What The Wealth Retirement Podcast

Will the Fed Cut Interest Rates Anytime Soon? Analyzing the Economic Outlook (096)

• Jonathan Bednar II, CFP • Episode 96

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We're all curious as to what the Fed's going to do with rates. On this episode we attempt to tackle this burning question. We start by retracing the economic journey since 2021, exploring how post-COVID inflation surged to 9% and prompted the Fed to raise interest rates aggressively. Despite these higher borrowing costs impacting mortgages, auto loans, and credit cards, our economy has shown remarkable resilience, thanks to a strong labor market and hefty savings. Now, with inflation reduced to around 3.4%, we evaluate whether the Fed's measures have been effective and consider the potential benefits and risks of a rate cut.

Join us for a dive into the Federal Reserve's potential strategies amid recent economic trends. 

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Thanks for Listening!

Jonathan

Speaker 1:

Will the Federal Reserve cut rates? This is a question that's come up a lot from clients and prospects, so I wanted to take a few minutes to answer it on the podcast. If you are new here, my name is Jonathan Bednar. I'm a certified financial planner, co-owner of Paradigm Wealth Partners in Knoxville, tennessee, and soon to be Chattanooga, and this is the what the Wealth podcast. The question around the Federal Reserve and rate cuts has popped up quite a bit this year and I'm going to answer this question. But I want to go back in time a little bit and kind of retell where we've been and how we got to where we are today.

Speaker 1:

So obviously we had, in 2021, the economy really take off. We were flush with cash that was granted after COVID. Everyone got cash. It was a little bit like Oprah Winfrey's television show you get some cash and you get some cash and you get some cash. And what happened after? That became runaway inflation. Inflation surged to 9%. Everything just became, you know, everything just became drastically over expensive, almost out of reach overnight, and it just felt, while we had a high from our investments and everything was doing really good in 2021, as we moved into late 2021, early 2022, there started to feel some resentment just for how much things cost, and it was everything. If you were building a house, it was lumber and windows. If you were paying rent somewhere, it was new rent increases, it was food, it was gas, it was clothing it was everything dramatically shot up, and so we found ourselves at a point where inflation was 9% and we needed to do something to try to combat that inflation.

Speaker 1:

Now, from the previous financial crisis, the great financial crisis we saw in 2008, the Federal Reserve had basically kept rates at what was called a zero rate policy for 10 plus years, and this was to stimulate the market and the economy after the great financial crisis of 2008. There's arguments around that was kept too low for too long. We're not going to talk about that today, but I do think there's some merit to everybody getting used to very, very, very low rates when a lot of times, the market really was feeling pretty good and we probably could have tolerated higher rates at that time, but we still had low inflation, and so the argument was it's really hard to raise rates when we have no inflation. So 2021 hits again, we jump up to 9%. The Fed has to act. We have to combat 9% inflation. How do we do it? One of the major policy changes that the Federal Reserve can do at that time is to raise interest rates.

Speaker 1:

So, starting in first quarter of 2022, we saw the Federal Reserve start to raise rates, and they did it methodically. A couple times there's a quarter point, a couple times there's half a point, but they essentially went from zero to 5% in about a one year timeframe, and that's a pretty aggressive rate hiking cycle. When you think about it, we're going from essentially 90 miles an hour down the interstate very, very cheap money to slamming on the brakes and cost of borrowing skyrockets. You know we saw homes going for two and three percent prior to this rate hike mortgages to now homes were charged. You know rates on mortgages on homes were seven, eight and nine, and so this has really caused not only mortgages but it also for businesses, for credit cards, for everything auto loans everything has increased the borrowing cost and so it's made it harder for people to buy new things.

Speaker 1:

But I'll say the economy has actually been resilient. It's weathered this rate hike pretty smoothly. We have a strong labor market. We have lots of jobs, openings and people employment Low employment still around 4%. People have spent some of the savings that they've accumulated from COVID. But that's one of the things that I think helped us kind of weather. That rate hiking cycle was the amount of cash that people had put back and the ability to continue to spend and buy things to weather that storm. So it helped keep the economy strong. Wage gains are increasing storm, so it helped keep the economy strong. Wage gains are increasing.

Speaker 1:

And so as the Federal Reserve hiked rates, we've seen over the last year or so CPI which is a fancy word for inflation come down. So we're at around 3.4 right now. If we look at this blue line right here, that is core CPI. That core CPI is CPI and we take out food and energy and so with that we're right around 3.4%. So when we do that and we see the Federal Reserve holding rates high here in the low fives, we start to wonder is the higher rates doing its job? Clearly, by looking at this graph you know you can't see if you're just listening to the podcast, but you should be able to see if you go to the Paradigm Wealth Partners YouTube channel you can see by this graph that the inflation has come down from nine to mid threes.

Speaker 1:

It appears like this rate hiking cycle has worked, and now we're at a point where, if we leave rates too high for too long, we put ourselves in a position to have a potential recession, and so we're seeing evidence that this rate cycle is working. It makes sense to start to cut rates and not go from five to zero, but maybe tick down a quarter point or half a point to start easing slowly. That will still provide us a way to combat inflation, but it will provide some relief for things like the mortgage market, for auto loans. There's really high credit card delinquency right now. So some of those things I think can be impacted in a positive manner if the Fed will cut rates Now.

Speaker 1:

The Fed is targeting a 2% inflation rate Right now. We're at mid threes, so there's still some work to do, but I think that in my mind, 3% is normal, so they're shooting for two. That seems a little low to me. That's been the standard over the last 10 or 15 years, so that's what the Fed has gotten accustomed to. So the answer is I guess the question is will the Federal Reserve cut rates? This year?

Speaker 1:

We were projecting early on. Most people were projecting the Fed would cut rates multiple times. The Fed has been very resilient on staying higher for longer, waiting to see that their work will hold and we won't see a spike back in inflation after they cut rates, and so they're just being very diligent and methodical in their process here. So it does appear like they will cut rates. The projections have gone down to only one rate cut this year, whereas before we were looking at potentially multiple rate cuts. Right now the potential is either September of 2024 or November of 2024 for a potential rate cut, but I do think we get one this year.

Speaker 1:

I don't know exactly when it'll be, but I do think that the Federal Reserve looks back. If they look back at the data, they can say you know, the work we have done has worked. We're not exactly to our target yet, but the trend line is down. I think, uh, what we've done is working and continuing to work and maybe it makes sense to take our foot maybe not completely off the brake, but not press down as hard. Slowly let that break, release and help some of these lower rates provide some positive impact for mortgage loans, car loans, business loans, those sort of things to help us continue to try to avoid a potential recession. So that is my long-winded answer on will the Federal Reserve cut rates this year? Thank you for listening and if you are watching, thank you for watching. Have a wonderful day. Be confident in your retirement.