What The Recent Fed Cut Means For You

So the Fed Cut... Now what? The Fed just made a bold move, cutting interest rates by 50 basis points, and if you're wondering how this impacts your investments or even your day-to-day finances, you’re not alone. Many are asking the same question: What does this mean for me? In this episode, Josh & Austin break down why the Fed made this decision, what it signals for the economy, and most importantly, how it will affect your wallet and the market!

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Transcript

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better, helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

All right. Hey, hey, hey. Welcome back to the Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. I'm Austin Wilson, co-Portfolio Manager at Hixon Zuercher Capital Management.

Josh Robb:

And I'm Josh Robb, director of wealth management at Hixon Zuercher Capital Management. How can people help us grow our podcast?

Austin Wilson:

Please subscribe if you're not subscribed already so you get new episodes when they drop on Thursdays. Also, if you could leave us a review on Apple Podcasts or Spotify or wherever you're listening, that'd be greatly appreciated and help us to be found by more people. So today with that housekeeping behind us, we're talking about the recent Fed rate cut, the first one in a while, and what that means for markets and you as a consumer and an investor.

Josh Robb:

That's right, because nothing drives the economy like a good old Fed rate cut.

Austin Wilson:

It's so interesting that we have become very fine-tuned to what the Fed is doing-

Josh Robb:

Oh, they watch and listen and dissect.

Austin Wilson:

Every word. Every word.

Josh Robb:

Oh, man. "Did he blink twice before he said that?"

Austin Wilson:

This was not always the way.

Josh Robb:

No. I can remember back in the day, they didn't even-

Austin Wilson:

In fact, there was no press conferences.

Josh Robb:

Yeah, I was going to say. They didn't even tell you. They just did whatever they wanted.

[1:24] - About the Recent Fed Rate Cut 

Austin Wilson:

So, we're in a new environment where the Fed is very keen on communicating well what they've done, what they're going to do, what their plans are, what they're seeing, but the markets are very closely watching this. So that's why it's very important. It's something we're going to talk about. So, what happened? Well on the 18th of September, the Federal Reserve cut interest rates by one half of 1%, 50 basis points, which is technically a two cut.

Josh Robb:

Yeah. Because they go in 25...

Austin Wilson:

Usually, you increase or decrease a normal one in 25 basis points or .25% increments. This was a double. And they also... What they did when they released their summary of economic projections, their SEP, is they signaled more rate cuts to come this year and quite a few more rate cuts to come next year. They would like to phrase this all as normalizing interest rates.

Josh Robb:

Right. They're not cutting. They're bringing back to normal.

Austin Wilson:

They are...

Josh Robb:

I mean, it's cut, but-

Austin Wilson:

They're cutting, but they're not doing it because things are falling off a cliff. They're not doing it because the economy shutting down or whatever.

Josh Robb:

As opposed to '08, '09 where they cut rates to help stimulate because the economy was struggling.

Austin Wilson:

So, there's a difference between a proactive rate cut and a reactive rate cut. A reactive rate cut would be, "Things are really bad and we need to reactively cut rates to stimulate growth." A proactive rate cut would be, "Things are slowing a little bit and we've gotten where we think we should be on things like... Inflation is the key one right now. So, we're proactively cut rates to make sure that we can extend this expansion as long as possible." So, we are in the latter phase right now where it doesn't seem like there's a recession on the eminent horizon. Obviously, there's always going to be another recession, but there isn't one right now in front of us. So, they're cutting rates-

Josh Robb:

Because recessions are part of a normal economic cycle. When things get too far out of whack, a recession helps bring them back to more normal. Okay.

Austin Wilson:

Yeah. So, we're not quite there. So, this is the Fed saying, "Rates are too restrictive. We just want to make them more normal, to stop slowing the economy as much with our high rates." So yeah, 50 basis points, more rate cuts coming there. In fact, I would anticipate in the next two meetings... There’re two more meetings the rest of this year. Markets are pricing in and it makes sense. You'll probably get another 75-ish basis points. So that'd be a total of three cuts, either a two and a one or one and a two throughout the rest of, and then quite a few more next year to get rates down to about 3.5% by the end of 2025. And that's more of a normal Fed funds rate.

So that's where we’re at right now. There was one Fed governor who said, "Whoa, whoa. This is too much. We shouldn't do that." That was Governor Bowman. He said 25 basis points. However, the majority of the Fed governors were like, "Yeah. Give us 50. It makes a lot of sense." The Fed also in their summary of economic projection revised their unemployment forecast up to 4.4% for next year. So, they have a lot of confidence in the economy growing overall and that's really not much of an increase from where we are right now in terms of unemployment. So, they think we'll be able to have positive economic growth without damaging the labor market too much. A little bit more slowing, but not a ton.

And then inflation in the US obviously has eased, but they're also playing this game where the Fed, which is our central bank, is discussing things and looking at things from other central banks around the world, like the Bank of England, the European Union, and they're working together here. So, we're going to lower rates. The Bank of England's going to lower rates. European Union's going to cut rates. We'll have to just work together on this, because inflation was a global problem. It's a global solution to work together to bring monetary policy back to normal.

Josh Robb:

And we seem to be a little bit ahead of everybody else when it comes to the recovery. Our inflation came down a little bit quicker and is lower than Europe and overseas. So, it makes sense that we're the first ones to start this process.

[5:30] - What Have Markets Done in the Past After a Rate Cut? 

Austin Wilson:

We're certainly... Yeah. And we're the largest. That's the thing too. So our monetary policy changes have a much bigger impact on the globe than most areas of the world. So that's what happened. The Fed cut rates, first time in a while. What have markets done is the next question. So let's talk about markets. The S&P 500 generally. So this is 505. Why is it 505 and not 500?... 505 of the largest US companies. That index generally has risen after the first rate cut of an easing cycle, but its performance has been weaker than usual over time. If you look one week, one month, three months, six months and one year out, mixed results, but generally higher, just mix whether it's more or less than average. Historically, the S&P 500 returns 4.9% on average one year after that first interest rate cut, seeing positive returns nearly 70% of the time. So that's actually not an amazing one-year number. It's a little bit below what you'd expect, but it's positive.

In three months following a rate cut, the market has typically dipped but rebounds before the six-month mark. That's historically what has happened. And this is really aligning with the conventional wisdom that lower interest rates stimulate economic activity because borrowing rates and borrowing costs are lower for businesses and consumers. This does tend to benefit the stock market overall. S&P 500 performance following rate cut cycles can vary significantly. However. A couple of examples here. US equities saw double digit declines after the first rate cut in '73, '81, '01 and '07. So that'd be obviously... The last two there, tech bubble and housing crisis. On the other hand, the flip side of that is the S&P 500 was up 36.5% after the '82 rate cut cycle.

Josh Robb:

I'll take that one.

Austin Wilson:

And in the most recent rate cut cycle, the S&P 500 was up 14.5% in the following year. So mixed results which way it could go. That's why averages are hard to look at.

Josh Robb:

Well, probably some of those depend on whether they were, like you said, reactive or proactive because if they're reacting to something, that may be part of why the market is down.

Austin Wilson:

Exactly.

Josh Robb:

I look at '07 or the '01, there was a lot going on there that... We were in a recession. There were reasons why the Fed was cutting not being proactive, but they were reacting to an economic situation.

Austin Wilson:

And I've had a lot of people ask me, "What does this mean?" And I really say, "It depends." That's a great answer, right?

Josh Robb:

Mm-hmm (affirmative). I like that answer.

Austin Wilson:

But it depends on what happens. So, if you get the soft landing thinking, so this is meaning the Fed lands the plane, no imminent recession, they've done their job, things get back to normal, the expansion continues, I don't really see that as causing much negative market. But if you get the hard landing, you get a recession out of this, that does put pressure on companies, and I think that that is ultimately what could cause a bear market.

Josh Robb:

We've talked about this. A recession and bear market are not the same thing...

Austin Wilson:

They're not always the same.

Josh Robb:

And they don't always happen in the same timeframe.

Austin Wilson:

They don't always align.

Josh Robb:

So yes. So Fed is reacting to economic things, not the stock market. We're just looking at how the stock market reacts to what the Fed is doing.

Austin Wilson:

So, if you want to know my opinion right now-

Josh Robb:

Yes. I do.

Austin Wilson:

Which of those two options are we looking at, this is just an opinion.

Josh Robb:

This is Austin Wilson's opinion.

Austin Wilson:

Take this for it's worth. As of right now, it seems like we're heading for a soft landing. I believe that the economic indicators are the labor markets still pretty strong. It's not as strong as it was, but it's pretty strong. Inflations come down. Consumers are still spending money and two-thirds of our economy. I think we're off to a more likely soft landing than hard landing, which should be supportive... I'm not saying crazy returns expected, but supportive for positive stock market returns. An opinion. Everyone's got one. So really what this comes down to is earnings. So positive earnings growth are what's going to cause the S&P 500 and the market overall to go higher over this next year. And when positive earnings occur, the market's average is 14% returns one year after that. When earnings decline during periods of falling interest rates, the S&P 500 is only averaged by seven.

So again, you get those positive earnings, you get that economy to be growing, people be spending money, you're going to have a better year likely than a worse year. A couple other areas of the market that are noteworthy of what happens in this, crude oil. Very volatile in the interest rate cutting cycles, often declining in the short-term, but swinging widely one year later, could go one way or the other.

Josh Robb:

In crude oil to me, there's so many outlying factors. I mean, you have the Middle East. There's a lot of pricing that happens by things that are going on over there. And so that one is always a weird one to me. I feel like it's harder indicator of anything because there's so many other factors impacting it.

Austin Wilson:

Gold is something that's very closely watched when it relates to interest rates. It's done pretty well after rate cuts typically. It dropped in 1998, pretty significantly after that, but in '07 or '19, the cutting cycles, actually gold was up pretty sharply after that. So just an area of the market we're not necessarily always the most big proponents of. We've talked about this before. But it does work in tandem with interest rates in a lot of ways when opposite. Industrial metals, copper, typically decline in the short-term there. That's all usually related to concerns about economic activity. So again, you get favorable economic activity that could do okay either way. And bonds, generally positive returns after the first rate cut. Only one instance, which would be 1998, where you had fluctuations between modest gains and losses flattish there. But generally speaking it makes sense. Bond math would say interest rates go down...

Josh Robb:

Prices go up.

Austin Wilson:

Bond prices go up. So again, maybe it's not going to be gangbusters for bonds, but pop back to the world of positive returns for bonds.

[11:21] - Dad Joke of the Week 

Josh Robb:

Good. All right. Let's take a break. We'll come back and look at how the consumer and investor are impacted by this. But first I got a dad joke.

Austin Wilson:

Bring it.

Josh Robb:

Austin, did you hear that the Energizer Bunny was arrested?

Austin Wilson:

I did not hear.

Josh Robb:

Charged with battery.

Austin Wilson:

Charged with battery. That's good. Fun fact.

Josh Robb:

Yes.

Austin Wilson:

Costco.

Josh Robb:

Costco.

Austin Wilson:

Buy Kirkland batteries at Costco. They're Duracell.

Josh Robb:

Are they really? Interesting.

Austin Wilson:

Yeah. So that's where we buy all our batteries.

Josh Robb:

You get a big pack of them too.

Austin Wilson:

You get a big pack. You can buy Duracell right next to them.

Josh Robb:

And they're more?

Austin Wilson:

Yeah. Buy Kirkland.

Josh Robb:

There you go.

Austin Wilson:

Kirkland King, baby.

Josh Robb:

There it is.

Austin Wilson:

George Kamel would say, the Ramsey guy. He's a Costco.

Josh Robb:

He likes Costco.

[12:00] - What Does the Fed's Rate Cut Mean For You?

Austin Wilson:

Yeah. All right. So we've talked about what happened from the Fed. We talked about what markets have typically done after this. But let's talk about what this means for you both as consumers and investors. So I have five thoughts of each of these. For consumer, so this is you as a consumer, borrowing costs are going to be lower if you need to borrow money. So interest rates on loans like mortgages, auto loans, credit cards, these obviously tend to decrease when interest rates come down, cheaper for consumers to borrow and finance big purchases because all interest rates are in some way, shape or form affected by the Fed lowering the very short overnight lending rate.

Josh Robb:

Because that's all this is. It's the overnight lending to bank, but then the bank says, "Okay. I'm getting charged less. I can adjust my rates going upwards." So that's how it impacts everybody. The Fed actually doesn't control anything else.

Austin Wilson:

They only control the front end of the curve.

Josh Robb:

Yep. So that's all... Yeah. In theory. Yeah.

Austin Wilson:

Unless we get into the questions about them, their balance sheet, which that's another topic…

Josh Robb:

But problem with these rate cuts, the only thing they're impacting is one thing, which is the overnight lending.

Austin Wilson:

Yep. So number two, refinancing opportunities. So suppose you bought a home in the last year or and a half or whatever where maybe you have a 7% mortgage. That's pretty high. Well, if you within another year or two maybe get rates down into the fives, there's a point-

Josh Robb:

.2% saving.

Austin Wilson:

There's a point where... There's math out there. You can look it up. But there's a point where it makes sense to think about refinancing because you'll save more over the life of the loan closing costs.

Josh Robb:

Even with closing costs. Yep.

Austin Wilson:

So refinancing opportunities may be available. Another thing is higher access to credit. So banks may be more willing to lend, which is going to give you more access to personal loans, home equity loans, other financial products, because rates are coming down. This could stimulate consumer spending, which we're hoping it doesn't to the point of inflation going up, but it could stimulate consumer spending because consumers are going to feel more confident spending, which is going to make demand for goods and services higher, which can drive economic growth as we know. 67% of our economy is driven by the consumer spending. So hopefully that does continue there. Another thing that's negative though, so we've had this period where it's been unusual in recent history, but you could put money in a high yield savings account or buy a CD and get 5%. That's really good.

Josh Robb:

That's a lot. Yep. Great.

Austin Wilson:

Considering what we had got years.

Josh Robb:

Over the last 15 years. Yeah.

Austin Wilson:

You were getting nothing. That's going to get much more normal. So you're not going to get five. You might get 3.5 in a year or so. Still better than nothing, but a lot different than 5. So my personal opinion on this is cash isn't an investment, period. So don't be counting on your cash earning a bunch for you, although it's nice when you do get something, but this is where cash coming off the sidelines and going into bonds or stocks is where hopefully people decide to put their money. So consumers.

Josh Robb:

Consumers. Yep.

Austin Wilson:

We talk about consumers. But as investors, what does this mean? Like we talked about earlier, number one, this probably could mean some gains in the stock market if we don't have a recession. Again, that's I think the key here. If you get a recession, all bets are off. Market will probably go down. Stocks can be more attractive compared to bonds when rates go down, which means that you could have potential gains in sectors like technology, growth oriented things because when interest rates go down, those future earnings and cash flows of growth companies are typically more attractive. So stock market could do okay.

Number two, bonds, like we talked about earlier, could do okay as well. As rates fall, bond prices rise to higher returns on existing bonds. So this could be capital appreciation even as those yields, the income's going to come down, the yield's going to go... Or the price is going to go up, right?

Josh Robb:

Right.

Austin Wilson:

Dividend stocks, mixed opinions on whether this is good or bad for dividend stocks. High dividend stocks may actually have some appeal because they're often compared to bonds as bond proxies.

Josh Robb:

From a yield standpoint.

Austin Wilson:

From a yield standpoint. So they could be more attractive compared to bonds, but also they could be less relatively attractive compared to growth stocks which pay less yield as well, which are going to be more premiumly favored, so... Could go either way.

Josh Robb:

Right. And growth stocks, less borrowing actually helps them, so they may have look more favorable. Got you. Yep.

Austin Wilson:

Commodities, we talked about that a little bit too. Could be mixed. Oil and metals may have some volatility. The dollar could be weakened through this because of interest rates differentials. And that really could increase global demand for commodities. But it also could, depending on the economic situation, obviously, decrease them as well. So watching out for that. That could have implications there. And finally, real estate, especially real estate investments like publicly traded real estate investment trusts, lower interest rates drive demand for real estate, which is going to benefit these investment companies which buy and manage real estate. They're very highly leveraged.

Josh Robb:

Because one of the factors of real estate is the income you receive... So like a REIT, real estate investment trust, the whole appeal to those is they usually have a high dividend yield.

Austin Wilson:

High dividend.

Josh Robb:

Because they'll collect the rent from their properties and distribute that out to the shareholders.

Austin Wilson:

And they have to by-

Josh Robb:

Up to what? 90%?

Austin Wilson:

90%. They have to distribute their income for tax purposes. So that's one aspect of it. But also they typically... These companies borrow lot money to operate And their operating costs are going to be lower then as well. So could be relatively attractive for real estate. So here's... The nuts and bolts of this come down to you got the first of probably quite a few cuts coming. This is a great time to be moving cash off the sidelines into investments provided we don't have an economic recession. Again, this whole thing hinges on if we have a recession, nothing is safe. It's going to be pretty rough out there. But as of right now, it doesn't look like we're going to be having a recession. So it should be a favorable market for fixed income or equities over the next year or so at least. So yeah, I'm excited about this cutting cycle, not fearful. In other cutting cycles we've had recently have been very reactive. This proactive one seems opportunistic.

Josh Robb:

And I would say the last time we did this was 2019 and it actually was going very well. COVID is really what disrupted this.

Austin Wilson:

Yeah. Absolutely.

Josh Robb:

So if we look back at that one, you had some stats on it, but the economy actually reacted very positive to this and it was doing well, but COVID really disrupted their plan, as well as how the economy was moving along. So again, historically speaking, like you said, as long as economy maintains a healthy kind of growth, that 1, 2, 3% growth, which is what we expect from our side of the economy, things tend to do all right with these type of cycles. So yeah, again, I think I'm on the same page as you. From a consumer standpoint, unless you're looking for new debt, you may not even realize or notice much change at all. You may see your savings account rates change a little bit, but other than that, unless you're looking for debt, it shouldn't really have a big impact on your life. And that's kind of the Fed's whole goal is like, "Let's just do this in a way that really doesn't disrupt anything." And that's really what they're trying to do.

Austin Wilson:

Well, that's the Fed. So they cut rates. Maybe you had someone asking what that really means. Well, send this episode to them and maybe they can get a little bit of help. And email us any ideas for any other episodes you have to hello@theinvesteddads.com. Until next episode, have a good one.

Josh Robb:

Talk to you later.

Austin Wilson:

Thanks. Bye.

Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn't have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today's show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click Subscribe and don't miss the next episode.

Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by the host(s) or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.