The Finatical
Week of September 27th, 2022 - University Endowments, Interest Rate Hikes, Widespread Inflation
Topic Breakdown - University Endowments
How do large, non-profit, institutions and universities manage to have enough funds to achieve their teaching goals? One reason for this is endowments. In this article, we will cover the meaning of a university endowment, their significance, and why many people criticize endowments to some colleges.
Introduction
In general, an endowment is a gift of money or property to a non-profit organization that invests the proceeds for a meaningful purpose. University endowments are funds or other financial assets given to academic institutions. Endowments are mostly funded through charitable contributions. Endowment funds help schools and universities with their educating, research, and public service goals.
Their Significance
So why are endowments so significant to universities? When a university/academic institution receives an endowment, the revenue generated is meant to pay a portion of the institution's operational or capital needs. In addition to a general university endowment fund, universities may have a variety of restricted endowments to finance specialized sectors within the institution, such as faculty positions, grants, and internships. Essentially, endowments increase the quality of education that universities can provide. Endowment funds are very important to the financial strength of schools and universities, specifically in the United States' university system. While many private colleges and universities have huge endowments, the majority of public universities have either extremely small endowments, or no endowments at all. Instead, they get support from state governments, which private colleges do not have.
Criticism
Even though endowment funds can sometimes be crucial to a college’s success, there is still some criticism regarding this topic. Top colleges such as Harvard have been criticized in the past for the size of their donations. Many people have questioned the value of endowments worth billions of dollars, comparing them to amassing wealth that is not needed for the university, especially with rising tuition fees. This is why many people believe that more colleges should use their endowments to lower their tuition. Even with the criticism of endowments, they are still largely prevalent among most private universities, and often do provide a higher quality of education.
Financial Trends
Fed Forecasting Hiking Interest Rates
The Fed announced this Wednesday that it will be raising interest rates as high as 4.6% in 2023 before the central bank officially ends its fight against increasing inflation. Additionally, the Fed also raised benchmark interest rates by another 75 basis points, resulting in an inflation rate of 3.25%, which is the highest it has ever been since the recession in 2008. Central bank officials are already warning U.S. citizens of another 75 basis point rate hike before the year comes to an end, as there are still policy meetings left in the year for the Feds.
The data that the Feds are using to signal their outlook for the paths of interest rates in the upcoming year, displayed six of the nineteen “dots”. These dots project that interest rates will continue to increase at a higher rate, within the 4.75% to 5% range next year. Economists are worried about how many interest rate hikes the economy will be able to sustain. Their cause for concern is due to these huge interest rate hikes potentially slowing down the economy so much that it may go into a recession once again. There is still some optimism as Fed officials are expecting inflation to eventually decline to the Fed’s 2% inflation goal set for 2025.
Inflation Far Beyond Gas and Food
For the majority of this year, inflation has been the hottest topic that is being discussed with economists and policymakers, where it was mainly an issue with the cost of food and gas prices. Furthermore, once supply chain issues started to resolve and gas prices abated, the common belief was that these would result in lowering food costs and easing price pressures across the nation’s economy. However, the consumer price index numbers that came from August crushed those aspirations, as prices continue to exponentially increase, indicating that inflation is here to stay. CPI numbers rose by 0.6% for the month, which was nearly double what Dow Jones estimated, resulting in the yearly cost of living also increasing by 8.3%.
Despite the decline in energy prices helping reduce the big-time inflation numbers, it has not been enough to remove the fears of inflation being a significant problem for the unforeseeable future. According to the chief economist at Moody’s Analytics, Mark Zandi, “The core inflation numbers were hot across the board. The breadth of the strong price increases, from new vehicles to medical care services to rent growth, everything was up strongly”. This pattern of inflation was also seen in sectors where it was not very common like, apparel prices, which often decline, were also by 0.2%. Although inflation is affecting the entire nation’s economy, a survey released by the New York Fed earlier this week reported that consumers are tending toward becoming less fearful about inflation but still expecting the inflation rate to be 5.7% next year.
Financial Guidance
“Belief in oneself and knowing who you are … that's the foundation for everything great.” ― Jay-Z
More often than not, it’s easy to doubt yourself and wonder if you’ll even succeed in what you’re seeking to achieve. However, it’s important to know that there will be rough patches, but to always have faith in yourself and what you seek to do. This can apply to anything you seek to accomplish in life, even outside of finance and investing.
Term of the Week
Inflation: Inflation is a measure of the rising prices of goods and services across an economy. When inflation occurs, it means that the currency is losing purchasing power within the economy. While inflation itself isn’t a bad thing, if too much inflation occurs within a relatively short time period, it can be a concerning indicator regarding the state of the economy. If too much inflation occurs within a short time period, it is called hyperinflation.