NerdWallet's Smart Money Podcast - Fed Could Finally Cut Rate Soon: What Would That Mean for You?

Episode Date: August 7, 2024

Learn how the Fed's interest rate decisions impact your finances and get insights on retirement readiness and brokerage outages. What does the Fed's recent decision to maintain the current interest rate mean for you? How will a potential rate cut in September impact your finances? Hosts Sean Pyles and Anna Helhoski discuss the implications of the Federal Reserve's latest moves and what you can expect from a potential rate cut in the near future. NerdWallet’s Senior Economist Elizabeth Renter joins them to provide insights and actionable takeaways on how these changes could affect your credit cards, mortgages, and overall financial strategy. Unsure of how prepared you are for retirement? Check out NerdWallet’s retirement calculator: https://www.nerdwallet.com/calculator/retirement-calculator  Then, they dive into the latest money headlines, including the alarming state of Americans' retirement preparedness and the recent brokerage outages that left many investors locked out of their accounts. The episode aims to leave you with a better understanding of how to navigate economic changes, prepare for retirement, and manage your investments effectively. In their conversation, the Nerds discuss: Fed interest rates, Federal Reserve, rate cuts, inflation, economic outlook, mortgage rates, credit card rates, unemployment rate, financial news, retirement savings, stock market, investment strategies, consumer spending, economic data, inflation rates, interest rate changes, economic growth, financial planning, loan interest rates, savings strategies, 401k plans, financial stability, market trends, stock trading, retirement planning, economic policy, job market, inflation impact, debt management, financial independence, stock market news, and Fed decisions. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic and then leave you with the latest money headlines. Today, we're going to talk with NerdWallet's economist Elizabeth Renter to get a pulse on the economy. We'll also dive into what the Federal Reserve did last week to interest rates, which was, drumroll please, nothing. Again. That's right. The federal funds

rate is staying at 5.25 to 5.5 percent, where it's been stuck since last July. But Fed Chair Jerome Powell did indicate that a rate cut in September is on the table. And that was happy news for the futures market, which is pegging the odds of a rate cut at 100% for September. Of course, there are no guarantees, but it would be the first cut since the Fed began battling inflation back in March 2022. A rate cut would be a big deal for Americans. For those who don't know, the Fed rate also influences interest rates set by credit card companies and lenders for things like auto loans and mortgages. Elizabeth will tell us more about what a rate cut means for you. Elizabeth, welcome back to Smart Money. Hey, thanks for having me, Sean. So quick clarifying question on your title, Elizabeth. You are NerdWallet's newly

minted economist. You want to tell listeners what that actually means? Yeah, absolutely. So as of this week, I've been at NerdWallet for 10 years. So I'm super excited to be stepping into this new role as NerdWallet's first economist. And I think I first mentioned last year or possibly even the year before on the podcast that I was in grad school. And as of this spring, I finished my master's degree in economics. So yeah, thank you. While I've led our data studies program at NerdWallet for several years, the degree and the title are really just in furtherance of what I've always loved doing, which is making sense of economic data and helping people understand what it means

for their finances. Well, congratulations on all of that. We will certainly be tapping your expertise as much as nerdily possible. So back to interest rates. The big question on all of our minds right now is what is the Fed waiting for? In one word, confidence, right? Okay. In more words, though, confidence that inflation is undoubtedly headed to the Fed's 2% target. Fed Chair Powell has actually used the word confidence many, many times over the past several months. In his press conference last week, he used it 12 times. And while inflation has come down considerably, the most recent read is 2.5%. He says they just need to feel more certain that it will continue the rest of the way. So this confidence or lack of confidence comes from the plethora of economic

data that the Fed examines every month. And, you know, I need to say there's been a lot of chatter since last week that the Fed should do an emergency cut. But I just don't see that as likely. If they didn't cut last week, the jobs report, which is subject to revision, is not enough to warrant emergency action. That data could change. And so while it did provide some assurance that the labor market isn't contributing to inflationary pressures, I would be really surprised if the Fed acted on it alone. Yeah, Liz, I agree. I had seen the last time that the Fed had done an emergency rate cut, and it was March 2020. Before that, it was 2008. And before that, it was 2001. So all those were

just really significant periods of time that totally warranted emergency rate cuts. And this one doesn't seem quite as definitely not on the same par. Exactly. Those were emergent situations. And as of right now, we are not in a similar situation. So let's get into inflation. Prices have been elevated compared to where they were four years ago. And people are understandably not thrilled, even though price increases are continuing to slow down. So walk us through what's happening right now with inflation. Sure. The recent history is that inflation or price growth accelerated to a high of about 7% year over year in 2022. And this is according to the PCE, which is the Fed's preferred measurement of inflation. Now, over time, this price growth has

slowed considerably due in varying degrees to unsnarled supply chain issues and the Fed's monetary policy. As I mentioned, the Fed ultimately wants this year over year inflation number to be 2% and we're getting very close. But there are other factors that play beyond inflation. So what about employment? We saw unemployment tick up over the last couple of months, but it's still relatively low compared to decades past. Is this level of moderation what the Fed has been waiting for? Yeah, that's right. So last week, we did see unemployment hit 4.3%, and that's a rate not seen for a few years, but it's certainly not considered high. The Fed's high interest rate campaign now in its second year

puts a squeeze on businesses. High interest rates make it expensive to borrow money, expand, and hire new workers. So the longer rates are high, the more we expect to see this squeeze show up in the numbers that measure the health of the labor market, numbers like the unemployment rate. The unemployment rate most recently was very low, below 4% for more than two years. So this current increase is, as of right now, more indicative of a return to typical than it is a warning sign. If it were to continue climbing, it could be a cause for concern. And you know, one more thing worth noting on the unemployment rate right now, it can be pushed up by either decreased labor demand, which is employers not hiring, for example, or an

increase in labor supply, which could be an influx in immigrants joining the labor force. And right now, both of these are at play. So it's really hard to parse how much of the change in unemployment is due to either one, and therefore how concerning an increase in unemployment should be. So we're getting a handle on inflation, the labor market is cooling. What about growth? Well, the economy continues to grow, and that's largely to the credit of consumer spending. Consumer spending accounts for about two-thirds of the GDP, which is the figure used to measure economic production. And consumer spending has been robust, even in the face of higher inflation and higher rates. That consumer spending is

beginning to slow, however. Still, in the second quarter of this year, the economy expanded at a rate of 2.8%, according to preliminary estimates. So those are three of the key factors the Fed takes into consideration when it makes decisions. Knowing that the Fed's inflation goal is 2%, is it safe to say we're heading close enough to that goal? The Fed shouldn't wait too long, right? Right. Well, really, the Fed is laser focused on just two of those things. They have a dual mandate, which is stable price growth and full employment. But they certainly look at GDP and loads of other economic data to provide clues about where inflation and the labor market are headed. It's near certain at this point that we're headed towards the Fed's 2% inflation goal. In fact, some economists think that underlying inflation or what price growth

is when you divorce it from the quirks of the data is already at that target. So that's one reason you're hearing people call for rate cuts sooner rather than later. Though the Fed has said they aren't quite confident enough, loads of other people seem to be. The risk of waiting too long is that the economy seizes and we enter a recession, but we're not there yet. And I think cutting soon is the right move to prevent it. So we mentioned this at the top, but after last week's unemployment report, the heads of some big banks like JPMorgan Chase, as well as the futures market are now pegging the odds of a September cut at 100%. And they're also estimating that the cut could be high, 50 basis points rather than 25 basis points.

So Elizabeth, can you explain what basis points are and what it would mean to see a 50 basis point cut? Yeah, absolutely. So you hear that term a lot the more you listen to economic news. Basis points are simply one one-hundredth of a percentage. So when you hear 50 basis points, it's 0.5%. And 100 basis points would be 1%. I wouldn't characterize 50 basis points as high, though it's certainly not the smallest cut they could make, right? 25 basis points would likely be the smallest we'd see. But to put 50 basis points in context,

when the Fed cut rates in 2020, the time period that you mentioned, Ana, in the thick of the COVID recession, they actually cut by 150 basis points in a matter of a few weeks. When you consider how much they've raised rates in the past two years, 50 basis points is fairly modest, and it wouldn't be an alarming action. So Elizabeth, is there anything that would prompt the Fed to hold its horses, so to speak? What would prevent a rate cut in September at this point? Sean, it goes back to that confidence we talked about. If members of the FOMC are missing that confidence, if there's any doubt that the 2% target is certain, that would prevent a cut. However, with the data that's come out since

their last meeting just last week, I think they're on the precipice of finding that confidence they were seeking. So let's assume the Fed makes a cut in September. What would consumers expect to see? Would mortgages and credit cards get less expensive immediately? Is there a lag? That's a great question. What does it mean for us? Well, the federal funds rate, which is the rate that banks charge one another on overnight loans, and that's the rate that the Fed directly influences, that affects other rates throughout the economy, but in different ways. It has the most direct impact on short-term rates or rates that fluctuate freely. So your credit card interest rate, for example, when the Fed begins cutting rates, people who carry credit card debt will see the interest rate on that card decrease. Mortgage rates, on the other hand, have a bit

more of a complex relationship with the target federal funds rate. Generally, mortgage rates and the Fed rate move in the same direction, but it's fairly common to see mortgage rates move first based on what the Fed is expected to do. And we've most recently seen mortgage rates decreasing based in part on that expectation that the Fed will cut soon. Average rates on a 30-year fixed mortgage last peaked at about 7.2% in May, but are now closer to 6.7%. As the Fed begins cutting, we're likely to see mortgage rates come down a little bit further, but not dramatically so. Now, September is the last Fed meeting before the election. For listeners, the Fed operates completely independent of the rest of the government, including the president and Congress.

The central bank is staunchly apolitical, but as we've seen, its decisions still have real influence on the economy. So could the Fed's decision in September influence how voters act in November? Well, you're absolutely right, Anna, that the election should play no role in what the Fed does. And my opinion is that it doesn't. You know, the Fed is committed to being independent from the political process, primarily because they understand how crucial that is to general faith in the effectiveness of the central bank and their work. That said, if they cut before the election, one could make the case that they did it for political reasons. And if they cut after the election, one could make the case that they did

that for political reasons, but for the other party. So there's a chance that no matter what the Fed does, we're going to see some people paint it as a political decision, despite it being committedly apolitical. But your question was, will that influence voters? And that's less clear. My bet is that the majority of people who consider the economy and economic policy in their election decisions have already made up their mind about which one of the incoming candidates is a better choice given their preferences. However, is there a chance some undecided voters will tip one way or the other based on the timing of Fed rate cuts? Maybe, but I don't really think that the number of those voters is substantial enough to impact

the outcome of the election. Well, Elizabeth, thank you for walking us through all of that. A pleasure as always. Yeah, absolutely. Thanks for inviting me to chat. Up next, a few money headlines from the last few days. Well, Anna, the market gyrations we've been seeing over the last few days are sure to strike fear into the heart of any American who's hoping to retire. Indeed, but hopefully they've evaluated their risk tolerance as well and can weather this storm. Yes, as we always say, try not to look at your 401k balances that often, maybe once a quarter or even just a couple times a year, especially if you are not retiring anytime

soon. But we do have some new evidence that regardless of the markets, folks really aren't saving enough for their golden years. The Morningstar Center for Retirement and Policy Studies issued a report that predicts 45% of American households will run short of money in retirement. Yeah, this is not good. To break it down a bit, the research finds that 47% of Gen Xers and 52% of baby boomers could experience retirement shortfalls. And they are either coming in or coming fast on those golden years. For those who have a bit more time, it's still not a rosy picture, with predictions that 44% of millennials and 37% of Gen Z won't have enough.

Hispanic and Black Americans are far more likely to experience shortfalls than those from other race and ethnic backgrounds at 61% and 59% respectively. And 55% of women who are single at retirement face a risk of not having enough money compared to 41% of couples and 40% of single men. Part of the problem for baby boomers and Gen X is that they were the vanguard of the shift to define contribution plans like 401ks instead of defined benefits plans like pensions. So they haven't had as many years to make that adjustment and save on their own. And the risk is even more significant for the American workers who do not have access to 401k plans at work. So the moral of this story

and pretty much every story about retirement in America is you've got to save, save, save, save, save as much as you can for as long as you can. And if you're not sure how prepared you are for retirement, check out NerdWallet's Retirement Calculator. It estimates your retirement savings based on your current contributions and then calculates how your savings will stretch in today's dollars, taking inflation into account. We'll link to that in the show notes or just do a search for NerdWallet Retirement Calculator. So Sean, as we noted, it's been a wild few days on the stock market.

And on Monday, if you tried to do something about it in your brokerage account, you might have had some issues. Yeah, if you were with Schwab, Vanguard, or Fidelity, it's possible you were locked out of your account for several hours. Some users also had problems with the Robinhood platform. No bueno on a day like Monday's meltdown with the Dow dropping a thousand points, especially if you are an active trader. The company said the problems were generally caused by high trading volumes that some platforms can handle. You know that confidence that you and Elizabeth were talking about earlier?

Hard to have it when there's no guarantee you'll have trading access on a wild market day. That's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD or send us a voice memo at podcast at nerd wallet.com. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple podcast, and I heart radio to automatically download new episodes. Today's episode was produced by Tess Vigeland and myself. It was edited by Rick Vanderknife. Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.