Tag: USA

US Budget “Deconstructs The Administrative State”

The Economist produced this graphic which shows the radical shift in US budget policy and says it shows a move to “deconstruct the administrative state”.

STEPHEN BANNON, President Donald Trump’s chief strategist, famously promised the “deconstruction of the administrative state”. On March 16th, the Trump administration took its first step toward achieving Mr Bannon’s vision by proposing a budget that makes steep cuts to domestic programmes.

Not all departments would suffer. Mr Trump’s budget proposal, which covers $1.1trn of discretionary spending for the 2018 fiscal year, requests an additional $52bn for the Department of Defence and $2.8bn for the Department of Homeland Security. The majority of this additional spending would go towards what the administration calls “urgent warfighting readiness needs” including fighter jets, drones, missiles and weapons systems. At least $2.6bn would be spent on the construction of a wall on the southern border, a project which could eventually cost as much as $22bn. An additional $1.5bn would go towards the expanded detention, transport and removal of illegal immigrants.

To pay for this build-up in defence and border protection, Mr Trump would slash budgets across the federal government. Under his proposal, with a familar title of “America First: A Budget Blueprint to Make America Great Again,” the Department of Health and Human Services would be cut by $13bn or 16%, the State Department would lose $11bn or 29% and the Department of Education would see its funding fall $9bn or 14%. The Environmental Protection Agency, widely expected to face the steepest cuts under the Trump administration, would be reduced by a whopping 31%, eliminating 50 programmes and 3,200 jobs.

How Mr Trump’s budget would affect the broader economy is still unclear. Despite calling the national debt a “crisis”, the proposal would keep overall spending at roughly the same level. Given Mr Trump’s zeal for tax cuts and frequent promise for massive infrastructure spending, deficits may even increase. The administration will not release its full budget—complete with ten-year spending and revenue projections—until May.

Of course, the president’s budget is only a wish list. It is Congress that ultimately controls the government’s purse strings. And at the moment, many lawmakers are wary of deconstructing the administrative state just yet. When asked on February 28th about the Trump administration’s proposed cuts to the State Department, Senator Lindsey Graham of South Carolina told reporters the president’s budget is “dead on arrival”.

Fed Embarks on New Phase of Normalization

The US Federal Reserve’s (the Fed) decision to hike interest rates by 25bps represents the beginning of a new phase of US monetary policy normalization, says Fitch Ratings.


The prediction for three hikes in 2017 in the Federal Open Market Committee’s (FOMC) December 2016 Summary of Economic Projections was initially met with some skepticism in financial markets. However, by moving rates up again so quickly, the Fed now looks well on track to deliver. Two rate hikes within the space of just over three months and some marginal toughening up of the statement on forward guidance underscore the contrast with the glacial and hesitant approach to unwinding stimulus seen in the past few years. More broadly, Fitch believes that the recent US rate hikes could mark the beginning of a significant shift in the global interest rate environment, with benchmark US policy rates settling higher over the long term than current market expectations.

The decision to raise the Fed Funds target rate to 0.75%-1.00% marks the second rate hike in just over three months. This represents a major acceleration in Fed action. Fitch now expects a total of seven hikes in 2017 and 2018, bringing the policy rate to 2.50%. This contrasts with just two rate hikes in total between the end of 2008 and 2016.

Macro indicators through 2H16 and early 2017 reinforce the likelihood of a pickup in rate normalization over the medium term. GDP growth of 2.6% (annualized) in 2H16 was a significant recovery from 1H16, underpinned by improvements in private investment and industrial output. So far, jobs data this year have also been supportive, with the latest nonfarm payrolls, unemployment and private sector earnings figures all pointing to tightening labor market conditions.

Material fiscal easing should bolster positive domestic demand trends. President Trump’s agenda of tax cuts, fiscal stimulus and deregulation in the financial services and other sectors strongly indicates that some level of growth boost is likely. Although the precise form of stimulus remains uncertain, Fitch believes that fiscal policy could add up to 0.3pp to economic growth in both 2017 and 2018. Fitch recently revised up its US growth expectations in recognition of the increased likelihood of fiscal easing, higher private investment and improving global outlook. Fitch forecasts US GDP growth to accelerate to 2.3% and 2.6% in 2017 and 2018, respectively.

Fitch does not believe that the increased pace of Fed rate hikes poses a risk to US economic growth. However, the impact from dollar strengthening could have wider global effects, especially should this result in prolonged monetary policy divergence. US rate rises, combined with fiscal stimulus, at a time when the European Central Bank and Bank of Japan are continuing to pursue ultra-loose monetary policy, should prolong the dollar strengthening trend. Rising rates and dollar strength have historically added to external financing risks for emerging markets.

Fitch believes that market expectations for a permanently lower equilibrium interest rate in the US and the continuation of ultra-loose monetary policy for several more years could be increasingly challenged. This could result in a rapid shift in consensus expectations toward a higher terminal rate and a faster pace of normalization. Notably, market consensus was not expecting a March rate hike as early as last month, although healthy macro data releases and hawkish public statements from FOMC members resulted in a quick shift in expectations ahead of the actual decision.

Rising interest rates in 2017 and 2018 will not be a broad concern for US corporates in aggregate, but pockets of risk could challenge entities at the lower end of the rating spectrum, according to Fitch Ratings.

With current LIBOR levels at or above most pricing floors – USD 3M LIBOR was 1.11% as of March 8 – subsequent rate hikes would expose leveraged loan issuers to reset risk that could pressure credit profiles and cash flow generation. This risk is most acute for deeply speculative-grade credits with large amounts of floating rate debt, already large interest burdens, and limited to negative FCF.

Near-term interest rate risk is most evident for leveraged issuers who took advantage of longstanding favorable market conditions to issue large amounts of floating-rate debt, but whose credit profiles deteriorated due to secular challenges or idiosyncratic issues that resulted in higher leverage, depressed cash flows and limited liquidity.

Retail companies, for example, with high floating-rate debt exposure could be particularly exposed to interest rate risk if secular challenges offset the benefits of an accelerating economy on top-line growth.

From a credit profile perspective, we are less concerned about exposure to fixed-rate high-yield (HY) bonds. Historically, HY spreads do not increase meaningfully until after the Fed has concluded its tightening cycle. As a result, modest policy rate increases may not be accompanied by corresponding increases in spreads.

Interest rates typically rise in response to higher inflation, usually during economic recoveries, implying generally improving credit profiles. Fitch’s Stable Outlook for US Corporates in 2017 supports this view.

Moreover, companies have been proactive in managing maturity profiles. US corporates have aggressively refinanced during nearly a decade of low interest rates, pushing out maturities with long-dated, low-coupon debt to maintain historically strong interest coverage metrics and solid liquidity profiles. We expect fundamentals to remain stable as expectations of growth in cash flow are fueled by persistent cost controls, efficiencies, and revenue growth, albeit weak.

The Trump administration’s tax proposal to cut the corporate tax rate to 15% and eliminate the tax-deductibility of interest expenses adds another layer of risk. Negative cash flow impact from the removal of interest expense deductibility may outweigh the positive cash flow impact from the corporate tax cut for issuers with high debt burdens and debt costs

The US is healing but we can’t even admit we’re ill

From The NewDaily.

The Federal Reserve’s widely anticipated rate rise is a reminder that while the US has learned from its housing market crash, our political leaders have created a record bubble of mortgage debt by shying away from reform.

When Fed chair Janet Yellen announced Thursday morning (Australian time) the fed-funds rate had risen to a new target range of 0.75 to 1 per cent, it caused barely a stir in markets. The New York Stock Exchange rose 0.8 per cent, as the Fed signalled future rate rises are likely to arrive sooner than previously expected.

These days the Fed telegraphs each move so effectively that markets no longer ask ‘will they move or not?’, but more ‘does that move reflect what’s really happening in the economy?’

Yes, with its years of super low rates, the Fed did set the scene for the 2009 housing collapse that hit global markets like a tsunami. But its three rate rises since the GFC have been spot on – late enough to avoid choking the recovery, but early enough to prevent inflation getting out of hand.

At a press conference Ms Yellen said the Fed is pushing rates back towards “normal” levels because the US economy has returned to reasonable health – growing at a “moderate pace”.

Meanwhile, Australia’s rates remain at historic lows. So what are we doing wrong?

The biggest reason we’re not seeing US-style growth is, gallingly, entirely self-imposed. Our political leaders have skewed the economy heavily towards real estate investing.

The vast sums of capital tied up in housing could be establishing new businesses, or backing the expansion of existing ones. Instead, we’re a nation hypnotised by capital gains that thinks buying and selling the same houses back and forth is a productive industry.

It all began in 1999, when treasurer Peter Costello cut capital gains tax to a rate well below the personal tax rates of middle- and upper-middle class Australians. It was one of the most economically harmful policies ever dreamt up in Canberra.

It did not take the nation’s accountants long to point out to clients that investing in a property, negatively gearing it for a few years, and then banking the capital gain at the new rate would slash the investor’s tax bills.

During the same period, the US was experiencing a credit bubble for different reasons – super low rates, plus the advent of sub-prime mortgages.

When the early ‘sub-prime’ phase of the GFC finally began to be felt, US house prices tumbled. And when the sub-prime crisis worked its way through the banking system, global stock markets crashed too.

Whereas the US learned from this and started rebuilding, we arrested our correction and did everything possible to keep the credit bubble growing.

As the share market tanked in 2009, Australian policy makers decided that the sacred cow of house prices must be protected at all costs. The 2009 first home buyer’s grant kickstarted that defence, and was topped up by most state governments too.

Even though the Rudd government’s own tax review – the Henry Tax Review – had recommended reining in negative gearing and the capital gains tax discount, all that was ignored.

The tax lurks stayed, gleefully maintained by the Abbott and Turnbull governments, and the RBA joined in by cutting interest rates that blew the credit bubble larger still.

The lack of action by politicians has pushed responsibility for reining in the bubble to the Australian Prudential Regulatory Authority, which imposed a fairly weak ‘speed limit’ on credit growth two years ago.

And now the RBA itself is threatening to put more “sand in the gears” of the credit machine.

It’s all too little, too late.

Australia, having ‘escaped’ the house price collapse that swept through so many nations in 2009, is now stuck in a self-imposed debt bubble.

Aging and Wealth Inequality

Interesting piece from the St. Louis Federal Reserve looking at the connection between age and wealth and its implications for aging and wealth inequality.

An individual’s wealth varies with age. Most people are born with little to no financial wealth and, as they age, they save part of their income to accumulate wealth or sometimes borrow to finance education, which creates debt. Once people reach retirement, they stop accumulating wealth and start spending down their savings. Thus, the richest people can often be found among those who are about to retire.

Age is not the only determinant of wealth. People’s wealth varies with how much they are given by their parents, their income, and their decisions on how much to consume or save and how to invest their wealth.

In this essay, however, we focus on the connection between age and wealth and its implications for aging and wealth inequality. The issue is salient because the U.S. population is aging and inequality is a frequent concern. Today, less than 15 percent of the overall population is 65 years of age or older, and that share is projected to rise above 30 percent by 2030. Is this going to exacerbate or mitigate wealth inequality in the United States?

The figure shows wealth per capita (black line) by age group in 2010. As indicated earlier, the richest people tend to be 65 to 74 years of age. The figure also shows the fraction of wealth (dashed line) held by households, ranked by the age of the head of household. A key message is that age is a significant source of inequality: The largest and youngest groups hold the least wealth—those under 35 years of age (blue line) represent over 25 percent of the population but hold only about 5 percent of total wealth. If the dashed and blue lines overlapped, each group’s share of the population and share of wealth would be the same and age would not contribute to wealth inequality. In this case, the black line would be flat: Each individual would hold the same amount of wealth, regardless of age.

One can examine the effect of the age distribution using a standard measure of wealth inequality: the Gini index (sometimes called the Gini coefficient), which varies from 0 to 1. A value of 0 indicates no inequality—everyone holds the same wealth. A positive Gini index indicates some inequality. If one individual held all the wealth—maximal inequality—the Gini index would equal 1. In the United States, for example, the richest 1 percent of the population holds 42 percent of total wealth.1 As the figure shows, the age group with the highest share of wealth—those 55 to 64 years of age—holds almost 31 percent of the wealth but represents only about 16 percent of the population. The Gini coefficient implied by the figure is 0.385.2 Because this Gini coefficient measures only the dispersion of wealth by age group, it omits additional sources of wealth inequality and therefore understates the true Gini coefficient for the United States.

A simple example helps illustrate that wealth inequality by age contributes to overall wealth inequality: Consider an economy, as shown in the table, with 100 people. Each young person holds $1 of wealth, while each old person holds $10 of wealth (top panel). The population shares of young and old are 80 percent and 20 percent, respectively. Note that this panel represents, in a stylized way, the features of the U.S. economy displayed in the figure: There are many more young people than old people, but the old hold more wealth than the young. The total wealth of this economy is $280, where the young collectively hold $80 and the old collectively hold $200. The young’s share of total wealth is (80/280) = 29 percent, which is noticeably less than their 80 percent share of the population. The Gini coefficient associated with this distribution of wealth is 0.51.

Suppose now that the economy ages and there are 50 old people and 50 young people (bottom panel). Because older people have more money, total wealth in the economy rises from $280 to $550. If each young person still holds $1 of wealth, their share of total wealth becomes (50/550) = 9 percent instead of 29 percent—a decline of 20 percentage points. But their share in the population decreased by 30 percentage points, from 80 percent to 50 percent, so the Gini coefficient declines from 0.51 to 0.41.

So the aging of the population, per se, is a factor that can reduce wealth inequality. This example, however, must be interpreted with caution. It does not imply that the forecasted aging of the U.S. population will be accompanied by a reduction in wealth inequality. As mentioned in the introduction, the calculation presented here abstracts from other forms of inequality not related to age. It is conceivable that these other forms of inequality may increase as the population becomes older and offset the effects described here.

US Financial Accounts 4Q 2016 Shows Household Debt Higher

The Fed released the US Accounts to Dec 2016.  It shows growth in household debt, but a lowering of business investment and government debt down from the 2008 highs.

Domestic nonfinancial debt outstanding was $47.3 trillion at the end of the fourth quarter of 2016, of which household debt was $14.8 trillion, nonfinancial business debt was $13.5 trillion, and total government
debt was $19.1 trillion.

Domestic nonfinancial debt growth was 2.9 percent at a seasonally adjusted annual rate in the fourth quarter of 2016, down from an annual rate of 5.8 percent in the previous quarter.

Household debt increased at an annual rate of 3.8 percent in the fourth quarter of 2016. Consumer credit grew 6.2 percent, while mortgage debt (excluding charge-offs) grew 3.1 percent at an annual rate. Percentage changes calculated as seasonally adjusted flow divided by previous quarter’s seasonally adjusted level, shown at an annual rate

Nonfinancial business debt rose at an annual rate of 2.6 percent in the fourth quarter, down from an annual rate of 6.3 percent in the previous quarter.

Federal government debt increased 2.9 percent at a seasonally adjusted annual rate in the fourth quarter of 2016, down from an annual growth rate of 8.2 percent in the previous quarter.

State and local government debt rose at an annual rate of 0.2 percent in the fourth quarter of 2016, down from an annual growth rate of 0.7 percent in the previous quarter.

The net worth of households and nonprofits rose to $92.8 trillion during the fourth quarter of 2016. The value of directly and indirectly held corporate equities increased $728 billion and the value of real estate rose
$557 billion.

 

 

US Mortgage Rates Climb Again

From Mortgage News Daily.

Mortgage ratesspiked, big-time, today.  Underlying bond markets had already moved higher in rate overnight, but the trend was taken to a new level by an exceptionally strong employment report from ADP.  Although this isn’t the big jobs report (we’ll get that on Friday), many market participants treat the ADP numbers as one of several advance indicators of Friday’s jobs report.  Sometimes it doesn’t register a response, but when it beats the forecast by as much as it did today (298k vs 190k), markets can’t help but adjust their trajectory ahead of Friday.

 

The net effect was the sharpest move higher in rates in several months, slightly outpacing last Wednesday’s rout.  Moreover, with the exception of a modest improvement on Monday, rates have moved higher every single day since February 27th.  In just over a week, the average conventional 30yr fixed quote is up approximately a quarter of a percent for most lenders.  Stronger lenders are offering 4.25% on top tier scenarios while many moved up to 4.375% with today’s weakness.

We think there is growing pressure to lift international capital market rates higher, which will create upward momentum on rates in Australia.

 

US RMBS Settlements Still Looming For Some European Banks

Uncertainty about the scale of penalties for US retail mortgage-backed securities (RMBS) practices more than 10 years ago will continue to weigh on some European banks’ capital management and dividends, Fitch Ratings says. They expect cautious capital retention to be a theme as the 2016 results season for European banks reaches its final stage.

The threat of large, unpredictable settlements hangs over a few European banks that have not settled yet, adding to the pressure on earnings and capitalisation from low interest rates and increased regulation. As a result, we expect banks will continue to prioritise cautious capital management and dividend policies, even though most have strengthened capital positions considerably since the financial crisis.

The US Department of Justice’s (DoJ) investigation into banks’ pre-crisis RMBS business has already cost USD31bn in cash settlements for eight of the global trading and universal banks. The DoJ examined the banks’ pre-crisis practices, including packaging, securitisation, marketing, sale and issuance of RMBS. European banks Deutsche Bank and Credit Suisse are the most recent to settle with the DoJ, agreeing to pay substantial fines of USD3.1bn and USD2.5bn, respectively, and to provide consumer relief.

Investigations into other European banks, notably RBS, Barclays, UBS and HSBC are ongoing. Barclays rejected a settlement in late 2016 and now faces a lawsuit. RBS, unlike other European banks, also still has a pending lawsuit with the US Federal Housing Finance Agency, which we estimate could add about USD3bn (based on an average past settlement rate of 10% of exposure) to any settlement with the DoJ.

Monetary fines have only constituted part of the settlements, and substantial amounts have been agreed in the form of so-called consumer relief, which we believe are proving far less punitive in financial terms. Consumer relief can include loan forgiveness, origination of lower cost loans and financing for affordable housing, targeted at the most vulnerable customers. Deutsche Bank has until 2022 to complete its USD4.1bn required consumer relief, and Credit Suisse until 2021, to complete USD2.8bn.

Pending regulatory and litigation settlements are factored into our analysis as a contingent liability. When a large settlement is reached, we assess the incremental cost in cash terms above provisions already booked and the affordability of the remainder through earnings. When a settlement will absorb at least two quarters’ earnings, we assess its impact on capital and the bank’s plans to remediate the capital effect.

We do not expect the outstanding investigations to lead to significant new restrictions on banks’ businesses or to damage their franchises. Banks have tightened conduct risk controls extensively in the period since the RMBS activity under investigation took place.

Low VIX and Thin Spreads Could Be on Thin Ice

From Moody’s.

The February 1 FOMC meeting minutes noted two interrelated developments. First, the narrowing by “corporate bond spreads for both investment- and speculative-grade firms” to widths that “were near the bottom of their ranges of the past several years.” Secondly, some FOMC members were struck by how “the low level of implied volatility in equity markets appeared inconsistent with the considerable uncertainty attending the outlook for such policy initiatives.”

Thus, some high-ranking Fed officials sense that market participants are excessively confident in the timely implementation of policy changes that boost after-tax profits. And they may be right, according to Treasury Secretary Steven Mnuchin’s recent comment that corporate tax reform legislation may not be passed until August 2017 at the earliest. The ongoing delay at remedying the Affordable Care Act warns of a possibly even longer wait for corporate tax reform and other fiscal stimulus measures.

Treasury bond yields declined in quick response to the increased likelihood of a longer wait for fiscal stimulus. Lower benchmark yields will lessen the equity market’s negative response to any downwardly revised outlook for after-tax profits. Provided that profits avoid a replay of their year-to-year contraction of the five quarters ended Q2-2016 and that interest rates do not jump, a deeper than -5% drop by the market value of US common stock should be avoided.

The importance of interest rates to a richly priced and supremely confident equity market cannot be overstated. In fact, the rationale for an unduly low VIX index found in the FOMC’s latest minutes contained a glaring error of omission. Inexplicably, no mention was made of how expectations of a mild and thus manageable rise by interest rates have helped to reduce the equity market’s perception of downside risk. An unexpectedly severe firming of Fed policy would doubtless send the VIX index higher in a hurry.

Moreover, the FOMC’s latest minutes failed to comment on the close linkage between the now below-trend spreads of corporate bonds and an exceptionally low VIX index. As inferred from long-term statistical relationships, the VIX index now supports the possibility of corporate bond yield spreads that are much narrower than what is suggested by the default outlook. For the purpose of quantifying the latter, an aggregate version of expected default frequencies will be employed.

VIX Index and high-yield EDF metric differ on risk

Though the calculations of both the VIX index and EDF (expected default frequency) metrics are sensitive to asset price volatility, the messages delivered by each measure of risk can differ significantly. The 0.72 correlation between month-long averages of the VIX index and the aggregate EDF metric of US/Canadian high-yield issuers is statistically significant, but it is also far from perfect. For example, despite their relatively strong positive correlation, the VIX index and the high-yield EDF occasionally move in different directions.

Since the January 1996 inception of the average high-yield EDF metric, the medians during business cycle upturns were 3.7% for the high-yield EDF and 17.9 for the VIX index. Recently, the high-yield EDF nearly matched its median of all recovery months since December 1995, while a VIX index of less than 13 was well under its comparably measured median. In other words, the high-yield EDF metric senses a good deal more financial market risk than the VIX index does.

By way of simple regression analysis, the high-yield EDF metric now predicts an 18.3 midpoint for the VIX index, which is far above a recent reading of 12.2. Conversely, the VIX index predicts a 2.7% midpoint for the high-yield EDF metric that is less than the actual EDF of 3.7%.

The two broad measures of risk also now predict two vastly different midpoints for the US high-yield bond spread. Compared to the high-yield spread’s recent 384 bp, the VIX index predicts a midpoint of 365 bp which is much thinner than the 462 bp predicted by the recent high-yield EDF and the EDF’s three-month trend.

Both cannot be right. Nevertheless, the modest outlook for 2017’s profits from current production suggests that the EDF’s predictions for the VIX index and the high-yield spread may prove to be more accurate than the VIX index’s projections for the high-yield EDF metric and spread. However as noted earlier, the realization of modest profits growth may be sufficient for the purpose of warding off a deep slide by share prices provided that the effective fed funds rate finishes 2017 no higher than 1.13%, while the 10-year Treasury yield’s annual average for 2017 is no greater than 2.6%.

US Banks Launch Payment App

From Bloomberg.

For years, US banks have watched as their youngest customers split restaurant checks, shared utility bills, and pitched in for parties using third-party payment apps such as Venmo.

Now they’re trying to take back the person-to-person payments business by launching an app of their own.

Nineteen banks, including Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo, are teaming up to start Zelle, a website and app that will let users send and request money much as Venmo does. Bank of America says it is the first to incorporate all of Zelle’s capabilities—including the ability to split bills between users—into its own mobile app, starting today. A standalone Zelle payment app should be available to anyone with a debit card, regardless of where he or she banks, by the middle of the year.

Bank of America's upgraded payment app. Source: Bank of America

Zelle has some stiff competition from Venmo and its parent company, PayPal Holdings Inc. Venmo, which started in 2009, processed $17.6 billion in transactions last year, a 135 percent increase from the previous year. In the common vernacular, “to Venmo” means to move money to and from friends and family. That’s a huge advantage, said Michael Moeser, director of payments at Javelin Strategy & Research. When presented with another option, “An avid Venmo user is going to ask, ‘Why do I need something else?'” he said.

Zelle’s not-so-secret weapon is its connection to the big banks where millions of Americans keep their money. Request $40 from a roommate over the Zelle network using BofA’s app, and the money shows up in your account within minutes of when he agrees to send it. On Venmo, that $40 would show up in your Venmo wallet right away, but then it stays there. To get the cash into your hands, you need to log into your Venmo account, cash out your balance, and wait—sometimes days—for the money to show up in your bank account.

Venmo is trying to accelerate that process. PayPal made deals with Mastercard Inc. and Visa Inc. to move money over their debit card networks. By the middle of 2017, it should be possible to cash out a PayPal or Venmo account instantly, according to PayPal Holdings spokesman Josh Criscoe.

Zelle was built by Early Warning, a bank-owned company that also runs the clearXchange payment system. It’s no easy task to build an app that syncs with 19 large banks, four payment processors, and two card networks. Each has its own legacy technology, and many already have person-to-person payment tools, such as Chase’s QuickPay, that are popular with some customers.

To launch the new app without disrupting the old systems, Zelle is being rolled out in phases. In the first, under way now, bank payment apps will incorporate Zelle’s options and basic design without any Zelle branding. Banks can add these features whenever they’re ready.  Later, bank apps will tout Zelle branding, and, sometime in the first half of the year, a standalone app will be launched.

BofA’s person-to-person payments will be free. Although members of the Zelle network will have the option to charge, it’s not clear if any banks will even try to do so when Venmo and other payment apps cost nothing.

The lack of an obvious revenue opportunity may be one reason why it has taken so long for banks to launch a serious competitor to Venmo. Moeser summarized the attitude of banks until recently: “Do I really care about two 18-year-olds sending $20 to each other? Maybe not.”

But the people designing Zelle imply their goal is much bigger than just helping college students split a pizza bill.

“This is a great time for us to move [person-to-person payments] from millennials to mainstream,” said Lou Anne Alexander, Early Warning’s group president for payments. The use of mobile banking apps is expanding exponentially, creating many more opportunities for people of all ages to send and request money. “Any place we see checks and cash, that’s our target,” she said.

Because Zelle is sponsored by and connected to their banks, Alexander said users should feel more comfortable using it for larger transactions and for a broader array of uses, from paying a contractor to collecting money for a school dance team. Zelle may also be used for business-to-consumer payments, such as insurance companies paying out claims.

Anything that promotes the use of digital payments is ultimately good for Venmo, said PayPal’s Criscoe. “The common enemy is cash.”

Zelle and Venmo have a lot in common with one major exception. Venmo is also a social app, where users can and do choose to make their transactions, along with any associated emoji-filled messages, public. Criscoe said the average user checks Venmo two to three times a week just to see what his or her friends are up to.

Zelle users won’t have the option to spy on their friends’ payment activity. The idea was tested on consumers but fell flat with Zelle’s intended audience, Alexander said. “While appealing to some ages, it’s not really appealing to all.”

US Real Income Remains Frozen

According to the US Bureau of Labor Statistics, real (adjusted for inflation) average hourly earnings were unchanged from January 2016 to January 2017. Before adjusting for inflation, average hourly earnings increased 2.5 percent over the 12 months ending in January 2017. Over the same period, the Consumer Price Index for all Urban Consumers (CPI-U), which is used to adjust average hourly earnings for inflation, also increased 2.5 percent.

Since 2009, the 12-month change in average hourly earnings ranged from 1.5 percent (in October 2012) to 3.6 percent (in December 2008 and January 2009). Over the same period, the 12-month change in the CPI-U ranged from −2.0 percent (in July 2009) to 5.5 percent (in July 2008). The 12-month change in real hourly earnings ranged from −2.4 (in July 2008) percent to 4.8 percent (in July 2009).

The 12-month changes in average hourly earnings and the CPI-U were equal in April, May, and June 2014. From that time until December 2016, the change in hourly earnings was greater than the change in the CPI-U, resulting in positive changes in real average hourly earnings.

These data are from the Current Employment Statistics program and are seasonally adjusted. Data for the most recent 2 months are preliminary.