Polls suggested a Clinton win; a no Brexit vote and no looming recession in 2007 – all were contrary to what people actually felt.

The election of Donald Trump as the next president of the U.S. is another proof that what people say in response to surveys does not necessarily match how they feel about the issue.  Polls taken close to the Election Day indicated a slight lead for Hilary Clinton in the presidential elections, but that was not the case.

In June of 2016, polls in the United Kingdom indicated that more people are going to reject a departure from the European Union.  In reality, more people voted to leave the EU, thus initiating the Brexit.  Here again, what people in the U.K. told pollsters was not necessarily how they actually felt about the issue.

Similarly, the disparity between what people say in response to confidence surveys and the way they actually behave with their money is a known phenomenon in behavioral finance.  One of the reasons consumer confidence indices were late to report on the looming recession in 2007 was because consumers remained optimistic in reporting to surveys, but acted contrary in real life.

A true measurement of financial confidence among consumers is achieved by measuring what consumers actually do with their money (objective) rather than ask them how they feel, which is subjective.  The Money Anxiety Index measures consumer financial confidence by observing actual financial behavior. 

The Money Anxiety Index is produced by Dr. Dan Geller, a behavioral finance scientist and the author of the book Money Anxiety.  The index measures the level of consumers’ financial worry and stress based on their spending and savings pattern.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  

The Fed is likely to choose September for a rate hike because June is too soon and December is too late.

A relatively weak first quarter may convince the Fed to push the rate hike to September.  June is too soon because the second quarter results will not be available, and December is too late because it is over the critical holiday shopping season.  
The Fed Open Market Committee (FOMC) has three more meetings this year that are followed by a press conference – June, September and December.  Due to the importance of the initial Fed rate hike, it’s highly likely that the first move will occur during one of these meetings.

In the March 18 FOMC meeting, the votes were almost evenly split between an initial rate hike in June and September.  However, in the March FOMC meeting the committee did not have the March disappointing job report,  which means that more members of the committee will push for a September initial hike in order to better evaluate the employment situation.  A December hike is not very likely because it is too late in the year and is right over the holidays' season.

Lately, consumers have been exhibiting signs of financial nervousness about the economic recovery.  The April Money Anxiety Index is flat at 65.7, indicating that the level of financial anxiety among consumers is not improving as evident from their spending level.  February personal consumption expenditures increased by only 0.1 percent in nominal terms, which shows that consumers are holding back on spending.  

The Money Anxiety Index measures the level of consumers’ financial worry and stress based on their spending and savings pattern.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  The Money Anxiety Index is highly predictive.  It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.   

Dr. Dan Geller is a financial behavior scientist exploring the link between the level of financial anxiety and the savings and spending habits of consumers.  In his book, Money Anxiety, Dr. Geller uncovers the mystery of the financial mind, explaining why we hate to lose more than we love to win and why we spend when safe and save when scared.

Rising rates, rising rates was cried before but they never did.  What if this time rates will rise and no one is ready?

We all know the story about the boy who falsely cried wolf too many times that no one paid attention when the wolf really came and attached the sheep.  So the question is – how do we know that this time the cry for rising rates is for real?  Well, we don’t, but since this time the probability of rising rates is high, we better be ready.

Here is a simplified way to look at the probability of rising rates in 2015.  The Fed, through its voting members, is faced with a dilemma.  The U.S. economy is improving steadily, GDP is increasing mostly due to greater consumer consumption and the employment situation has greatly improved in the last few years.  All in all, most of the vital signs of the U.S. economy are healthy and the economy can sustain a mild rise in short-term rates.  Except, of course, for very low inflation rate caused mainly by low gas prices and flat wage level.

So the dilemma is – do you raise the funds rates based on the improving aspects of the economy with the hope that the dip in oil prices is going to be short lived and inflation will rise later on?  Or, do you hold off on increasing the funds rate until inflation reaches the 2 percent mark thus delaying normalization for the longest time period in U.S. history?  Based on the latest announcement from the FOMC and the new makeup of its voting members, there is a 75 percent chance that the funds rate will increase in June of this year, and a 25 percent chance that it will be delayed.

So, if you know that there is a high probability that the wolf is really coming this year; what do you do?  You get ready.

Pricing has two dimensions – competitors and consumers. When you price your deposits based only on the competitive landscape, you are assuming that consumers respond to rates in the same way all the time. This assumption is incorrect. In reality, consumers respond to rates based on the principles of behavioral finance.

The governing principle of behavioral finance is that consumers make intuitive decisions during stressful economic times, as a result of high money anxiety, and shift to analytical decision-making mode when economic conditions improve. The implication of this principle is that financial institutions can price deposits differently during various levels of money anxiety. Here is a case in point illustrating the power of money anxiety over consumer financial behavior..MORE.