Ep 53: The Fed Cut Interest Rates: Prepare For Landing 🛬

Jess, it's happened. The Fed lowered rates by 50 basis points. We started this podcast while the Fed was ascending the interest rate plane into the air and finding its cruising altitude. Now the descent has begun and this is a new subject for us. So what happens now? Yeah, it is. The Fed has found neutrality. It's what we call it. They've balanced the risks, so they say. So we need to talk about what that means. And more importantly,

What that means to you as a self -directed investor, what we need to watch for. A lot. A lot today. A lot. We're the flight attendants on this journey. That's right. We're going to guide you through your flight. What is it called? Your landing. Yes, the landing. You're listening to the Market Make Her podcast, the self -directed investing education podcast that makes the stock market make sense and shows you all of the tools and resources available at your brokerage firm from

her perspective. That's us. We're her. That's right. So you know how it works, what to do, and are up to date on current events, like what the Fed did this week, dropping interest rates. And this podcast is teacher learner style. So that means no financial jargon and real expert answers. And we're your host. I'm Jessica Inskip, the resident finance slash stock market Taylor Swift obsessed nerd.

Been in this industry for way too long now, over 15 years, and I share my knowledge on CNBC, Fox Business, Yahoo Finance, the Schwab Network, and of course, all of you. And I'm Jessie DeNuit. I'm learning alongside you. So my job is to ask the questions you were thinking and then some to make it make sense. I'm on a mission to understand how investing in the stock market works, because I want my money to make money. I don't know about you. Absolutely. And now, interest rates, they really affect your money quite a bit. The word?

Of this Fed meeting, Jesse is recalibrate. If we could do one of those Gen Z edits like they do on TikTok, that trend where it's like, I just let Gen Z edit this, it would just say recalibrate 27 times. it. So many times. Is good old Fed Papa Powell used or is that the word you're using? That's the word that he used so many times. It was very interesting. What he's basically saying is that he recalibrated

the approach to focus on sustainable and moderate economic growth by supporting the employment mandate. So basically what he's saying is we've got confidence that we've beat the battle on inflation, that it's headed closer to 2%. It was a bold move with 50 basis points because normally 50 basis points would indicate a recession or that something broke because that's a bigger cut. He owned the narrative. Like that's what I was very concerned with. So meaning.

50 basis points is, hey, I'm in control. I still have my credibility. I'm going to cut this much before we see a bigger spike in unemployment. 4 .3 % is still really, really low. Historically, it's going up. I don't want any more pain on the employment front. That's kind the message that I got that he was giving us. But 50 basis points is bold. Bold move. It's bold, but I think it's kind of what everyone was expecting. Like, no one's sh

gonna be surprised by that, right? Yeah. And you know, that's what the market was expecting. But actually that morning it was a 60 % probability that it would be 50 basis points and then about a 40 % that it would be 25. So the market did expect that. And we sold off yesterday, but now we're in rally mode again today. We should go through his speech and then there was some Q &A. So naturally I took about like three pages worth of notes so we can go through them today. Did you make a PowerPoint?

I did not make a PowerPoint today. I'm sorry. know I'm working on a Taylor's version one though. It's really good. am. But nonetheless, recalibrate is the theme. So we want to keep that in mind. And just like we pay attention to what Taylor Swift says, we're going to pay attention to what Powell says. Whenever he gives a speech, he always starts with, let's review where the economic data is currently and then move into monetary policy. So we should do the same thing. He says,

GDP is at a 2 .2 % annual rate for the first half of the year. Said any available data is pointing to similar growth this quarter. That's important because the growth in GDP, just like we were talking about the business cycle, growing as an economy, producing goods and services within the country, that's not indicative of a recession. So because we had that growth, that was his cushion to keep rates higher for longer. And consumer spending was a resilient component of that as well.

So is this data prior to September? Didn't we say though September is the worst month? Yes. Okay. Everything is always on a lag. a good question. it's just on track this quarter to be positive from a growth perspective. We had a lot of other data like retail sales came out super, super strong. I'm more concerned with the quality of those sales. Like we have delinquencies going up. All outstanding consumer debt is very, very high. It's at record highs, but it makes sense that it's going to go higher and higher because

inflation, right? But the acceleration of the percentage that is delinquencies is at 3 .2 % right now. And we haven't been above 3 % since 2012, which is still low. It's just the way that it's increasing is really, really high. So he's just trying to get in front of something bad happening is what I took away from that. he cut by 50 basis points, which is only half of a percent, but still that's a lot to cut at once. It is perspective. Okay.

It's a bold move, a very bold The market is reacting well. It's responding well, then rallying. Yes. And for now, and I think a lot of it has to do with the shifting economy, that AI narratives, there hasn't been mass layoffs yet. And that's the concern. He's getting in front of mass layoffs. Interest rates, it has this domino effect where now we can spur growth again, because if you're investing in AI, it's going to be at a lower rate.

or companies can hire more because they can borrow more, it frees up expenses. Just like our credit card bills, anything variable is going to go down, that frees up expenses for us, which might spark more spending as long as a reduction in rates is not indicative of something breaking and to stimulate the economy because of a recession. That's why it was bold. As in, like, in the past, the last two times that we cut 50 basis points was right before the tech bubble and right before the great financial crisis. I see.

And in 2007, when it was cut by 50 basis points, the stock market was at all time highs and then we had a housing crisis. that's, that's why it's, what's happening. Okay. So that's scary part, but I still think I'm not in the camp of, my gosh, let's freak out because it's a different, different type of economy. Economies change just like our menstrual cycle changes over time. This is cycle changes over time. What he was concerned about though, is the housing market. And I really, really thought this was interesting what he stated.

So I'm going to kind of jump back from the economic and into the Q &A. The housing market hasn't cooled enough, as in prices are still elevated. Within the Q &A, someone mentioned that if houses and rents haven't come down yet to your target 2 % inflation, do you think lowering rates is all of a sudden going to spur demand because now mortgages are going to be lower because they're tied to the 10 -year rate? And then that's going to make prices go up because people are going to get into bidding war because people want to buy.

And I thought his answer was really, really interesting. This is a new one that I've heard from him. He said, it's dragging. The leases aren't rolling over. They're not coming down as much. It's slower than expected. It's like the direction is clear. It's fine. It's going to, it's going to take time to show up. But he says it's taking longer than anticipated because if you think about it, you do an annual lease renewal. It's not something you go do all the time, like buying groceries. So that's why it's a lag to show up in the data because when you're leased, if you're renting.

It's usually like once every year that you do that. So says, you know what's going to take a longer cycle for that to happen. As long as it remains in control, the rest of the elements, they're behaving very well. He called it behaving. But then what he said, and I found this very, very interesting. He's like, listen, this is something that is a supply side issue. As rates come down, people are going to move more. The real issue with housing is that we're not on track to have enough housing. That's supply side.

needs to be built. And he's like, I can't fix that. He's like, where are we going to get the supply? I can't do that. He said it will be dealt with by the market mechanics and fiscal policy. He basically just like washed his hands of it. that was really interesting to me. I don't understand. mean, like, okay, I understand that it's a supply issue with housing or whatever. That's a bigger country issue, It is. Like, there's like so many

ways that housing can be provided, but that has to do with the stock market. It does. Yes, does, Jessi. OK. It does. We've got this issue of coming back to work in all those office buildings. There are some companies that are converting that into residential homes. Right. That's good for housing prices. If it's affordable, it puts money in consumers' pockets. And if there's money in consumer pockets, that's good for... Yeah.

the stock market. There's a trend now where they're forcing employees to come back to the office five days a week. Is it just because they didn't want to lose their commercial real estate? I don't understand. That might be. Yeah, I'm not as well versed in that. I mean, I did have a thought on that. I saw that from Amazon where they're pushing for the five day work week. But I had a really good conversation with a developer friend after the release of the Strawberry AI with Chagy P .T. and he's like, I don't need to hire any devs anymore.

from working on the corporate side and being involved in understanding layoffs and how they work, that's a path to layoffs is if you refuse to do this, now we're not firing you, you're gonna quit. Right. That's my theory. No data to back that, you're speculation. No, I mean. But it's a good thought though, Jessi, because now what we're really focused on

is the employment picture. Are there going to be layoffs? And a lot happened with our employment picture. Hiring has slowed down. And you got to think about the unemployment rate. So we've got participation that's up. That's really good. But then we also had an influx of immigration. As data, we have more people come in. 50 plus has left. They retired. They're the ones with the 3 % interest rate homes. If they start downsizing, then that would be good. It's all.

like a big spider web. all related. Yeah. No, you're right. Because that would provide housing availability for others who looking for houses. yeah. Exactly. Exactly. So the job to workers gap has narrowed. He called out as a positive. And when he's talking about this neutrality of the risks, what he means is there's a dual mandate that the Fed has, right, which is maximum employment and price stability.

He says the upside risk to inflation, so the risk of inflation surging is less than the downside risk to employment. I think that inflation is under control. And if I don't support economic growth by lowering interest rates, then I'm not going to do a good job with the other side of the mandate, which is maximum employment. That's what that statement means. Yes. But then that leads to the word of the day, recalibration.

He is recalibrating to the focus of the labor market. There's strength in the economy. It's not a preset course, but he's going to make decisions meeting by meeting, which is something that he said. And this is also another one of those Fed meetings where we got a dot plot. Do you remember what that is, the SEP? Yeah. And I originally thought we got the dot plot every time, but we don't. So we got one this time. Yes. It's every other meeting. And so.

They said the median is that unemployment will actually be at 4 .4 % by the end of the year. So their economic projections, they tell us about where they're going to feel about inflation, where they feel about the Fed rate, where they feel about unemployment. So they see it increasing by the end of the year, but then decreasing by the end of next year. Because the dot plot is telling us how they are showing markers of the data and

their projections of where they think it's going, right? How we can see the feds projections and then use that to make our own informed decisions. Yeah, exactly. The way that they describe the dot plot is this is not policy. We're not saying we're following this. This is not like an outline. This is just where we feel based on the data now, you get the middle mean view of how everyone within the committee feels that changes because the data changes. And so

It's helpful to get into their mind of, this decision is going to impact it by this much next year, but then it changes all the time. So just take it with a grain of salt. That's right. Yeah. You can go through 24, 25, 26, and 27 and see where you think everything's going to be. So they still see GDP at 2%. They see unemployment going up all the way into 2025, but then slowing down.

They see PCE not even reaching their target of 2 % until 2026, but they see it's on the path. But the federal funds rate, now they're showing we're going to be at four and a quarter or four and a half about by the end of the year, whereas in June, they told us they were going to be at five. OK, you're right. So they adjusted. They put in more rate cuts, which is very interesting. So where are we at right now for the federal funds rate? Current is $475 to $500.

And right now there is a 57 % probability that we'll do another 25 basis point cut on the next meeting and then a 43 that they'll do a 50, another 50. And how long does that take to affect things like mortgage loans and auto loans for the consumer? The market already anticipated this rate cut and mortgage rates already reacted. That happened before he even announced it.

Because the market's forward looking. That's why I wanted to drill it into your head. And it processes information as it comes in, but it also anticipates information. Because remember, the Fed impacts the front end of the curve, which is the shorter term once. Mortgage rates are tied to the 10 -year treasury. So more correlated to the 10 -year, that's more supply and demand, but that's also based on what he does. So it's like a domino effect, but that's not the first effect in the domino. Does that make sense?

What's the first effect? The front end. The front end of the curve. That's towards the middle of the curve. The curve's going to start re -steepening. So instead of being inverted, it's going to de -invert. Remember, it's our scry. So that's going to show us economic growth, which is good. We want to see economic growth. So it looks rosy -colored right now, is basically to answer your question. OK. Yeah. We're hoping that we're going to see interest rates dropping in.

loans, like credit cards or auto loans or mortgage loans, things like that. And as a result, we're going to also see our high health savings account interest rates drop. So that's the other part of it, which we've been about for months. But it's happening. is absolutely happening. It's happened. It's happened. We're there. The plane still in the sky, our descent has happened. Is this what we're considering a soft landing then? We don't know yet.

We don't know yet because now we're starting our descent. haven't landed. He's trying to get in front of that. And I think he owned that narrative. It's a bold move. He kept his credibility. That was my concern because a 25 basis point cut is completely manageable. 50 basis points you have to justify. Yeah. And so there was one Q &A. There's a ton of Q &A. But the one that started it was, are you more concerned with the labor market because of this 50 basis point cut? We're surprised. What's going on with the labor market? Yeah.

And he didn't directly say that there was deterioration of the employment picture, but he absolutely indirectly stated it. I took that away. He said, payrolls, they were revised down. As in someone looked at the data and said, hey, we need a mistake. We actually didn't have as many job openings as we thought. Yeah. And so he's like, it was artificially high, and it's probably going to be revised down more. So that, to me, is saying, OK, well.

actually, yeah, there's risk on this employment picture deteriorating and it might be worse off than we thought. And then someone said, hey, because remember we got that employment picture or the employment report the day after the last Fed meeting when you and I had that conversation. We're like, why didn't they cut? Yeah. And then they had a risk. And then the market sold off. Someone said, if you had that employment picture, would you have cut then? He's like, yeah, I probably would have. So maybe he's just making up for it. Yeah, it seems like it.

I don't understand why they do that before they get that data. Then why would they just have the meeting after the data? That's a great question. And sometimes they get the data beforehand. They front run the data. But that didn't happen this time, which I don't know. It's just like prolonged things, you know, but whatever. exactly. We are that we are. But now he says the balance of risks is even because of the spaces point drop, which is inflation and unemployment.

The risks are now even at this moment. OK. Good. Great. Yes. Well, and he's like, the labor market's solid, and I'm going to keep it there. Yeah. Solid for now. mean, I guess we're just going to see what happens, right? Yeah. That's true. But mean, growth is solid. The labor market is solid historically. And he gave us a number, which I always look for. So he said, lower fours is indicative of a good labor market. And the SEP projections reflect that, too.

because they had it all the way up to as high as 4 .4%. The higher fours would be 4 .5 and higher. So if we see that. What is SEP again? The series of economic projections. That's also the dot plot. OK. So if we see a print above 4 and 1 half, 4 and 1 or higher on the unemployment report, which we've got another one before the next Fed meeting in November, that could really trigger a sell off. There's always a sentence he says that we should hang on to. And that's the one I think we should hang on to.

is his definition of a good labor market. OK, so can you go over that again? Labor market is what right now? So our unemployment is at 4 .3 percent. OK. And he categorized a good labor market in the low fours. OK. So anything in the higher fours would be a bad labor market, which means the labor market is deteriorating, which means layoffs might come, which means you're going to have to cut rates even more.

to prevent those mass layoffs. Because that's what we don't want. We want everyone to have a job. If there is high credit card debt, but people still have a job, they can still make their payments. But if they lose their job, then that's what gets us into recession. So we're looking OK so far. We are. We are. And he says he's not seeing rising claims. He's not seeing rising layoffs. And he says he's not hearing it from companies. And he said this action, he wants us to think of it

as they're acting before the labor market is deteriorating, which I think was good on his end because he owned the narrative. That's really important to say, hey, I'm in control of this. Yeah. You know? Yeah. So people don't freak out or what? Yeah. Otherwise they would. And when they freak out, the market freaks out. Right. So the market responded well. There was a sell off the other day, but now it's rallying again. So yeah, you know, everything looks. It looks it looks it looks for it. It does. It does.

And there were two other questions that I think we should go through or actually three. So there was another one that said, what about this era of free money? So we talked about the era of free money, kind of what that means. Did we? I don't know. OK, we had the great financial crisis, big recession. The Fed lowered interest rates in response to that to stimulate the economy. That's considered the era of free money.

because interest rates were next to nothing, so you could borrow for literally nothing. Sovereign bonds were negative rates, essentially. He feels like we're so far away from that and that we're not going to get to that place again, which to me goes back to something we said for a brief moment when we first started this, Jessi, which is I really do think that we just, as an economy, recovered from the great financial crisis, which is crazy.

Mortgages are actually getting back to normal. It's not normal to have a 3 % mortgage in the history of mortgages. It was nice. Nice how it lasted. But I mean, it might get lower, like fives and fours, and that's great. But yeah. Which is interesting. Well, then, mean, just sounds so, like, that and the things, if mortgage rates lower, then people might be more likely to sell the homes that they've been staying in because they've been high. And then that will help free up the

Exactly. And that would be good if it's, and he's leaving it to fiscal policy and there is plans out there and a concept of a plan. Yep. And that really leads to the question that I'm really glad someone asked. He said, Hey, is this political? You made a bigger cut than normal. And I'm really glad somebody asked that. And so we think about that. Yeah.

Well, the Fed is not supposed to be political. And I think he did a great answer. So we have to remember Papa Powell was actually elected or appointed rather by former President Donald Trump and then remained through Biden. He says, listen, this is my fourth election year, Nothing political is being discussed. We don't have agendas. We don't have sides.

My job, I have a dual mandate, which is maximum employment and price stability. And that's what we focus on. But then he went through how other democracies within the world that are like ours work. Like everyone has a central bank, or most people do. Remember we talked about that like a few weeks ago. Like, everyone has a central bank. Right. And if you insulate the central bank from control of any politician,

It avoids decisions being in favor of one political party over the other. And that could be a problem because they want to see the economy grow as in like the president, whoever's in office. Right. They want to take credit for it. Well, if you're lowering interest rates, you're literally hindering growth. That's your entire goal. So you could see how they can't be political. That could be a huge issue. Huge, huge issue. So he's like, listen.

If you look at democracies around the world who are insulated from and are independent like we act, they do a better job of tackling inflation in the long run because they're focused on their job and not this outside political interference. And I really liked that answer. Yeah. It's like we don't support a cause or an issue, just maximum employment. Yeah, just their dual mandate. That's it, which is great. They should be doing it because they're a private organization, even though they're like the chairs appointed by the president.

Yep, exactly. Exactly. He's like, our jobs to support the economy. That's it. Great. Good job. Good job, Papa Palace. Good answer. OK, good. Good answer. And then the last takeaway that I really liked is he said, what is a good definition of inflation? We haven't talked about inflation in a long time, as in from the stock market perspective. And eventually, we're not going to talk about it anymore.

because we're going to move on to what's ever moving the market next. So it's going to go into the political season very, very quickly. Then it's going to probably move back into AI because now interest rates are lowered. There is going to be a big cap X spending cycle, which means companies are going to spend money because now money's cheaper, right? Right. So everything's going to change. And he's like, that's a good definition of inflation when everyday people aren't thinking about it, aren't going to the grocery store and be like,

in this economy, this inflation. So a good sign of inflation is that nobody's talking of inflation. Exactly. That's when it's under control in his eyes. So pay attention to the people around you. He's like, I want to get back to what is inflation. Yeah. mean, it's got a dual mandate, but the consumers are who really matters. It is. That is part of it. It's pretty much everything. It's absolutely everything. Consumers make the world go round.

the collective makes the world go round. Maybe we haven't beat the battle of inflation or declaring victory just yet or on that road, he says. But maybe we recovered from the great financial crisis. That's what's happened. I don't know. I still feel like a lot of people are still feeling it, but hopefully there aren't mass layoffs. People are able to get work and, you know, pay off their debts and make money and spend wisely. Yeah. Well, and if inflation is in balance,

where wages are gonna go up, eventually you get used to it, right? Callie Cox said it best. She's like, eventually that $9 Caesar salad isn't gonna seem so high. It's just gonna be the normal. And then wages should help with that too. Well, yeah, wages need to reflect that. Like if it's the new normal, maybe it's fine for some people, but like overall, it needs to be okay for everybody. Yeah, yeah.

And then just what I'm watching from a market perspective. I actually talked about this one on CNBC today. So when we look at the stock market, we look at the S &P 500, which is market cap weighted. And then if we want to see brets, we look at the equal weight. I like to look at the NASDAQ 100, which is mostly technology stocks. The S &P 500 hit an all time new high today. The S &P equal weight hit an all time new high today. The NASDAQ 100 did not. that's interesting. Right. So.

there's broader participation, which is good, but that also means there could be turbulence ahead. Yeah. So we just have to watch that. But if it hits a new high and everything else does, then that's good. You know, we're all we're all all in sync. The cycles are sinking. I'll back to the menstrual cycle. It really does. I really think we should start saying, those are trying to figure out like is the stock market still in its luteal phase? Yes. Are we like, yeah, where are we at?

The cycle 20. Any other takeaways that you have from that? Or do you think September is still going to be the worst month for the stock market or what? So from what I look at, there aren't signs of a pullback, but there is signs of consolidation, which is fine. That's still a direction sideways as a direction. What do mean consolidation? Consolidation. So the business cycle is the economy. Then there's a stock market cycle, which is rally. Okay. Going up.

Consolidation is in the name, it just means sideways, not going anywhere up and down, but in a small area. We call that a trading range, like a floor bouncing from ball to ceiling. It just keeps doing it. Doesn't go any higher, doesn't go any lower. Okay. Just kind like in this little area. And then a decline. So if we are in rally and then consolidation, we might go into rally again, because remember the stock market doesn't go straight up.

It goes, it goes up and it has little declines in between. You just don't want those to be violent declines. Right. It goes up and down, but looking at the whole overall picture, it continues to project upwards. It does. It does. But we're hitting that period where the NASDAQ 100 isn't hitting new highs too, which means when it gets close to it, it might struggle to get there a little bit, which is going to align with the election.

And there's one thing that the stock market hates more than anything. And that's uncertainty, which is what we have. Yeah. Well, with the election side. Right. So depending on what happens over the next couple of months, that's right. See what happens to the stock market. Yep. Because it's not just about who gets in the presidential seat. It's also the Senate. Can stuff get passed? Who's going to overtake the House? Are they going to be full of gridlock again?

And it's not like the stock market's looking for an outcome, it's looking for certainty. Yep. We'll it there. There's a lot to digest there. We decided we're your flight attendants on this airline because the Fed is the pilot raising interest rates. And since we've been helping you navigate this whole time, we're going to have fun with our closing. Here we go. Here we go. Ladies and gentlemen, we have begun our descent.

Please turn off all inflation worries and shift your focus to the unemployment picture. In preparation for landing, be certain your extra cash is locked in a higher rate and your seatbelt is fastened as we may experience some turbulence upon descent. Here on Market Maker Airlines, we value your feedback. Please leave a review or comment if you enjoyed our service today. We thank you for choosing Market Maker to help you navigate the interest rate skies. We know there is lots of options for you to choose, so thank you for flying with us today.

Please share us with your friends and family to help us grow. Thank you. And remember, when you build knowledge, you break barriers. Break barriers. Jessie, I think that you have a very good flight attendant voice. I used to want to be a flight attendant. Yeah? Yeah, because the travel and everything. I always thought it'd be so cool. Mm -hmm.

Remember, investing involves risk. There is always potential to lose money when investing in securities. Market Maker provides educational content and resources for informational purposes only. We are not registered financial advisors and do not provide personalized investment advice. Any information provided by Market Maker on our website or podcast is not intended to be a substitute for professional financial advice. Market Maker is not...

liable for any investment decisions made based on our content.