Money Rehab with Nicole Lapin - What The Fed's Decision Means For You

Episode Date: May 9, 2024

Last week, The Fed decided to keep interest rates steady. Today, Nicole unpacks how you'll be affected, and how you can use this update to your financial advantage.

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To get started, visit bofa.com slash newprosmedia. That's B-O-F-A dot com slash N-E-W pros, P-R-O-S, media. Bofa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Last week, the Fed decided to keep interest rates steady. Now, in general, we know how interest rate changes affect us. Higher interest rates means it's more expensive to get money, which means things like mortgages, the APR on your credit card, pretty much all vehicles for borrowing money get more expensive. But if you're the one lending money, which is in effect what you're doing when you're

buying a CD or a bond or even open a high yield savings account, higher interest rates are good for you. And lower interest rates means it's easier to get money, cheaper mortgages, cheaper personal loans, but less ROI on bonds and high yield savings accounts. Of course, interest rates were slashed during COVID and then boosted to curb inflation. Over the last year, the Fed started slowing down the interest rate hikes because inflation started to fall. But at the top of this year, the Fed was optimistic that they would be able to start cutting interest rates. However, inflation seems to be fighting back more than experts anticipated.

So as a rockstar economist Nouriel Roubini said on the pod on Monday, we'll see what's actually possible with interest rate cuts. But the net trend seems to be that interest rate hikes are at least starting to mellow out. But has that trend really been reflected in our wallets yet? Not really. Mortgages are still super expensive, the average credit card APR is still over 20%, and categories like car insurance and household repairs are still up double digits from last year. So given all this info, there's an obvious next question. If interest rates really are the lever that is supposed to take the heat off our wallets, is the solution broken? In order to

really answer that, we have to look at the mechanics of that lever. As we know, probably now better than in any point in history, the Fed controls interest rates. And fun fact, the Fed is divided into three entities to meet all of the responsibilities of making the economy healthy. Yes, we do love divvying up our government bodies into threes in this country, don't we? Well, the three entities are the Federal Reserve Board of Governors, the Federal Reserve Banks, and the Federal Open Market Committee, or the FOMC. With the Fed, there's a lot of minutiae and paperwork and bureaucracy that you really don't need to know.

But there are a few things that would be helpful to understand. First of all, the Fed is always supposed to serve the public interest and not private companies or the small elite fraction of the national population. But how do we make sure that they're always kept honest? Well, one of the branches of the Fed, the Board of Governors, is an agency that answers to Congress. By reporting to Congress, in theory, this agency is supposed to be put in front of the citizen elected officials and therefore kept accountable. The entity that is most newsworthy, at least right now, is the Federal Open Market Committee or the FOMC. The FOMC has two very big jobs. First,

creating monetary policy, and second, managing the country's money supply. One big way the FOMC tips the scales of the economy is by determining how much interest banks can charge when they lend money from their reserves to other banks. This interest rate, known as the Fed funds rate, is what's adjusted in response to the needs of the economy, and this is the interest rate that everybody is talking about. So the Fed isn't directly setting the interest rate that you're going to pay for your mortgage, but it starts a cascade effect that flows from what banks are able to charge each other in interest to your wallet. Once the Fed changes the rate banks charge

each other for loans in response, banks will then adjust the rates they offer to people. That's where your mortgage and your loans start to be affected. If the Fed funds rate goes up, banks raise their rates for borrowers to maintain their profit margins. The reverse is true when the Fed funds rate goes down. Banks typically will lower their rates for borrowers. This flowchart also has another path, which adds businesses as an intermediary step between banks and people. Because banks don't just loan money to people, they loan money to businesses, too. A higher Fed funds rate means higher borrowing costs for businesses. This might lead to businesses delaying or scaling down plans for expansion,

which can mean slower economic growth, possibly fewer new jobs or forced price increases to the products they sell. So this domino effect does reach consumers. So why are we still feeling so much financial pressure? Well, the easiest answer is that the Fed hasn't started cutting rates yet, and inflation hasn't been fully brought under control yet. So we shouldn't expect to see lower rates on our personal finances just yet. The more complicated answer is, while the Fed funds rate is important and certainly influential in the financial world, it isn't the only factor that affects purchases.

If you're a prospective homebuyer, your housing cost isn't just your mortgage rate, right? The actual price of the house is pretty important, too, and those prices are affected by supply and demand, not just the Fed funds rate. So while we can't map out our financial plan entirely based on what the Fed decides to do rate. So while we can't map out our financial plan entirely based on what the Fed decides to do with interest rates, we can make that a part of our overall financial strategy. For example, while the Fed was too optimistic when they started talking about rate cuts, experts like Dr. Rubini are still predicting cuts this year. So if you're considering a loan, you might want to wait until rates drop, which will save you money in interest rates over the lifetime of the loan. And if rates drop, the yields on assets like CDs

will drop as well. So if you're thinking of purchasing a CD, now is the time to lock in those great yields. I know it has felt like hard economic times, and so the decisions the Fed makes can feel different. But they do ripple through the economy to affect all of us, from Wall Street to Main Street. And by understanding how these rates are set and manipulated, you're better equipped to make informed decisions about loans, savings, investments, the major financial food groups. For today's tip, you can take straight to the bank. The FOMC next meeting is in June, and around that time, be careful with your investment portfolio. The stock market is very, very sensitive to changes in the Fed funds rate. The rule of thumb is typically that an

announcement of a lower rate makes the stock market very, very happy. So I would recommend beware of the timing of these Fed meetings because the stock market will likely show some movement around these times and it's not necessarily always the best time to take a big risk. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok at

moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.