts in consumer behavior. Savvy investors will focus on young, on-trend brands with room for significant growth and also will bargain hunt for well-known, established brands needing investment capital to adapt to the new environment.

Want more consumer goods insights for 2022? Read our industry outlook.

---

This article was written by RSM US LLP and originally appeared on Apr 18, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/industries/restaurant/5-key-business-issues-restaurants-are-facing.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.