Federal Reserve Interest Rates Retirement Planning Investments Military

Understanding the Federal Reserve’s June Meeting and Its Impact on You

finance in the news Jun 13, 2024

The Federal Reserve, often called the Fed, just concluded its June monthly meeting where the members discussed the U.S. economy. The Fed is like the country’s bank manager: it helps control how much money is available and keeps an eye on inflation (how fast prices go up). The Fed's authority comes from the Federal Reserve Act of 1913, and since then the President has appointed the Chairman, who is currently Jerome "J-Pow" Powell. The Chairman of the Fed is one of the most powerful and influential people in the world when it comes to stock markets, real estate, and most of the economy. This blog post will explain what the Fed’s decisions mean for your investments, retirement savings, and financial plans.

 

What Did the Fed Decide?

During the June meeting, the Fed decided to keep interest rates the same. Interest rates are the cost of borrowing money. When interest rates are low, it’s cheaper to borrow money for things like buying a house or car. When rates are high, borrowing money becomes more expensive. You would expect that if the Fed lowered the interest rate, more people would want to borrow money to buy things like houses, cars, and even stocks or cryptocurrency. So lowering the rate could lead to "easy money" and a better economy.

The Fed also talked about inflation. Inflation is the rate at which prices rise over time, and the Fed's goal is to keep inflation right around 2%. Recently, prices have been going up faster than usual, including in May when they went up 3.3%. When the cost of things go up, your money doesn’t buy as much as it used to.

Economic growth and inflation work against each other, and the Fed Funds Rate is caught in the middle. If the Fed lowers the Rate, more growth should happen -- and more inflation should exist. On the other hand, if inflation is high and the Fed raises the Rate to bring inflation down, it usually slows down the economy. It is the Fed’s job to manage interest rates and balance inflation with economic growth.

By keeping the Federal Funds Rate the same, they are basically saying they don't know what is going to happen with inflation or the economy, but that they aren't worried about how things are going. They don't want to make a change that could "shock" the economy or stock markets and possibly make one or the other worse. So the news means we can expect more of the same, and should not panic.

 

History Matters

The current "Federal Funds Rate" is 5.33%, which is slightly higher than it was one year ago when it was 5.08%. However, the rate was near 0% from 2009 to 2015 as America's economy recovered from the Great Recession and Housing Bubble, and again near 0% from 2020 to 2022 while the economy struggled during the COVID pandemic. Because most people only remember these years of 0%, 5.33% feels really high.

The effect in the U.S. economy for the past 2+ years has been that most people and businesses have thought right now is an expensive time to borrow money. They remember when it was 0%, and many are trying to wait it out until it goes back (close) to 0%. Many expect the Fed to lower rates at least to 2-3%.

But this popular view that we'll soon get back to 2-3% is pretty random and based mostly on hope, and there's no reason to believe that will or should happen. The Rate has averaged 5.42% since 1971, which means where we are right now is pretty much normal!!! (source: https://fred.stlouisfed.org)

For this reason, I personally believe and recommend that the sooner you are comfortable with normal and commit to start borrowing and investing again, the better for you in the long run.

 

 

How Does This Affect Your Investments?

Ultimately, we all just really want to know "what does this mean for my savings?" Whether you've been waiting to buy a house, are worrying about your Thrift Savings Plan (TSP) investments, or have been playing the news trading stocks on your Robinhood app, it's good to know what is happening the the U.S. (and global) economies. So what does the Fed news mean for your accounts?

1. Stock Market:

  • Stock markets do NOT like surprises. The price of a stock (shares of companies) is an attempt by millions of traders to agree what that company is worth, and surprises mean the price will likely change. Good surprises can result in major gains -- and bad surprises can result in major crashes.
  • When the Fed keeps interest rates the same, it can help the stock market stay stable. This is good news if you have money invested in stocks. Stable interest rates mean companies can plan their finances better, which can help their stock prices stabilize -- and usually continue to go up.

 2. Bonds:

  • Bonds are like loans you give to the government or companies. They pay you back with interest over time. When the Fed keeps interest rates the same, the interest you earn from new bonds might not go up. However, if you already own bonds, their value might stay steady.
  • The bond market is much larger than the stock market, so surprises here might not cause major changes to your GameStop shares on Robinhood, but could have big effects on the economy.

 3. Real Estate:

  • Mortgage rates shadow the Fed Funds Rate, which is why the average American has felt anxious about borrowing money to buy a home and has been waiting for the Fed to drop its Rate. If the Fed dropped the Fed Funds Rate by half a percent (to 4.83%), you could expect the mortgage rate to go down about the same (to about 7.23%). More people would want to borrow money to buy a house.
  • Stable interest rates mean mortgage rates might not change much, which is one reason why the Fed lets us know their plan for months to come. The fact they are saying there may only be one change anytime soon means you can expect mortgage rates to stay around 7.5-8.0% for the rest of 2024.
  • Current 30-year mortgage rates for a VA Loan are about 7.73%. The 30-year mortgage rate average since 1971 has been 7.74% -- just like with the Fed Funds Rate, right now we are normal!!!
  • If you need a new house, you should just buy now; if you don't need a new house and want to wait for lower rates, you could be waiting for years for mortgage rates to drop back to 5% or lower.

 4. Thrift Savings Plan (TSP), 401(k)s, and Individual Retirement Accounts (IRAs):

  • Retirement accounts are limited by the Internal Revenue Service (IRS) to only invest in stocks and bonds (with a few exceptions). That means that your retirement savings are directly linked to the Fed Funds Rate and what Chairman Powell says you can expect in the next few months.
  • Stability is good -- and surprises are bad. By saying that there might be one change this year, you should not feel anxious about your current savings and strategy.

 

What Does this Mean to You, and What Should You Do?

Surprise headlines will cause investments to go up or down quickly, but once the headline passes the stock or bond will also calm down and the price will stabilize. Stabilize means the price that crashed down will usually bounce back, and the price that rocketed to the moon will generally start to come back to earth. In fact, by the time you make a trade on the headlines, it's usually already too late to stop the loss -- or to get the jump on profits.

Robert Kiyosaki says, "be careful about catching falling knives." What he means is that if you react emotionally to a headline, you will probably end up catching a falling knife and get hurt. Reacting to headlines is always a mistake. Still, if it does seem like the economy is heading for a rough patch and the market may fall because of weeks of consistent news, it may be wise to "get defensive" and sell some of your Amazon shares on Robinhood to lock in profits and avoid potential losses.

But you should also not react the same way with your TSP retirement savings as you do in your Robinhood trading app. The reason is that you are trading in Robinhood for profits now, but your TSP is for creating real wealth in 30-40 years. Since 1913 for every 30-year investment period in the history of the United States, the yearly average return has been 10.8%. Yes, really, 10.8%! Even for 30-year periods that included the major stock crashes of 1920 (-89%), 1987 (-22.6%), 2000 (-49.1%), 2008 (-56.8%), and 2020 (-33.9%).

While you might want to buy or sell in Robinhood, when it comes to your TSP the best reaction to any news about J-Pow, the Federal Reserve, or interest rates is: DO NOTHING. Your retirement accounts are built on a strategy focused on 30 years, and over 30 years you won't lose if you just keep consistent. So stop worrying, and stop shifting your investments back and forth between C, S, I, F, G, or L Funds.

What are some other things you can do to prepare yourself and protect your investments?

 1. Get Educated on Financial Markets and the EconomyWhen you know your history and you know your investment strategy, you can confidently stick to it for the long run. By having knowledge and the confidence that comes with it, you'll stop being whip-sawed around by headlines, and you'll stop feeling anxiety about your investments and make knee-jerk decisions.

 2. Stay on Top of the Headlines, HomebuyersFor the Average Jane and Average Joe, the Fed Rate and headlines  DO matter when you're thinking about buying a home. It takes 30-45 days to close on a house, and during that time the Fed could meet and could raise its Reserve Rate -- which would also cause mortgage rates to go up. If you are shopping for a mortgage now, watch the headlines. If it looks like rates will go up, you can save $1,000s in interest payments by paying for a "rate lock" today; if there's no sign of rates going up, don't give the bank a bunch of free money by wasting it on a rate lock that won't matter!

 3. Diversify Your Investments: Don’t put all your money in one type of investment. Stocks and bonds are not the only ways to diversify, and both still generally move in similar directions. Add investments in real estate, commodities (gold, silver, copper), oil and gas, and other alternatives to balance your portfolio. (As noted earlier, you generally can't own these in your retirement accounts, which are in stocks and bonds. To diversify across all your investments, consider buying rental real estate with non-retirement savings.)

 4. Review Your Retirement Plan: You need to get at least a 9.2% average return on your retirement investments to reach your goals in 30-40 years. You can get this with a mix of 70% stocks and 30% bonds -- or even slightly higher returns as you own more stocks, all the way up to 10.8% on a 100% stock mix. If your TSP is invested less than 70% in stocks, you're leaving profits on the table. Review your current mix of TSP investments, and if you happened to have made a "panic sell" and moved most of your savings into the F Fund, G Fund, or any of the Life Cycle Funds, consider fixing it. Our forthcoming book The Ultimate (Military) Retirement Plan shows you how keeping your TSP savings in a Lifecycle Fund will cost you $2.5 million over 40 years. Never. Own. TSP. Lifecycle. Funds. 

 

Conclusion

The Fed’s decisions can have a big impact on your money in the short run, but in the long run (10 years or more) everything tends to even out. The sooner you need your investments to pay off, the more you should pay attention to headlines. On the other hand when it comes to retirement savings, so long as you have a solid strategy in place, the best thing to do is turn off the news and go find something else to do. Like read a book on finance, listen to a Podcast on investing in real estate -- or just go to the gym!

 

DISCLAIMER: This is not financial, legal, or tax advice. These are strategies based on historical averages and trends. Always do your own research, and when appropriate consult with a professional.

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