The Federal Reserve cut policy rates by 25 basis points, to a range of 4% to 4.25%, and pencils in two more reductions this year
“I live a comfortable life, but the Fed’s decision won’t make a blind bit of difference to me.” (Photo subject is a model.)
Dear Quentin,
I don’t want to sound ungrateful, but I have what you may regard as a controversial question: Am I the biggest loser with the Federal Reserve’s interest-rate cut, which I assumed will have happened by the time you read this or, more likely, your readers see this.
I’m 68, retired and living in California. I’m on a fixed income (a mixture of a traditional and Roth IRA and Social Security, a small annuity, plus other investments). My income is $6,000 a month. I live a comfortable life, but the Fed’s decision won’t make a blind bit of difference to me.
My niece has a 6% mortgage rate, which will cost thousands to refinance, and her brother is still trying to get a foot on the property market. They are both gainfully employed. The rate cut will, I gather, encourage more buyers to return to the property market, pushing up prices more.
Related: ‘I am highly alarmed by the proposed changes to retirement accounts’: I don’t want bitcoin or private equity in my 401(k). What can I do?
You can email The Moneyist with any financial and ethical questions at [email protected]. The Moneyist regrets he cannot reply to questions individually.
Don’t forget that bigger picture – that is, the world you and your niece and nephew are living in.
Dear Happyish,
You are NOT a loser. You’re a winner for so many reasons.
Here are just a few of them: You are 68 and you are engaged enough to write a letter to this column, and you care enough to want an answer. You have retired, something millions of people long to do, and you have a healthy monthly income with a generous mixture of federal benefits, investments and retirement accounts. With the Fed cutting the benchmark rate by 25 basis points, you don’t have to worry about mortgage rates because you own your own home.
How lucky are you NOT to have to rely on a Fed rate cut to, for example, keep a small business operational? How fortunate are you NOT to have to follow the Fed’s every move because you need to consolidate debts at a lower interest rate? How amazing is it that you managed to retire on $6,000 a month, all due to your own hard work – and you do NOT have to worry about a jobs market that some critics say could go the way of the 1990s dot-com boom and bust?
Lower rates make it cheaper for the government to borrow money. The national debt exceeds $37 trillion.
You are on a fixed income, relying on modest increases in inflation with your Social Security, and the rate of return on the stock market with your IRAs. The latter should benefit from a rate cut, as Wall Street will likely cheer efforts by the Fed to respond to what critics say is a slowing jobs market and economy, and the backdraft from President Donald Trump’s tariffs, which will increase the cost of doing business and the prices customers pay for products and services.
Fixed annuities have had a good run with higher rates on U.S. Treasury and corporate bonds, but lower rates will temper those favorable terms. “After years of laughably low rates, fixed-rate deferred annuities are having a moment,” according to Bankrate. “For people approaching retirement, the thought of locking in a 6% return is much more appealing than securing a 2% return. Sales of fixed deferred annuities have grown in lockstep with the rising federal funds rate.”
Don’t forget that bigger picture – that is, the world you and your niece and nephew are living in. Fed Chair Jerome Powell’s term ends on May 15, 2026. If the jobs market is deteriorating, a rate cut would help to restore some momentum. Lower rates also make it cheaper for the government to borrow money. The national debt currently exceeds $37 trillion and the government spent more than $1 trillion last year servicing the interest on that debt.
Related: Will the Fed’s quarter-point cut really help your finances? What it means for mortgages, credit-card bills and savings rates.
Maintaining economic stability
The Fed cut policy rates by 25 basis points, to a range of 4% to 4.25% on Wednesday afternoon. Some variable-rate auto loans and credit cards may reflect the rate cut in a matter of weeks, but fixed-rate loans, of course, will remain unchanged. Lower rates could lead to a reduction in delinquency rates across credit-card and unsecured personal loan accounts, says Michele Raneri, vice president and head of U.S. research and consulting at TransUnion (TRU).
As for the likes of your niece and nephew: “This 25-basis point reduction in the target rate will likely serve as a catalyst for further expansion, particularly among consumers who have been waiting for a more favorable rate environment before re-engaging with credit products,” Raneri added. While the broader impact of a rate reduction on consumers remains to be seen, “it could offer some relief from the persistent budgetary pressures driven by inflation,” she said.
You won’t benefit from lower rates like younger members of your family, but you are protected from the rise in rates.
You, thankfully, do not have to live and die by the Fed’s latest decision: This Fed rate cut is late in the day for those who believe the economy is in much worse shape than recent economic data suggests, while other skeptics say that the data did not actually support a rate cut at this time. Jai Kedia, research fellow at the Center for Monetary and Financial Alternatives at the Cato Institute, belongs to the latter group. He has not advocated for or against a cut.
Kedia’s main point appears to be that the Fed is not all-powerful. “Monetary policy is not as important as other market forces, and the Fed does not really control interest rates, let alone macroeconomic outcomes like inflation,” Kedia wrote in this analysis. “Nor should people expect the Fed to save the economy from the negative effects of bad economic policy, especially supply shocks like tariffs that raise both inflation and unemployment.”
Your letter is not incorrect. Whether you have money in CDs or high-yield savings accounts, you will have to hunt for better yields. But if you want to upgrade your old car, lower interest rates could help you secure better terms for your loan. Reframing the facts of your letter might provide a new perspective: You won’t benefit from lower rates like younger members of your family, but you are also protected from the rise in rates. That’s why they call it an interest-rate cycle.
The biggest winners, like you, are insulated from the Fed’s decisions.
Don’t miss: ‘I’m confused!’ Why does President Trump want a rate cut so badly?
Previous columns by Quentin Fottrell:
I’m 67. My wife, 48, is financially illiterate. How do I teach her to manage our money? After all, I won’t be around forever.
‘He is increasingly angry’: My troubled son lives with me. How do I ensure he is financially secure after I die?
‘I am my mother’s caregiver’: My mom, 93, added my name to her retirement accounts. Will she qualify for Medicaid?
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-Quentin Fottrell
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