NerdWallet's Smart Money Podcast - Money News: Why The Fed Paused Interest Rates, The CFPB, and “Dumb Money”

Episode Date: September 27, 2023

Learn why the Fed paused interest rates. Plus: the Supreme Court's CFPB hearing, NFT prices, and a new GameStop movie. Join hosts Sean Pyles and Anna Helhoski as they break down the latest headlines in the world of personal finance. They explain the Supreme Court's upcoming hearing on the constitutionality of the Consumer Financial Protection Bureau's funding structure, the risks of investing in "dumb money" like the Powerball lottery and NFTs, and the new movie "Dumb Money," which tells the story of the GameStop stock-buying phenomenon. They then have an in-depth discussion about the impact of the Federal Reserve's interest rate decisions on the financial lives of Americans. They explain how interest rates work and how they can impact the economy and individual financial lives. They also offer some tips for Americans who are concerned about the impact of rising interest rates. In their conversation, the Nerds discuss: the Supreme Court, the Consumer Financial Protection Bureau (CFPB), the lottery, NFTs, Dumb Money, GameStop, meme stocks, the Federal Reserve, interest rates, the US economy, credit card interest, inflation, and personal finance news. 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 personal finance news roundup, where we take a look at recent developments in the world of money, and then go in-depth on an issue that's important to your life and your bottom line. If you have a mortgage or a credit card or a car loan, or basically if you're a participant in the American economy, the Federal Reserve has an impact on your financial life. Yeah, the Fed has a range of functions, but it's best known for setting interest rates,

which affect your ability to borrow money. Generally, the Fed sets interest rates higher when it wants to combat inflation and lowers rates to stimulate the economy. Last week, the Fed met to decide whether to raise interest rates or keep them the same. We're going to take a look at what they did and what it bodes for the future of interest rates. But first, a few money headlines. The U.S. Supreme Court opens a new session on Monday, and the Consumer Financial Protection Bureau is on the docket. The court will hear arguments Tuesday over how the Bureau is funded. Yes, and as a refresher, the CFPB was created in the aftermath of the 2008 financial crisis

as a consumer watchdog. It enforces laws around things like payday loans, mortgages, and credit cards, and it's essentially a clearinghouse for complaints that consumers have about all kinds of financial products. Since its inception, it's been funded through the Federal Reserve System instead of the way most agencies are funded, which is through Congress. And that was an attempt to remove it from the vagaries of politics and changes of administration. But two organizations representing the payday loan industry, the Community Financial Services Association of America and the Consumer Service Alliance of Texas, argue the Consumer Service Alliance of Texas argue that this funding method is unconstitutional because it doesn't go through

the usual congressional appropriations process. The Fifth Circuit U.S. Court of Appeals ruled against the CFPB, so now it makes its case at the Supreme Court. If the agency loses again, all kinds of enforcement actions taken over the life of the agency could be called into question. From 2012 to 2022, the agency delivered more than $16 billion in relief to consumers and imposed $3.7 billion in fines through various legal actions. A decision is expected sometime next spring. Sean, our next headline is about dumb money. The movie coming out this week about the GameStop stock buying phenomenon. We're actually going to get to that in a moment, but no other dumb money. Okay. First, the dumb money of the Powerball lottery.

Oh, yes. $835 million could be mine, Anna. Yeah, right, Sean. That's what everybody thinks. And that's why people play. The odds, though, are about one in 292 million. Sean, spending $2 on that ticket is dumb money. What I'm hearing you say is that I have just as good a chance as anybody else. Sure, Sean. Absolutely nothing. Well, then let's move on to dumb money number two, NFTs. Oh, yeah. Stuff that doesn't actually exist, but that people have forked over millions to own. Exactly. Non-fungible tokens or NFTs were all the rage a couple of years ago. They were basically digital art pieces are in quotation marks, of course, where you could buy something like a photograph or a painting, but not actually own any physical property. Yes, this involved something called blockchain,

and you were given a sort of digital certificate of ownership, and it was often tied up in cryptocurrency. Yep, let's not go into much further, because this dumb money is, for all intents and purposes, worth nothing today. A report by a company called Dapp Gamble, which purports to review and analyze crypto gambling platforms, looked at more than 73,000 NFT collections and found 95% of them were worth, guess what, Sean? Zero dollars? Zero ether, actually. In other words, zero cryptocurrency. And this is an asset class that at one point had a monthly trading volume of $2.8 billion.

Dumb money. Very dumb money. So what about that movie? That's next. Okay, so Sean, you've heard about this new movie called Dumb Money. Here's a clip from the trailer. Yo, what up, everybody? Roaring Kitty here.

I'm going to pick a stock and talk about why I think it's interesting. And that stock is GameStop. I love this guy. Retail traders hooked into GameStop. I think they think it's a good investment. It looks like there's one guy driving all the buying. Who is this? Dumb money, man.

Happy to take it. Dumb money, man. Happy to take it. Dumb money, man. Happy to take it. And did I hear a cat in there? Like, was that even in the script? They probably got millions for that one meow. More dumb money. Anyway, listeners might remember that back in early 2021, a bunch of community members

on a subreddit forum called WallStreetBets started hyping stocks in the video game retailer GameStock. Without getting into the entire history of what happened, you're welcome to read the 44 page report by the Securities and Exchange Commission if you want. But suffice it to say, it turned into a mania. The stock jumped 1500% over a span of just two weeks. A few average investors made huge returns and billionaire short sellers took it in the shorts. It was really the advent of the meme stock. Exactly. So the movie is based on the book The Antisocial Network by Ben Mesrick.

It's about all the craziness that happened with GameStop, both with the so-called pros and the amateur traders who took them on. And our editor, Rick VanderKneife, talked with a couple of them. Kim Campbell is 38 and a registered nurse in Davis, California. She bought some shares of GameStop in late 2020 through her Roth IRA, which at the time had about $6,000 in it. A couple of months later, she watched what was happening on Reddit and got caught up in the frenzy. It was a very interesting time like living in it through it. It was so exciting to see it like covered on the news and all that. And I had an awareness, like this is something like big that's happening

and I actually know what's going on. Like I am part of this group they're talking about on the news kind of thing. So it was neat to have that perspective of it. She's still holding on to almost all of the shares she bought Sean, the good old buy and hold strategy. And she says she has

no regrets. Rick also talked with Noah Linear. He's 25 and lives in Raleigh, North Carolina. He was in school at Duke University and got his dad to let him invest about $6,000 from a savings account. Linear says a lot of what drew him to what was happening with GameStop was just the experience of being active on Reddit and being part of a movement. It can be exhilarating to like participate in that, or it was exhilarating to, you know, see the post, like see a post about like in Times Square, like GameStop being on like a huge billboard and then some of these posts about that. And, you know, at the same time, like posting how like the stock price is increasing and you just get caught up in this world.

It's a very, very compelling world, which is part of what made it so hard to exit. So what kind of money did Lanier make out of all of it? Noah did sell after an intervention by family and friends and walked away with more than $100,000. It's safe to say a lot of small investors didn't do as well. So now the experience extends to having a composite portrayal of you and your fellow investors hit the silver screen. Dumb Money is already in some theaters. It goes wide on the 29th. You gonna go see it, Sean? Even though I do own some of the meme cryptocurrency

Dogecoin, I'm probably going to wait until this one's on streaming. Fair enough. I do want to mention that meme stocks are an extremely risky market timing venture. They're also not necessarily valuable assets, so proceed with extreme caution. All right, that's what we saw and heard about over the past week in Money News. Let us know what we missed and send us the headlines you've seen and want to hear more about. And now, on to our in-depth look at what's happening with the Federal Reserve and interest rates. news. Let us know what we missed and send us the headlines you've seen and want to hear more about. And now on to our in-depth look at what's happening with the Federal Reserve and interest rates.

The Federal Reserve's Open Market Committee left interest rates unchanged last week. That means things stay pretty much status quo for now, although officials did indicate that it's possible we'll see another quarter point hike before the end of the year. Yeah, a multitude of factors will go into that decision. And we're joined now by fellow nerd Liz Renter, here with a look at what last week's pause means and what it bodes for the present and future. Hi, Liz. Hey, you two. Liz, let's start first with a quick reminder of what the Federal Reserve Open Market Committee does, its role in the U.S. economy, and its current mission.

Sure. So the central bank, or the Fed as we call it, has a dual mandate that is two jobs, price stability and full employment. And right now, they're laser focused on the former, that is restoring price stability by lowering inflation to a goal of 2%. The Federal Reserve Open Market Committee, or FOMC, is tasked with implementing that Fed policy to make that happen. And one of the main tools that the Fed can deploy is changing the federal funds rate.

Can you explain what exactly the federal funds rate is and, importantly, why consumers should care about it? Yeah, absolutely. So the federal funds rate is an interest rate that banks actually charge one another on overnight loans. And the Fed influences this rate by setting a target. The banks then adjust according to that target and the effects are felt across the economy. By raising their target rate, the Fed makes it more expensive to borrow money and more profitable to save, which slows the flow of funds or consumer demand throughout the economy and cools demand-driven inflation. So the Fed had previously

been on a pretty long streak of rate hikes, 10 of them since March 2022. Then it paused in June and hiked again in July. At the July meeting, Fed Chair Jerome Powell had said that the June pause and the July hike didn't signal the start of a pattern to increase rates at every other meeting. And yet here we are. Right. We paused. Right. Exactly. So rates are paused for now at a range of 5.25 percent to 5.50 percent. That's a 22 year high, by the way. Powell said during a press conference following the September meeting, quote, we're taking advantage of the fact that we have moved quickly to move a little more carefully now. He also said there was a strong possibility of an additional hike at one of the two remaining Fed meetings for the year.

He actually said it was, quote, more than likely. So where would you say the Fed is at right now, Liz? Well, they're waiting and they're watching. And I feel like we've heard that several times in the press conferences over the past year. It takes time for the effects of this monetary policy to play out. 18 months is one timeframe that we frequently hear thrown around. And it's only just over 18 months since the Fed began rate hikes. So in that sense, we may only be witnessing the early effects of their campaign. Also, there are many other factors that play into how inflation moves, and economists right now disagree on how much of the

decreases we're seeing can be attributed to what the Fed is doing versus more time passing since shocks like COVID or the initial invasion of Ukraine. So when we say they're waiting and watching, they've really got a lot to keep their eyes on. Liz, the work of the Federal Reserve can feel very far from most folks' everyday lives where they're trying to pay their bills and afford groceries and maybe even save for retirement if they're lucky. So what does a rate pause mean for consumers' mortgages, car loans, and whatnot? Are we headed toward more stabilization? Well, generally speaking, it does mean greater stability in the interest rates we pay. It's important to note that not all interest rates track the federal funds rate one for one, but they do move in a similar direction. However, the stability doesn't mean that those rates are coming down soon, right?

If the Fed finds it necessary to raise rates again before the end of the year, the interest we pay could rise further. And they have signaled keeping rates high for as long as needed. It always feels like the central bank is somewhat shocked at the resiliency of the economy in face of all the rate hikes over the last 18 months or so. It certainly seems to defy economic theory, at least. Can you tell us why the Fed and economists have been so surprised? A big part of it really goes back to those two factors that I mentioned, the dual mandate, full employment and price stability. Historically, there's been a trade-off on these two things. So

the dual mandate was seen as a balancing act. In the past, there was a far clearer inverse relationship between employment and inflation. And so when employment was high, inflation was low and vice versa. This was shown in something called the Phillips curve. So the thinking is that in order to get stubborn inflation down, you'd have to cool the economy enough to cause high unemployment and a recession. But we're finding that Phillips curve has flattened and the relationship between employment and inflation is less clear now. So we're seeing inflation coming down without unemployment rising, which seems good. And yet consumer sentiment doesn't seem to reflect the resiliency of this economy. That's been consistently reflected in consumer confidence surveys.

Powell said last week that it's largely because consumers, quote, hate inflation. Can you speak to this overall perception, Liz? Yeah, absolutely. So when we talk broadly about the health of the economy, we're taking a very bird's eye view of things. We're discussing the national unemployment rate, for example. But the lived individual experiences of people report that tells me the labor market is doing well. Likewise, if I really felt that 9% inflation last summer, like at the grocery store, I'm not going to feel the current 3% as a relief. Prices for the things in my cart aren't coming down. They're just growing more slowly. That makes sense. I mean, I'm still shocked at how expensive some things have become. Take my beloved cream cheese, for example. I recently pulled up a receipt from a grocery order from September 2021, and the two-pack of

cream cheese that I usually get cost $4.99 back then. Now it's $6.49, and that might not seem like a big change, but it amounts to a roughly 30% increase over two years for cream cheese. Ugh, you know, I tried making the switch to tofu cream cheese on my weekly bagel, and it's just not the same. So I guess I'll be paying a little extra for the real stuff. Yeah, worth it. That's funny. I have a similar example with oatmeal. But yes, I think we all have those examples right now. Right. I mean, overall inflation has come down in terms of its growth,

but there's still some stickiness there. Lately, you've been seeing that at the pump. Tell us about some of the other prices consumers might be seeing out there. Well, Sean, you're right about gas prices. Those are a great example of the disconnect between consumer perception and what's really going on in the economy at large. So we know that there's a strong correlation between what people pay at the pump and what they think going on in the economy at large. So we know that there's a strong correlation between what people pay at the pump and what they think about inflation and the economy broadly. And as of right now, gas is up. This week, it's over 380 per gallon across the country, according to AAA. So seeing those lighted signs on every corner is a daily reminder of a really

prominent price point. And that sticker shock is palpable for many Americans and really out of our control. So Liz, what does all this tell us about the possibility of a so-called soft landing without the economy tipping into recession? Chair Powell said last week that this soft landing was a, quote, primary objective. We've been hearing about a looming recession for more than a year now, and that doesn't exactly match the definition of looming. Well, I think we're seeing some pretty notable optimism from the Fed. So last week, in addition to that FOMC decision, they released their economic projections. So this is data that they release every quarter where the economists on the committee make forecasts on where they think things like inflation, employment, GDP, and other economic

measures will be in the coming months and years. Not only did their projections look more optimistic this time around, estimates of future unemployment came down and their estimates for GDP went up compared to June, but they also cited less uncertainty about their forecasts. In last week's episode, we talked about the strong possibility that there will be a government shutdown as early as October 1st. What would that mean for the Fed? Well, it's important to remember that the Fed is focused on that dual mandate. I know I sound like a broken record, but they have limited power. And so while they can keep the possibility of a shutdown in mind, they can't really preemptively do anything about it. If the federal government

shuts down, the Fed can use their limited tools to react to potential macroeconomic impact as it happens and as it pertains to full employment and price stability. So these two things are really their guiding stars. And I think what it means for the Fed will really boil down to how long a potential shutdown lasts and therefore how it could impact the broader economy. And then in the shorter term, in the meantime, a shutdown could impact their ability to get information. The Fed digests a ton of federal economic data in determining what steps to take next. So if data coming in from the Bureau of Labor Statistics, for example, is delayed, it could make it more difficult to really see how the economy is doing. Liz, is there anything else you think

is important for consumers to know about the current economic situation? Do you have any advice for them? Well, one thing I'd like to call out is sort of just a tactical thing closely related to how you may experience interest rate hikes. Don't forget about credit card interest. We're hearing a lot about mortgage rates right now, and rightfully so. But many Americans carry a credit card balance from month to month, and the rates have risen there too. Average rates have gone from 16 to 22% since the Fed began their campaign. And while that doesn't seem like a huge increase, the interest really adds up when you're carrying a balance from month to month.

All right, Liz, thanks for stopping by to explain all this to us. Absolutely. Thanks for having me, you too. That's it for this week's Money News. We always welcome your questions and comments. So 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 nerdwallet.com. And remember to follow, rate, and review us wherever you're getting this podcast. Today's episode was produced by Tess Biglin and edited by Rick

Vanderkneife. Kevin Tidmarsh mixed our audio. 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.