As Fed officials propose new hikes in interest rates, consumers have taken to “Buy Now, Pay Later” lending platforms.
Are these platforms a haven or a burden on the tightening budgets of the American middle class?
More Rate Hikes Coming, But Likely Smaller
While the markets are anticipating additional rate hikes, they will likely come in smaller doses, according to a Wednesday speech by Fed Chair Jerome Powell.
Since March, “the FOMC has been removing monetary policy accommodation at its fastest pace since the 1980s in an effort to bring inflation back down toward the Fed’s 2% target,” said St. Louis Fed President Jim Bullard.
In 2021, the Federal Open Market Committee, responsible for defining the Federal Funds rate, was expecting inflation to remain around 2% during 2022, which did not happen.
By September 2022, the median FOMC participant projected that headline inflation would be 5.4% and core inflation would be 4.5% at the end of this year.
As per recent data, Bullard says that “it would take a policy rate of at least 4.9% to exert downward pressure on inflation.” The current Fed Funds Rate stands at between 3.75% and 4%.
The Labor Market
The Fed’s role is to fulfill a “dual mandate of stable prices and maximum employment,” Bullard added. With employment still strong, the Fed continues to feel comfortable to further raise interest rates until inflation winds down.
“Even under generous assumptions, the policy rate has not yet reached a level that could be considered sufficiently restrictive,” Bullard noted.
On Monday, John C. Williams, president and CEO of the New York Fed, called inflation “the number one economic concern across the globe.”
“Inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential,” he said, adding that while it’s a complex problem, he remains confident that the Federal Reserve's actions will restore price stability.
“Overall demand for labor and services still far exceeds available supply, resulting in broad-based inflation, which will take longer to bring back down.”
The labor market remains remarkably tight, Williams said. Pointing to robust hiring and rapid wage gains.
However, growth is slowing. He anticipates that the unemployment rate will climb from its current level of 3.7% to between 4.5% and 5% percent by the end of next year.
With interest rates cooling global demand, and supply chains improving from their disruptions, Williams expects inflation to be at around 5% by the end of the year and “to slow further to between 3 and 3.5 percent for next year.”
Buy Now, Pay Later Hits Records On Thanksgiving Deals
While rising interest rates are causing demand to slow down, “buy now, pay later” platforms (BNLP for short), are helping consumers make up for the loss in purchasing power.
In a recent interview with Fox Business, Max Levchin, co-founder and CEO of Affirm AFRM, one of the largest BNLP lending platforms, said that in an inflationary environment people need more access to credit.
“They’re literally losing their purchasing power and we’re here to give it back to them,” he said.
That means that from Affirm’s perspective, inflation brings more demand for point-of-sale lending platforms like themselves, PayPal PYPL, Sezzle SEZNL and Afterpay.
Cyber Monday 2022 brought an estimated record revenue of $11.3 billion as BNPL purchases increased by 85% compared to the week before.
In the case of Afterpay, the platform saw a 120% rise compared to the week prior.
Many users of the BNPL model are younger consumers, who have subprime credit scores and are unable to access other types of lending. People living paycheck to paycheck are also turning to these platforms.
Many consumer transactions using BNPL platforms are interest-free for the customer, while a fee is charged to the seller for being able to offer this service.
For consumers looking to finance an article or service immediately, a no-interest loan sounds like a no-brainer. But users of these services should make sure to have the capacity to make the payments in due time.
Affirm’s latest report shows that accompanying its growth, is also an uptick in delinquencies, meaning that more people are missing their payments.
Benzinga’s Take: “Buy now, pay later” platforms can get many Americans out of a jam when money is tight. They can also be enticing propositions to acquire a desired product or service without having to wait.
However, the temptation of interest-free loans shouldn’t be taken lightly, as missing payments can lead to a debt spiral which can lead to further financial difficulties.
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