Fed Rate Cuts, the Yield Curve, Social Security Too

Fed Rate Cuts, the Yield Curve, Social Security Too

In this episode of the Mullooly Asset Video and Podcast, the team experiments using Squadcast to record their session. The discussion centers on the upcoming Federal Reserve meeting and the potential interest rate cuts of either 25 or 50 basis points. They analyze historical rate cuts and their market impacts, referencing DataTrek research for context.

Discussions also delve into the yield curve’s predictive power concerning recessions, before transitioning to practical retirement planning advice, particularly on timing social security benefits while working. The episode concludes with a brief update on Tim’s participation in a challenging race.

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Fed Rate Cuts, the Yield Curve, Social Security Too – Transcript

Hello and welcome back to the Mullooly Asset Video and Podcast for this week. We’re trying something new out here, using Squadcast to record our videos and the podcast instead of doing it all sitting around the conference room table together. Brendan, Tom, thanks for joining me on this call. And we’re going to talk about what is the big topic of conversation here in the markets.

In the beginning of September, we have the Fed meeting next week. And the big question on everyone’s mind is going to is if it’s going to be 50 basis points or 25 basis points. So the Fed has been signaling over the last week last month out there conference in Jackson Hole that the time has come for interest rate cuts.

So now the market is trying to digest whether it’s going to be 50 basis points or 25 basis points. Or 25 basis points, so want to share some numbers to jump us off here from our friends at DataTrek research They do great work And they looked at the numbers dating back to 1990 So I guess this was when the fed started being more transparent about what their plan is going to be for the future of interest rates.

So There were five times that the Fed has either cut by 25 basis points or 50 basis points as an initial cut. There were three times that they cut by 25 basis points. July of 95, September of 98, and July of 2019. And just to give some context in July of 95 they were, they brought rates up from 3 percent to 6%.

And then starting in they started with 25 basis points and ended up cutting by 75 total in 98. There was the Russian currency, long term capital management debacle going on. So they cut by 25 then. And then in July of 2019, They reverse course from their hiking cycle in 2018 and cut by 25 initially.

Just to wrap it up here, then they, had two 50 basis point cuts that were again, the initial cuts. Those two times were January of 2001, just after the dot com bubble, and in September of 2007, When all the housing market turbulence was going on and just before the great financial crisis.

So only five data points here. Don’t know if we want to draw too many conclusions from, these numbers but what are these numbers say to you guys?

I think the the idea that the Fed is going to cut 50 basis points without some kind of crisis. in the media every day without a crisis, there’s no reason for them to be even considering a 50 basis point cut.

I know that I put on social media about a week ago that no one’s even discussing the possibility that there may not even be an interest rate cut next week. And I know that’s just people can’t wrap their heads around that at all. But Powell moves very slowly and he’s very deliberate about when changes are coming.

And so I think there’s always been the possibility, very low odds that there may not be a rate cut september 16th and 17th. That’s a week away. I don’t know what what they’re really going to do. The consensus now seems to be after the CPI yesterday and the PPI today that people are, seem to be settling in around the 25 basis point cut.

We know one thing is for sure. The Fed’s going to be cutting rates in the future. Friendly Fed is usually in the markets is usually the market’s best friend. So I, wouldn’t get too hung up on the timing though. Brendan, what are you, what are your thoughts?

I think another point that Nick and Jess from DataTrek Research threw onto our radar earlier in the week was like, if you compare the current Fed funds rate to the two year treasury yield over history, they track each other within 50 basis points or so of one another, and they are about one and three quarters percent apart now with the two year treasury yield having moved Pretty dramatically lower versus the fed funds rate.

And that’s been a good signal historically that the fed funds rate is about to move for one reason or another. I think what the market seems to be pricing in is. There may be a percent or so movement between Fed funds rate and the two year Treasury yield if they were to converge, meaning Fed funds rate come down a percent or so, put it back into the normal historical range of how those two move.

In conjunction with one another but yeah the worry that the fed might have about doing 50 basis points right off the bat is what it would signal They seem to be pretty, sensitive to their messaging not only in the words that they use in their public statements, but the implications of it And so if you look at what Case had laid out for us what the 50 basis point moves have meant in the past You It was that maybe the usual things were going on with the economy that would cause the Fed to want to lower rates.

But also, there might have been some kind of exogenous event going on that would otherwise mean they would have to go above and beyond the usual cadence being 25 basis points. Maybe 25 seems more likely just, for that reason alone, because they don’t want to freak people out.

I think that sends a message if they jump straight to a 50 basis point cut they, when you listen to folks on TV, they talk about multiple two years ago, they were talking about multiple rate hikes.

And just for the listeners out there, most of the time, they’re talking about a quarter point cut being a single move. So when they talk about the Fed moving over a period of time four rate cuts, or four rate hikes, what they’re really talking about is four twenty five point twenty five basis point moves.

I really think that if they were to jump to a 50 basis point cut for their first move, they’re indicating that they have, they may have data that shows that the economy is weaker than expected. That could be short term harmful for markets, but long term, okay. I think Powell is really focused on.

You know how the market reacts to these things I think them not making a move next week would be would be taken poorly I think the market would probably sell off I think if he gives the market what they’re all expecting 25 basis points and 25 basis points for a period of time I think that’ll just keep things Status quo.

I think another question that kind of lends to this is How far do they go? If they’re talking about lowering rates a quarter point at each meeting, how far do they go? Do they do this for a year and able to drop a point short term interest rates from 5. 255 down to 3%. That seemed to be the discussion this morning on Bloomberg.

One of the things I thought was funny was the stats that we had from Datatrek start in 1990 because the the information prior to that point is just a little fuzzier in terms of how many basis points they were actually cutting. It was just like, yeah we did we did a little bit of cutting or, we raised them a little bit and so you can’t rely on it as much.

And people survived pre 1990 when the info that we were getting from the Fed was You know, maybe less detailed or they weren’t speaking publicly on such a regular basis it obviously is going to impact the market in the short term whether whether they do a cut, how much the cut is, but big picture.

I think the reasons for why the Fed is considering what it is probably better to wrap our minds around than than the actual movement itself. So like when, the Fed’s looking at this, their dual mandate is employment and the rate of inflation and so inflation has been moderating.

It’s still as we found today in the report maybe a little bit sticky, but you look at things like unemployment And I think that’s what they’re trying to be sensitive to now when they start considering these cuts I don’t want to overstay their welcome at these restrictive levels and lead to people losing their jobs because Inflation and unemployment are two things that we all hate and for good reason.

I chuckle after doing this for so long when I see folks in our industry commenting that the Fed is behind the curve. The Fed is supposed to be behind the curve. That is, that actually is their, where their place should be. Because if they’re moving in anticipation of data in the future, they’re really creating their own data by doing that.

And so the Fed will always be a little behind what’s happening in the economy. They’re more reactive, in my opinion, than they’re going to be proactive. And that’s, I think, you

love it if they could be proactive, but I think you’re probably right in that sense. I heard I heard the guys on animal spirits this week talking about just reminding and it made an impression on me too, cause I didn’t remember it this way. The feds didn’t start raising rates in this cycle until inflation was well over 8 percent already. And so they were buying the curve then in hindsight, maybe it would have been great if they could have started that sooner.

And maybe that means in a perfect world, they had started cutting already at some point this year, but waiting for a little confirmation before they do something as serious as changing the rate of interest that impacts all the other rates of interest in our economy it’s probably the right thing to do, even though it’s a little frustrating at times to see them be behind the curve.

It has to be. It has to be frustrating to watch. Remember right before they started raising rates aggressively, they kept talking about the term transitory, that this is going to be a short term phenomenon that we’re going to see. I guess their definition of transitory is different from everybody else’s.

But yeah, that’s You know, they have to wait until the ink dries on the data.

I think everyone laughs at when they say that they’re data dependent now. But it’s they have to be, and I think that you Bren, to your point, you want them to be data dependent, you want them to be acting based on Actual numbers that they’re receiving from from the different economic sources and you don’t want them to be acting based on gut feeling or No

if they if they tried to be more proactive than reactive and they made an educated guess look at the amount of flack they get now for doing what they do based on the data as it comes in. If they were doing stuff based on guesses, I think people would go insane, right? That’s like the amount of Monday morning quarterbacking that would be going on.

It’s already it’s already a lot. I can’t imagine what it would be like if they were basing these decisions off of projections for the future as opposed to data that we’re getting in real time.

I also want to put all of the Fed talk into context because it is we’re drilling down pretty hard on it.

A lot of other people are drilling down harder than us on CNBC, Bloomberg, all these different market channels, dissecting 50 versus 25.

And to an extent, it’s worth, it is definitely worth talking about. But I think it’s back when CPI in 2022 when there was like CPI days and the market would be extremely volatile on those days, I feel like we’re in a similar space here with the jobs reports coming in and certainly whenever the Fed meet is meeting, we’re seeing these pretty volatile days in the market.

But in, in context of the next, Three six months a year out two years out five ten years out certainly, again, I don’t know if we’re making large or any investment decisions based on what the fed is or isn’t doing.

So, a quarter point on the fed funds rate Like what are you doing next week if that happens with your portfolio as a result?

Hopefully nothing is my answer like if you’re waiting for that and doing stuff. I mean You It could be that your your M. O. Is just very different than ours in terms of what we’re helping folks with. You could be day trading and maybe that’s important to you. But for anyone who’s even modestly long term with their money, I’m not sure there’s a whole lot to do as a result of a quarter or a half a point move on the fed funds rate.

I can vividly remember after the 1987 stock market crash that, People were so fixated. We didn’t have CNBC back then, but we had financial news network and people were fixated on CPI day, as Casey just mentioned, I had to actually, at that point in my career, I had to look up and see what the CPI was like, okay, remind me again, what goes into the consumer price index and we had PPI and we were hanging on employment reports.

We were still getting money supply reports on Thursday afternoons after the market closed. And you’re right in the sense that this became the next data point on whether we were in a, recession or not, if the fed was going to move or not. So yeah, I’m getting flashbacks as we go through CPI yesterday and PPI this morning.

Seems like every roughly every year or so, we have a new. Economic data point. That’s the that is the most important one this week’s job report is the most important job report of our lifetimes like people will joke on twitter on the internet and I And more with the joking than the people who are taking it overly seriously.

Of course, this data matters of course, it can impact things like the market on a day to day, but like Probably not making big changes to your investments based on one data point in a series like CPI or unemployment. With that fund rate changing as a result of those sort of things. Not to poopoo it, you want to pay attention.

Obviously it’s our job too. So we do, but I think it’s important to put it into context and say what matters. As a result of this data that we’re getting. And it’s often a lot less than people, I think expect because of, how heavily the media is reporting on information like this as it’s coming out in real time.

Yeah. Another one of those indicators has been the yield curve, which we inverted back in around this time. I think it was November of 2022. So just Refresh everyone’s memory. A normal yield curve, short term rates are going to be lower than long term rates. So when the curve inverts, short term rates are higher than long term rates.

We have some more info from our friends at Datatrek. They looked at the 3, 3 month and the 10 year. Which it’s usually you look at the 2 year and the 10 year. But the 3 month and the 10 year is even shorter of a time frame. It’s one of those tools again that people try and use and say it’s worked this time.

‘ Definitely going to continue to work in the path in the future. And I’m going to throw up the chart here that DataTrek shared .

So here you can see that the gray bars are recessions. And when the arrows are indicating when the yield curve inverted so you can see that Every time there is a yield curve inversion, a recession follows shortly thereafter. But what Datatrek pointed out is that in 1990, we had an external event. We had Iraq invaded Kuwait, oil prices skyrocketed, and that coincided with the yield curve inversion.

In 2000, 2001, we had the dot com bubble burst. In 2007, when the yield curve inverted, we had, like I said before, that the housing crisis, which led to the great financial crisis. And in 2020, we all had the COVID pandemic. It’s not necessarily one of those tools where you can say, oh, it was the yield curve.

There are external factors that we obviously, we don’t have a crystal ball. We don’t know what is going to happen. There are so many different factors at play here. So I think it’s just one of those instances where you don’t want to draw the conclusion of it happened this time. It’s going to happen again.

What are your guys thoughts on the yield curve?

Can you pull up that chart again? So I think I’m not, I know it’s a political season and everybody dodges questions, but I’m going to try and dodge your question here. What I want folks to see on this, the gray bars, like Casey mentioned, are the recessions.

And this chart goes back to 1982.

There’s a lot of white on that chart.

There’s, yeah, there’s very little gray on there. And folks do the freak when it comes to recessions. I think everybody should just calm down.

Yeah. Obviously from the standpoint of if you can safely assume that a recession is going to occur, but you’re not going to be one of the five, 10 percent of people that end up unemployed during that, period of time then, all you need to really do is have a sound enough investment plan, cash flow plan to get through that period of time.

Because as we see, there’s a lot of white on that chart as as, it relates to the gray, which are the recessions.

But I think we spend time worrying about them because of the implications, because we don’t know during those periods whether we will be one of the people to lose our jobs or not.ecause that has huge ripple effects on people’s finances and could even put them in a position where They have to sell investments while they’re out of work double whammy I get why people worry about them, but I think point well made that these are The exception more than the rule when you look at what the economy is doing It’s usually expanding not contracting and the contractions haven’t been You know super long lived even over a period of time like that.

And so Good context to have when we start worrying about things like recessions like bear markets they’ve been temporary things, over the course of history and while they can be traumatic I think you can hedge yourself against all the bad that does occur during the during this period of time and you come out the other side.

All right, so I want to move away from the dissecting the fed and the yield curve and the economic stuff and move to a More of a planning topic kind of want to piggyback off a video. I did last week. I spoke about how if your thinking about retiring early, you might want to save outside of your 401k.

But now I want to talk about what if you get into that early 60s, even throughout your 60s, what if you’re in that time and you want to continue working, can you receive social security benefits, which is another big piece of the retirement equation, when to claim social security benefits?

Can you both be working and claim social security benefits? At the same time. So just to give us some context here CNBC did a retirement survey and 28 percent of retirees who are currently retired. 28 percent of them are working in some capacity. It doesn’t give us the ages for how old these folks are.

So it could be 60 70s 80s we’re not sure. But for the next generation of retirees, which again is an undefined age bracket, the next generation of retirees, 53 percent of them say that they plan on working in some capacity in retirement. Again, not sure if this is because they want to or because we think that they’ll, because they think they’ll have to, but 53 percent of pre retirees think that they’ll be working in some capacity.

So this is a decision that a lot of people might have to be thinking through is. Can I get social security and still work? Should I do that? What are the pros and cons of that?

To Set you guys up a little bit more this There are there is an income threshold so you can work and claim social security at the same time But if you make too much money, then some of your social security benefits will be you won’t receive the full benefit So the income threshold here in 2024 is 23, 320.

So if you earn anything over that, your amount will be or your social security benefit will be decreased. I’m going to share my screen here again and have you guys walk us through the example of how those benefits are will be calculated in the future. So

I’ll say as this is coming up on the screen that Brendan and Tim have popped some people’s bubbles in the sense that they have walked in with the concept that, Hey, I’m going to retire.

I’m going to pick up this other job that I’ve got lined up and I’m going to file for social security at the same time. And they’re 62 or 63. And when we tell them, Hey, some of this money is going to get clawed back you’re going to have a problem. It’s it was a real eye opener for folks.

Yeah, and the further above the threshold you are the less likely it makes sense For you to do both of those things both collect social security before your full retirement age And earn some income from employment along the way notably though Something like your pension Or taking money from retirement accounts during that period of time is not going to impact It’s it really is just earnings from employment.

And so it’s important to separate the sorts of income that you have and think through how they all factor into the overall retirement plan. And that’s one, one kind of wrinkle here to be aware of, I think.

Yeah, good distinction there. So the way that it works is that your Social Security benefit is reduced by 1 for every 2 you earn over the income limit.

And that might make your head spin. So let’s walk through an example. So let’s say on the screen here, Social Security benefit is 12, 000 a year. You earn 35, 000 from employment, so wages 35, 000 a year. The earnings limit is that 23, 320. Got to calculate how far you are over the earnings limit. In this example, you are 11, 680, 000 over the income threshold.

To determine what your benefit is going to be reduced by, divide that by 2, so it’s going to, your benefit is going to be reduced by this number, the 5, 840, subtract that from what your benefit is, and you’re going to get 6, 160, which is just over 50 percent of your actual Social Security benefit, so you’re only going to get.

About half of your benefit if you have this amount of earnings per year.

Yeah, so like maybe there’s a world where that Reduced amount of income is enough to bring it all home for you in terms of you know Covering your cost and that’s your only option. There’s nothing else you can do to get that income that you need And the reduction is fine so you choose to collect anyway But you have to do the math to figure it out because in a lot of cases the reduction that you’d be eating You Makes it not worth it to collect early.

You do end up getting some of those benefits that are held back during this period of time they, they come back to you past your full retirement age. But if you’re talking about the present and what you’re going to need to do to make ends meet, it’s, you have to do that calculation case that, that you just walked us through.

If you don’t then you’re going to, you’re going to be in for an unpleasant surprise.

So important to understand your cash flow and. A reminder that this is for folks who are thinking about filing early before their full retirement age. So if you are in a position where you can wait to file until your full retirement age, for a lot of people now it’s becoming 67 you don’t have this clawback situation going on.

It’s only for folks who are looking to file early.

Yep. That’s a good point. And like I said, I think social security is one of the biggest factors that we help folks decide on when it comes to retirement planning. I think retirement planning, like you said, cash flow is, another big thing. Investment allocation, what we can expect in terms of return, inflation, longevity, all of those things are factored into our retirement planning discussions.

This is a little interesting. Social security wrinkle that if, like I said, if you want to continue working during those your early sixties and claim social security, this is a decision that you got to do the math on and you got to think through fully before you lock in anything.

I think to, to the point of your prior video better, better than being in a position where your only option is to collect early.

And face a reduction like this, it’d be great to have a liquidity bucket, whether it be at the bank or in something like a brokerage account, like those, after tax investment accounts that are accessible to you and have a different tax status than your pre tax retirement accounts or your other earnings.

It could come up big during a period of time like this where you could defer that benefit, get a little bit more money, not face a reduction. And and still have the income that you need. And so I think that’s a good follow up to your prior point that you were making, Casey.

Definitely. If you guys don’t have anything further there, I’m all out of topics to throw your guys away. So I think that’s going to wrap it up for this week’s video and podcast.

Do we want to talk about the missing Mullooly? Where’s Tim? We’ll

Tim’s running through the woods in New Hampshire or something like that?

Yes.

doing some, it’s like a race, a relay race. And he’s, I guess the first leg of it he’s doing is straight up a quas quasi mountain from what I hear. So he’s in for he’s in for a treat this weekend from what I understand.

So the running from the, middle of New Hampshire down to some beach.

And it’s, is it a 24 hour race? Something, a 100 mile race? Something like that. I

don’t think he’s gonna sleep or anything. It’s just he’s got three legs to run Tim, we wish you well, man. Good luck out there.

Yeah, say hi to Goggins for us.

Exactly, alright, thanks as always for tuning in.

We’ll be back with you guys next time.