What the Fed’s Rate Cut Means For You

Today, we're going to be discussing Fed rate cuts and how they might affect you. Hello, welcome to Money Talks. My name is Ken from Summit Financial Consulting. If you'd like more info about what you hear on the show today, be sure to give us a call, 586-226-2100, or visit our website, summitfc.net. Be sure to check out the podcast page, then you can see all of our past shows and you can subscribe on Apple Podcasts, Spotify, or Amazon Music. So when the Federal Reserve makes a move, it's usually not just a headline that you read in a news article online. It actually touches a whole bunch of stuff. So mortgages, credit cards, money markets, savings accounts, CDs, all of this stuff is affected when the Fed makes interest rate moves, typically. And the one that was made back in September is certainly no exception. So today we're just going to be unpacking what rate cuts might mean for you and your debt and your long-term financial strategy. If you're fully informed and putting a plan together. But before we jump into that, let me welcome Tony. Tony Shore, my co-host. Tony, what's the worst thing you've ever taken a loan out for? Surprise random question.

Wow, yeah. This wasn't in the bullet points I received, Ken. And this wasn't mentioned during show prep. As you know, listeners and viewers, Ken and I spend hours doing show prep for this show. No, I'm kidding. I'm kidding. Ken does a lot of prep. I jump on and just along for the ride. But okay, what's the worst thing I've ever taken a loan out for? Well, I have been guilty at one point in my life of running up some credit card debt. So I would say that's the worst thing in that situation that I've done is put... um, some day to day items or wants, I would say probably new stereo or audio equipment, uh, that I, uh, Couldn't afford. I bought anyway. Speakers, you know, sound system, the works and instruments, guitars, and put that on credit or a credit plan. So really, that's taking out a loan, you know, making payments on it at high interest. That's the worst thing.

I think mine was I got a pager in 1995. You had to take out a loan to buy a pager? I think I did. I was like working at Kroger bagging groceries, making $5 an hour. So that was probably a week's wages.

Stereo equipment or musical equipment or recording equipment. That has been my guilty past of running up. And see, I was worse. Mine is worse because mine is much more expensive. I went in way further into debt than you probably had to to get a pager. Although back in the day, pagers weren't necessarily cheap. I remember in the 90s, Mountain Dew had a campaign where if you collected all these box lids and paid for shipping, you get a pager. So for years, I had a Mountain Dew logo pager that I used, and my wife thought it was hilarious that I did that. That is awesome. that I saved up Mountain Dew UPCs off 12 packs and stuff and clipped it off the label off of the bottles. No, the plastic bottle. Yeah. So, yeah, I did that. That's funny. That's from way back. That's a way back situation in the 90s that I did. But so I got mine almost free. can if you just save those mountains, didn't drink enough, do back in the day. Yeah, yeah, I drank too much, so, uh, that's, that's, I paid the price though in other health. I paid the price in health, took a few years off my life, but didn't have to take out the loan like you did. That was the debt paid. But taking out loans, high interest loans, which, you know, credit cards right now, what are they? I think 22 to 30 percent is the range I've seen because I still have a daughter in college. So we're still getting them coming to our address for her, all the credit card ads. Oh, yeah. And I open them to look at the interest. And it's like, you know, zero percent APR for the first 24 months. Then I look then 27 percent. Then one was 30 percent. 30. Wow. Yeah. It's a shame loan sharking isn't still a crime. Yeah. Yeah. I don't know how they get away with it. It's just like they should not be able to. I think there should be a law passed that no matter what a bank, a credit card company, any type of loan institution, there's there should be the government should regulate. I'm not for government regulations in a lot of areas, but they should regulate how much interest can be charged.

Or maybe like a high interest on so much, but then once it gets to a certain level, then cool it. Yeah. I don't know.

Yeah. Yeah. It just seems a 30% seems anything over 20% seems outrageous. Right.

Yeah, I guess it depends on their profits, right, and how many people default because that's sort of what they're trying to do.

Sure, if they're a business and they have to stay in business and we all want to be able to have the convenience of credit cards, however.

Not vending credit card companies, by the way.

Yeah, look at you taking the stance. Yeah. I'm going to get, yeah, we're going to get some mail on this one. I'm going to get flack for being in favor of government regulations, and you're going to get flack for defending big financial companies and credit card companies for the interest they charge. You don't want to be either end of that spectrum. No, we better move on.

Yeah, we better. Quickly move away. I'm sorry. Yep. No, no worries. So, well, the main topic for today is just, I guess the biggest headline coming out of this topic for today is that the Federal Reserve did decrease interest rates in September for the first time in nine months. So that's a pretty big deal. Yeah. And for consumers, it normally boils down to two main effects, I guess, two big headlines for your average person. So that's that borrowing gets a little bit cheaper. but the interest rate that you earn on savings accounts and money markets and CDs aren't quite as strong. We use, you know, clients email us almost every day asking for what's the best money market out there. What should I do with my cash that's sitting on the sidelines? A good one now is paying around 4%, 3.9%, where before this rate cut, it was closer to 4.2%. So there was, sometimes it takes a little bit of time, but this one was pretty fast. Those interest rates fell pretty quickly. So yeah, you got to keep an eye on things and keep your head on a swivel. I have talked to some people where the interest rate they were making on their money market actually dropped more, more like half a percent. So now they're trying to find a new one that only dropped a quarter percent. So on the savings side, it can sometimes be pretty swift and you got to go out and reshop it and try and find the best of the best again.

I find it unique that it's interesting, but not surprising that on the saving side, when you're trying to earn interest on your money, that when the Fed lowers the rates, that drops pretty quick, how much they're willing to pay you in interest. But your debts, the credit card companies don't drop. There we go.

Now we're getting to the right side of history.

Yeah, exactly. That's that's the problem. And of course, it's that way. Companies are slow to lower their rates based on these drops when they're earning money from you. But when they're paying you on your money. Oh, we've got to lower the rates right away. So that's that's frustrating for a lot of people. And it just illustrates when the Fed lowers rates, there's good news and there's bad news. Right. The good news is hopefully, you know, business could go out and get loans from banks at a lower rate. So they'll do more expansion, more hiring. That's the hope. And it'll grow the economy. However, for people who are near retirement or in retirement, it's not a good thing because you're not usually in retirement making those large purchases, especially if you're in a few years. And you're trying to get as much earning on your safe money as possible, on your money where your principal's protected. If you have a CD or a MIGA, those are two popular ways to earn money. interest on your money that's not at risk or tied to the market. And so those rates are going down because of the Fed. Right. Is that right?

Yeah. And our last show about having an emergency fund, you know, unfortunately, those emergency funds, you want to try to make as much as possible, but not have that money at risk, but also have it be liquid if you need it. So, yeah, this is sort of a black eye for the emergency fund. But, you know, you just got to put your boots on, put your helmet on, do a little bit of research, looking around, try and find the best rates. We always recommend our clients reach out to us. And if you're watching us for the first time, you know, feel free to give us a call, 586-226-2100. If I find a money market for you, we do not charge a management fee on that. I'm not really doing anything on a day-to-day basis. I'm just trying to help people as much as possible. That's great. Yeah, we're happy to help do that shopping around for people. On a side note, you know, you're talking about how banks don't lower the interest rates on the interest that they charge. I feel like gas stations do the same thing. Like if there's a big, you know, missile strike here or there and oil prices shoot up, those gas prices go up within 10 seconds.

Instantly, like even though it hasn't affected, it's not even close to affecting the gas that they're getting because that has to go, that gas has long been... paid for through the chain. Yeah. It's been, it's been through the supply chain already and at the lower price, but they're going to instantly raise the prices. But then when oil drops, you see the price really drops significantly of oil and there's a surplus of oil. Yeah. Slow. Yeah. Yeah. Yeah. It'll take months to make that same drop that happened instantly. Yeah. The day you read about something negative happening with oil or the price of oil going up, the prices, you go to the pump and they're already raised. But when something goes the other way, it takes a while. It does. It's like me when the bill comes and you and I go out to eat. Ken and I are out for lunch and the bill comes. All of a sudden, my arms get really short and I can't quite. I get the T-Rex arms and I was going to say your nickname is T-Rex. I'm kidding. I'd be happy to buy you lunch, Ken. But yeah, I see your point there. That's that's true. But also people like mortgages, I'm sure you'll get into that. But people, a lot of people, my wife and I included, have been waiting on the sidelines. We want to downsize. All our kids are moved out. We want to move from a split level down. you know, uh, home to, uh, one level where we can age in place and smaller. But, uh, we've been waiting because we have a 2.9% interest or mortgage rate right now, uh, three, less than 3%. Right. And, and do we want to double that? No. So we've been waiting. Um, And it's not necessarily directly or drastically affecting mortgage rates yet. Maybe a little bit, I think. And you can clarify that for me. But the Fed's going to lower interest rates some more the way it looks. So maybe that time will come.

Yeah. So when it comes to the Fed lowering interest rates, I'd say that's one of the most confused topics when it comes to finance. So the Fed rate is the rate that banks are charged for overnight loans to and from the Fed and to other banks. So sometimes it has a direct correlation. And when the Fed drops rates, rates on everything drop. But the true source of the interest rate for mortgages is actually the 10 year U.S. government bond. So our wonderful government, as we all know, spends way too much money and they have auctions and they say, OK, we're offering up an opportunity to loan the United States government money. And in exchange for that, we're going to pay you an interest rate. And it's it's literally an auction, Tony, where they're saying, OK, who wants to buy this bond at four percent? crickets, you know, nobody wants, okay, let's try 4.125%. And they go through that process until investors step in and loan them the money. And then they lock in that interest rate. So mortgages are based upon the 10 year. So Not in every case do interest rates on the 10-year bond drop. It sort of depends on how bad is our government deficit spending. The good news is over the last six months, the 10-year U.S. government bond interest rate has been dropping. Part of that is another show and topic that we've discussed extensively are the tariffs. So the tariffs do bring in revenue. They are reducing our interest. or at least reducing our deficit. So some investors globally have said, you know what, the U.S. debt isn't quite as bad as I was thinking it was six months ago. So interest rates have been dropping. So that's been lowering interest rates on mortgages, thankfully. But, you know, to your point, there's so many people that just don't want to move because they are locked in. I'm locked in at 2.7% on my mortgage. Wow. Yeah.

Wait a minute. Do you just, you always have to one up me. I was here. I was bragging about 2.9 and you have to come in with the 2.7 again. Really? Look at you rubbing your hands together. Grinning. His grin just grew by three sizes.

I was looking at three sizes that day. Every day I was looking at it during COVID and locked that baby in at just, just the right time. But yeah, that's the bottom line is, yeah, I'm not moving there. I hate moving a and B I've got this interest rate that, well, sure. Really, the only people I see moving, Tony, are first time homebuyers, obviously, people that had a divorce or a job change where they have to physically relocate. Yeah. Other than that, everyone's just seemingly waiting on the sidelines. Yeah.

Yeah. And but I've read a lot of stories. In fact, I interviewed a really top realtor, real estate person in a fairly major city in the U.S., top in her town. And she said she doesn't see the rates ever getting back. And I read on the same thing on, I think, Fox Business and CNBC. They're saying if you're waiting for the 2% and 3%, you you're, you're going to be waiting. If you're alive today and waiting, it's not going to probably happen in your lifetime. If at all.

I would agree with that.

We're not going back. They said to that, you know, you, you might, you know, 5% is going to be a good place. And realtors will tell you you're not buying an interest rate. You're buying a home, right? Right. Yeah. And so they say you can always refinance. Well, yeah, Yeah, but that can cost money, too. And a course of a real estate person is going to say that. But you're right. I mean, you're not buying the interest rate, but you have to pay it until you can until they go down. That's the problem.

Yeah, I agree with what you said in terms of I don't think these first time homebuyers should wait until the rate is perfect because as rates go down, there's going to be more and more of a feeding frenzy. I would say. I mean, there's just so many people that are waiting to buy.

And so many people are on the sidelines right now. It's it's crazy.

Well, and typically when rates drop, prices increase. So are you really winning in that scenario? You know, it's just watering down your down payment.

At some point, you got to bite the bullet. And, you know, I've read articles that give different numbers. You know, some say six, some say 5.5, you know. And so if you wait for it to get to four or five, it might be you might be paying just as much because the prices might go up.

Well, and most mortgage brokers that I speak with, they say that if you can get half a percent, three quarters of a percent, one percent drop in rate, that's that's great. You know, and you never know if it's going to go lower. Who knows what our government is going to spend money on next and possibly that that 10 year U.S. government bond rate could start increasing. So then, you know, you hate to miss the opportunity. But I saw a number that said if the interest rates on mortgages drop to six percent, there's four point seven. a million homeowners that could lower their rate by at least 0.75%. So, you know, don't, no one to provide a specific stock tips on the podcast, but man, some of these mortgage companies that would benefit from that, you know, their, their profit could go through the roof from all these refinancings. And then also people jumping off the sidelines and trying to buy homes. But, um, You know, so the refinancing boom could definitely happen in and of itself. But in terms of housing, like my extremely quick economic lesson is that in the 80s and 90s, the baby boomers were the largest portion of our population. And your average human spends the most money on average between the ages of 35 and 55. That's when they're buying houses, getting married, having kids. All these things cost money. So 80s, 90s, you know, stock market performed very, very well. Yeah. Fast forward to the last five years. Now the millennials are the largest portion of the population. And, you know, your average person buys their house, their first house in their early 30s. And the millennials being the largest portion of the population, they're in those peak home buying years.

Yep.

entering their peak spending year. So I'm cautiously optimistic and hopeful that the economy is going to continue to be strong. But I talked to first-time homeowners and also people who are looking to downsize who are saying, well, I'm just going to wait around. These housing prices are unsustainable. It's going to, we're going to have a crash year soon. I don't see any data saying we're going to have a crash because there's just so much demand. I mean, that's the market, you know, it's supply and demand. And if you've got a ton of demand from these people that are waiting to buy a house, you know, it's going to help out. Yeah, it's going to put a floor underneath things, in my opinion.

Yeah, I think that's a good point. I think you're making a really good point there. Now, as far as the Fed lowering interest rates, what do you think about the future of the Fed? Is it looking like they will lower it once or twice more this year?

Yeah. So, you know, we've talked in the last couple of shows about the government shutdown as of today. 22 days as of this recording. October 22nd here, we're still shut down. So we've been talking about how that's going to affect things. And now we finally got a legitimate problem when it comes to the Fed because they just can't see all the data. So the jobs report for September was supposed to be released in early October, but it wasn't. So the government didn't have the manpower or chose not to because of the spending cuts due to the shutdown to gather that data. So the Fed has two main goals, and that's maximum employment and stable prices. And with stable and prices, we're talking about low and stable inflation, too. So there is going to be what they call a CPI report, Consumer Price Index Inflation Report, coming up in the next couple weeks. So they're managing to get that data out. So the Fed will have one piece of data. But that's that's really only half the equation. So I would argue the Fed sort of flying in the dark here to some degree when it comes to employment. And there is some other data that's publicly available from companies like ADP that sort of give us a hint. But that government data is sort of the cornerstone. So anyways, I got two dates on the calendar right now. October 29th and December 10th, because those are the two upcoming dates where the Fed will decide whether or not they're going to do additional interest rate cuts. They've said that they're taking it meeting to meeting.

So we'll see what that means. And with the lack of data, that is nobody has a crystal ball, but that does throw even more before people were pretty certain before the government shutdown that the Fed would lower it at least, One or two more times by the end of the year. And the indications were that was pretty likely probably a quarter of a point each time. Now, you know, the prognosticators or the people who would make these predictions or talk about that. Uh, now it's less certain, uh, because no one knows what the fed will do. Of course, nobody has a crystal ball. And like you said, because of the government shutdown, they're not getting all the data government, uh, some of the government data has stopped flowing. And so the jobs report, they're not going to see an updated jobs report probably. And, um, that's, that's kind of why they lowered. They said that that was the main indicator they used to lower the rates and Right. And it depends on what the jobs market was doing. But if they don't have a good handle on that and where that's headed, then maybe they'll wait. I don't know.

There's some speculation that the federal government didn't. put money towards the jobs report cause it was going to come in bad, but then they are going to produce the CPI report. So maybe that's good. So maybe they're playing favorites and allocating money to, you know, we'll, we'll see how it goes.

Sure.

You know, every government and every administration wants to, to window dress, um,

Well, sure. They all do that. Yeah. Yeah. That's that's the party, the politics of the whole situation. And it's too bad politics play a part. And the Fed has always tried to be separate. But it is interesting. We'll see how that all works out.

Yeah. the Fed can't be manipulated directly, they manipulate the data potentially. So we'll see how that goes. I did find one clue, Tony. So the Fed funds rate right now is between four and 4.25%. And the Fed has said repeatedly for months that they don't want to stimulate because that may cause inflation, but they also don't want to restrict the economy because that could cause job losses. So they basically want to be neutral. So like another way of saying that is they don't want to hit the gas and they don't want to hit the brake. They just sort of, they just sort of want to coast and not be an influencing factor. So there's this Fed, Fed speak, um, number, and it's referred to as R star. So someone wants to take a deep dive down a rabbit hole, they can Google search R star, but the cleaver, I've never heard of that. Yeah, so that, that's like the perfect rate, and, and no one knows exactly what that perfect rate is for. Um, I love that. R star is the perfect rate, but the problem, no one knows what it is. No, I Well, the Federal Reserve Bank of Cleveland took a guess at it recently, and they predicted that 3.7% would be that perfect R-star number. So that would mean one to two more rate cuts of 0.25% should get us pretty close to that rate. So we'll see. Yeah, that's interesting.

The R star reminds me of Douglas Adams Hitchhiker's Guide to the Galaxy, in which they state the answer to life, the universe and everything is 42. The problem is the problem is nobody knows the exact question. We know the answer to life, but we don't know the question. That's humanity's problem. We don't know the question, but we know the answer. And it's 42, by the way. For our listeners that didn't know the answer, it's 42.

The Fed funds rate right now, the range right now could be 4.2. See?

See? Adams was on something. Yeah. Or on to something. I was going to say, was he on something or on to something? I think maybe a little bit of both if you've read his books. They're fantastic, by the way. But I was a big fan as a kid growing up of the Hitchhiker's Guide to the Galaxy series. Very interesting. English humor throughout, but really a great, just a great take on humanity. Right.

Our podcast is so awesome, Tony. It's like advice for life.

Club. Yeah. Well, I know I get us off track. That's that's you keep us on track with the finances. So is there anything else you want to talk about when it comes to the Fed rate dropping interest rates, the Fed rate lowering?

A couple of quick things. Yeah. So if they do drop rates, that should continue to especially help business loans. So we already talked about credit cards, but a lot of business loans are floating rates. So this could immediately stimulate the economy because if businesses have lower interest expense, that means more money for hiring or expanding capital investments, new factories. All of that becomes more attractive if they're paying less in interest. And then just a quick blip about credit cards. A total U.S. credit card debt as of last month was $1.21 trillion. And that amounts to $6,492 per United States citizen. Wow. And they're about 6% higher than it was a year ago.

Credit card debt is a killer.

Yeah, yeah. So any reductions in interest rate on the margin will definitely help people to be able to pay that down faster. That's what we're all hoping.

Yeah, yeah, exactly. Yeah, I think that's it's good. I hope I am actually hoping they will lower it a couple more times, to be honest. But we'll see. Like you said, they don't want to spur the economy too much more. I mean, it's it's weird because you get different indicators. The jobs numbers are questionable. Tariffs, a lot going on. There's still the war in Ukraine, political, some political upheaval. But. The stock market is setting record highs. Other economic indicators have been great. So interesting. I think the Fed's in a tough position right now. They are. Yeah.

Yeah, no doubt about it.

Yeah. All right. Well, Ken, I think this is a great topic and you brought to the show today and I did my best to keep you off of it. But you managed to keep bringing us back. I like that. Before we go, the key, though, you want to know how the Fed rate cut is going to affect you. If you have a plan, it doesn't have to negatively affect you if you're working with a trusted financial services professional and the team at Summit Financial Consulting. So that said, Ken, I know you love to hear from our listeners out there. How can they get a hold of you and your team there to ask questions or set up a no charge, no obligation consultation?

Yeah. And we were talking about this before the show. Now's a great time to reach out to us because it is health insurance, open enrollment. So if you or anyone, you know, or your parents are shopping around for health insurance, it's a great time to just take a look. Even if you love your plan right now, it doesn't hurt to get a second opinion and just see what's out there. So whether it's health insurance, um, tax prep, estate planning review through our estate planning attorney team at estate guru, um, Just give us a call at 586-226-2100 or go to our website, summitfc.net, and we will help answer all of your questions.

All right. Thanks, Ken. Listeners, that does it for today's episode of Money Talks with Summit Financial and our host, Ken Wink. Thank you for joining us for Money Talks. Don't head into retirement without a strategy that addresses both income and taxes. For more information, please contact Ken Wink at Summit Financial, working with people you trust. Call 586-226-2100 or visit summitfc.net. Join us again soon for another episode of Money Talks.