What The Wealth Retirement Podcast

Exploring the Economic Effects of a the Recent Rate Cut (097)

• Jonathan Bednar II, CFP • Episode 97

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How does the Federal Reserve's latest rate decision influence your financial future? 

With inflation taking a roller-coaster ride from 9% to a more manageable 3%, we explore the Fed's motivations for this rate cut and its broader implications for your portfolio. 

Reflecting on the history of inflation—from the days of 10-cent Cokes to today's prices—we consider what the future holds for consumers and investors alike. As we dissect the market's response, we'll also touch on recent job reports and the Fed's commitment to steering the economy through these choppy waters. Whether you're planning for retirement or evaluating your next big investment, this conversation provides insights to guide your financial decisions.

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Thanks for Listening!

Jonathan

Speaker 1:

The Fed pivot. On September 18th, wednesday, the Federal Reserve cut rates by 50 basis points, after hiking rates throughout 2022 and holding those through much of 2023 and 2024. And so today on the what the Wealth podcast, we're going to talk about the Fed the first Fed rate cut since 2019, actually. So that's what's on the docket today. I'm your host, jonathan Bednar. This is the what the Wealth podcast, where we talk all things retirement, investing, financial planning for you so that you can make informed financial decisions about money, about life, about retirement. So thanks for joining us.

Speaker 1:

This has been really an interesting rate cycle. We had inflation hit as we've talked about many times on this podcast as high as 9%. Today, inflation is sitting somewhere around 3%. I don't have that CPI inflation number in front of me right now, but it doesn't much matter what the actual number is today. What's important is the inflation rate has come down because of the Federal Reserve raising interest rates to where they did around 5% and keeping them there while the inflation rate has come down. Now I'm not going to try to sugarcoat or make some fair tale up that inflation is really down.

Speaker 1:

Of course, eggs are more expensive than they were four years ago, as is gas, as is almost anything that we buy, whether it's goods or services. And that is really the nature of inflation in and of itself. Every year there's a cost of goods sold or services sold that increases year over year over year. I actually just put in a 1950s Coke machine, vendo 56. These machines were built between 1957 and 1959. And I put this Coke machine in my Chattanooga office. We just opened it. And what's really interesting about these Coke machines are is that for 10 cents you could get a fresh glass bottled Coca-Cola beverage. Those days are long gone. So today a Coke cost you, you know, around $2, $2 and 50 cents. Gone are the days when you could get a 10 cent Coke, except for at Paradigm Wealth Partners Shadnook office. We still offer them. And so the history of that kind of 60 years where 50, 60 years where a Coke's gone from 10 cents to $2.50 or $3, is really the same thing we see across everything, all goods and services, and that will continue to happen. In 20 more years, cokes aren't going to be $2.50 or $3. Cokes are going to be $4 or $5 or $6.

Speaker 1:

And so you know, while inflation, the inflation rate, and really we're talking about the rate of change. When, a couple years ago, when the inflation rate was 9%, that was the rate of change from the prior year. Today it is 3% plus or minus, and that is a 3% rate of change above the previous year, and so the idea that inflation is down is true. The rate of change is down from where it was last year. That doesn't mean that inflation is still not higher than it was from several years ago, and so I think there's a misconception there.

Speaker 1:

But what the Fed has done is what they tried to do by keeping rates high was cut. Keep rates high to allow a higher rate to take some of the money supply out of the market, which would then slow that rate of change down in the inflation rate. That has happened. So it's come to a point now where it made sense for the Fed to cut interest rates. We were at around 5% an hour, 50 basis points or half a percent less than that, which is actually a positive for the market.

Speaker 1:

We actually saw on the 18th, when the Fed cut these rates, the market not really know how to act. The market went up, then it went down, then it went up and it just kind of bounced all over the place On a Thursday, the 19th. The market had a great day. The market rallied pretty strong and kind of rejoiced the Fed taking this decisive action to cut rates by half a percent instead of a quarter of a percent, and that really showed their commitment to. You know, the time has come.

Speaker 1:

There has also been some kind of sluggish numbers in the job reporting that's happened lately. That's made it seem like maybe we don't have as strong as economy as we thought we did and maybe the Fed missed their chance back in July. I do think, looking back, they should have taken that chance to cut in July and they didn't, and so the market has rebounded. Some kind of gave them another, if you will, kind of a t-ball at bat to cut rates, and so they didn't miss that chance. Now the forecast is they're going to cut rates again. Well, didn't miss that chance. Now the forecast is they're going to cut rates again. Well, there's several forecasts out there. I've seen 120 basis points total, which would be 1.2%. I've seen potential another 50 basis points in November and then multiple cuts next year. The point is, I think, the market's kind of forecasting a target federal funds rate of about 2.9%. Last I saw in 2026. So we're going to be slow, but they are going to be methodical. They're not going to just cut to zero unless really the bottom falls out of the labor market. We see kind of stagflation. We see maybe a recession start.

Speaker 1:

I actually don't think data supports that we're going to have a recession. Right now that could obviously change and a lot of times we don't even know we're in a recession until when the recession is actually called. Which is actually two quarters of negative GDP. So just because the market goes down doesn't mean we have a recession. It means that we've got some volatility in the market. If we have two negative quarters of GDP, that means we have a recession. So if we have a recession or again job layoffs we have high unemployment, something like that then I could see the Fed cutting rates substantially, maybe back to zero.

Speaker 1:

But I think we're far gone from that zero rate policy. I think we're going to try to set a new normal of somewhere around 3% Fed funds rate. This is actually a positive for the market. That means it's going to be housing mortgages are going to be cheaper. Car loans are going to be cheaper. It's going to be cheaper for businesses to get loans to continue to support and grow in the local community servicing good services for consumers. So this is actually a net positive for people. They win, the communities win. It won't be an instant effect. It will be a slow, methodical kind of trickle in. It takes a little while for these to be felt. There's one downfall is that we've gotten used to 5% interest rates in money markets accounts and kind of high yield savings and it's been easy to just kind of park cash and then earn a decent return for the first time in 15 years. Those days are coming to an end. I don't think it's going back to zero, but I do think it's going to start dropping and they will drop rather quickly as the Fed cuts rates.

Speaker 1:

So I'm going to share a tweet from Ryan Dietrich, who is the chief market strategist at Carson. He was a former chief market strategist at LPL Financial, one of the greatest financial statistical wizards of all time in my opinion. That's not proclaimed, it's just he's got a really great mind. So what he said is and I'll show this if you're watching on YouTube or somewhere else in video format the last 20 times the Fed cut rates when the S&P 500 was within 2% of an all-time high based on the day before the cut, which is what we just happened, meaning the Fed is within 2% of its all-time high. The last 20 times the Fed had cut rates with that window 2% of the S&P 500 in an all-time high the S&P 500 was higher a year later all 20 times and up 13.9% on average. Yesterday was the 21st time. That doesn't mean that we're going to be 21 out of 21. We could not be up next year or 12 months from now.

Speaker 1:

But history as a guide shows us that the market likes when the Fed cuts rates. It makes it easier for people to get loans, to have cheaper mortgages, it's easier for businesses and for companies to refinance debt, to get new debt, and the market rewards the S&P 500 or the S&P 500 investors are rewarded with staying the course and not getting sucked into kind of the panic and hysteria of what's going on. So I thought that was a really interesting stat for you to kind of think about and ponder. I believe that this is beneficial for the market. I think the market continues to go higher. We're going to have volatility. That's natural when you're an investor. It is important to stay the course, be confident in your retirement.

Speaker 1:

Have a wonderful day. Thanks for listening. If you haven't already subscribed, please subscribe. Thanks for joining me on another episode of what the Wealth. If you enjoyed the episode today, smash that subscribe button. It helps me more than you think. Also, if you found this episode insightful and a light bulb went off, share it your friend, aunt Judy, the random guy in the office who's always talking about investments. Wealth isn't about just the chain. It's about our choices, chances and changing our financial futures. The information in this podcast is informational, in general in nature and does not take into consideration the listener's personal circumstances. This podcast is not intended to be a substitute for specific financial, legal or tax advice. You should consult the approved qualified professional prior to making a final decision. Securities offered through LPL Financial member FINRA SIPC. Paradigm Wealth Partners is the other business name for Independent Advisor Alliance. Investment advice offered through Independent Advisor Alliance, a registered investment advisor. Independent Advisor Alliance and Paradigm Wealth Partners are separate entities for LPL Financial.