Personal Finance

Here’s why the Federal Reserve is in no rush to cut rates in 2024

Published

12 months ago

April 10, 2024

Business Finance News

The Fed feels it 'can't get it wrong again' and will err on the side of caution, economist says

The Federal Reserve is in no rush to lower its benchmark rate.

Earlier expectations that the central bank was planning multiple cuts before the end of the year seem less likely.

On the heels of Friday’s strong jobs report, Wednesday’s consumer price index increased at a faster-than-expected pace in March. Both suggest that inflation is staying stubbornly higher, which experts say is likely keeping the Fed on the sidelines.

Now markets are pricing in a less-than 20% chance of a rate cut in June, according to the CME’s FedWatch measure of futures market pricing, down from nearly 80% one month ago.

Since the start of 2024, higher-than-expected inflation data made top Fed officials less eager to ease policy. Chair Jerome Powell indicated last month that, with the economy still growing at a healthy pace and the unemployment rate below 4%, the Fed can take a more measured approach when it comes to cutting interest rates.

“We are prepared to maintain the current target range for the federal funds rate for longer if appropriate,” said Powell at a post-meeting news conference in March.

The risks of allowing inflation to persist still far outweighs the risk of triggering a recession.

Mark Higgins

author of “Investing in U.S. Financial History: Understanding the Past to Forecast the Future.”

“The risks of allowing inflation to persist still far outweighs the risk of triggering a recession,” Mark Higgins, senior vice president at Index Fund Advisors and author of “Investing in U.S. Financial History: Understanding the Past to Forecast the Future,” recently told CNBC.

“[The Fed’s] failure to do this in the late 1960s is one of the major factors that allowed inflation to become entrenched in the 1970s,” Higgins said.

This time around, the central bank is likely to remain extremely cautious, Higgins said, even if that means holding rates higher for longer.

“My gut is that they are aware of the risks and won’t ease too early,” he added.

The Fed’s ‘two major mistakes’

“The Fed has made two major mistakes in its history,” according to Higgins, and those two missteps still influence the central bank’s moves today.

“The first [mistake] was allowing the banking system to fail in the early 1930s, which caused the Great Depression to deepen significantly,” he said. “The second was the great inflation of the 1970s when inflationary pressures picked up and the Fed tightened but backed off prematurely, which is the risk the Fed faces now.”

While financial regulations and the creation of deposit insurance could prevent a widespread banking crisis from happening today, “the real danger here is that the Fed loosens prematurely, which is exactly what they did in the late 1960s,” Higgins said.

'Big Short' investor Steve Eisman: Deep down Fed's Powell is 'petrified' of redoing Volcker again

“Deep down, Powell is petrified of redoing Volcker again,” Steven Eisman, Neuberger Berman’s senior portfolio manager, said recently on CNBC’s “Squawk Box.”

The Fed has “engineered what looks to be a soft landing, inflation is coming down, the economy is still strong, why would you waste rate cuts now and risk a resurgence of inflation when really all you need to do is declare victory?” he said.

Even in prepared remarks last month, Powell referenced Volcker’s earlier interest rate policy as a reason policymakers don’t want to ease up too quickly now.

“Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to two percent,” Powell said.

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Personal Finance

Amid tariff sell-off, avoid ‘dangerous’ investment instincts, experts say

Published

21 minutes ago

April 4, 2025

Business Finance News

Jamie Grill | Getty Images

As U.S. markets continue to suffer steep declines in the wake of the Trump administration’s new tariff policies, you may be wondering what the next best move is when it comes to your retirement portfolio and other investments.

Behavioral finance experts warn now is the worst time to make any drastic moves.

“It is dangerous for you — unless you can read what is going to happen next in the political world, in the economic world — to make a decision,” said Meir Statman, a professor of finance at Santa Clara University.

“It is more likely to be driven by emotion and, in this case, emotion that is going to act against you rather than for you,” said Statman, who is author of the book, “A Wealth of Well-Being: A Holistic Approach to Behavioral Finance.”

That may sound easier said than done when headlines show stocks are sliding into bear market territory while J.P. Morgan is raising the chances of a recession this year to 60% from 40%.

“When the market drops, we have sort of a herd instinct,” said Bradley Klontz, a psychologist, certified financial planner and managing principal of YMW Advisors in Boulder, Colorado. Klontz is also a member of the CNBC FA Council.

That survival instinct to run towards safety and away from danger dates back to humans’ hunter gatherer days, Klontz said. Back then, following those cues was necessary for survival.

But when it comes to investing, those impulses can backfire, he said.

“It’s an internal panic, and we’re just sort of wired to sell at the absolute worst times,” Klontz said.

‘Never trust your instincts when it comes to investing’

When conditions are stressful, our frame of reference narrows to today, tomorrow and what’s going to happen, Klontz said.

It may be tempting to come up with a story for why taking action now makes sense, Klontz said.

“Never trust your instincts when it comes to investing,” said Klontz, particularly when you’re excited or scared.

Why investors should hold despite market sell-off

Meanwhile, many investors are likely in a fight or flight response mode now, said Danielle Labotka, behavioral scientist at Morningstar.

“The problem with that, in acting right away, is that we’re going to be relying on what we call fast thinking,” Labotka said.

Instead, investors would be wise to slow down, she said.

Just as grief requires moving through emotional stages in order to eventually feel good, it’s impossible to jump to a good investing decision, Labotka said.

Good investment decisions take time, she said.

What should be guiding your decisions now

Many investors have experienced market drops before, whether it be during the Covid pandemic, the financial crisis of 2008 or the dot-com bust.

Even though we’ve experienced volatility before, it feels different every time, Labotka said.

That can make it difficult to heed to the advice to stay the course, she said.

Investors would be wise to ask themselves whether their reasons for investing and the goals they’re trying to achieve have changed, experts say.

“Even though the markets have changed, why you’re invested, your values and your goals probably haven’t,” Labotka said. “These are the things that should be guiding your investments.”

While there is the notion that life well-being is based on financial well-being, it helps to take a broader view, Statman said.

At any moment, no one has everything perfect when it comes to their finances, family and health. In life, as in an investment portfolio, all stocks don’t necessarily go up, and it’s helpful to learn to live with the good and the bad, he said.

“Things are never perfect for anyone,” Statman said.

Personal Finance

20 items and goods most exposed to price shocks

Published

54 minutes ago

April 4, 2025

Business Finance News

Employees at a clothing factory in Vo Cuong, Bac Ninh province, in Vietnam.

SeongJoon Cho/Bloomberg via Getty Images

The Trump administration’s plan to slap steep tariffs on goods from dozens of countries is expected to spike prices for consumers. Some items, like leather goods, will see a bigger jump than others.

The overall impact on households will vary based on their purchasing habits. But most families — especially lower earners — are likely to feel the pain to some degree, economists said.

According to an analysis by the Budget Lab at Yale University, the average household will lose $3,800 of purchasing power per year as a result of all President Donald Trump‘s tariff policies — and retaliatory trade actions by other nations — announced as of Wednesday.

That’s a “meaningful amount,” said Ernie Tedeschi, the lab’s director of economics and former chief economist at the White House Council of Economic Advisers during the Biden administration.

The analysis doesn’t include the 34% retaliatory tariff China announced Friday on all U.S. exports, set to take effect April 10. The U.S. exported nearly $144 billion worth of goods to China in 2024, the third-largest market for U.S. goods behind Canada and Mexico, according to the Census Bureau.

Clothing prices poised to spike

The garment industry is among the most susceptible to tariff-related price shocks.

Prices for clothing and shoes, gloves and handbags, and wool and silk products will all increase by between 10% and 20% due to the tariffs Trump has so far imposed, according to the Yale Budget Lab analysis. Tedeschi noted that some of these price increases could take 5 years or more to unfold.

Srdjanpav | E+ | Getty Images

The bulk of apparel and shoes sold in the U.S. is manufactured in China, Vietnam, Sri Lanka and Bangladesh, said Denise Green, an associate professor at Cornell University and director of the Cornell Fashion + Textile Collection.

Under the “reciprocal tariffs” Trump announced Wednesday, Chinese imports will face a 34% duty. Goods from Vietnam, Sri Lanka and Bangladesh face tariffs of 46%, 44% and 37%, respectively.

Taking into account the pre-existing tariffs on China totaling 20%, Beijing now faces an effective tariff rate of at least 54%.

“The tariffs are disastrous for the apparel industry worldwide, but especially for smaller countries with highly specialized garment manufacturing,” Green said.

A lot of clothing production has moved overseas over the last 50 years, Tedeschi said, but it’s “very unlikely” clothing and textile manufacturing will return to the U.S. from Asia in the wake of the new tariffs.

“People will still import clothing to a large extent, and they’ll have to eat the price increase,” he said.

Car prices are another pain point

Various Mercedes-Benz vehicles assembled in the “Factory 56” production hall.

Picture Alliance | Picture Alliance | Getty Images

The duties announced Wednesday are on top of other tariffs Trump has imposed since his second inauguration, including duties on automobiles and car parts; copper, steel and aluminum; and certain imports from Canada and Mexico.

The cost of motor vehicles and car parts could swell by over 8% according to the Yale Budget Lab analysis.

Bank of America estimated that new vehicle prices could increase as much as $10,000 if automakers pass the full impact of tariffs on to consumers.

“Rising car prices are already a major pain point for the vast majority of Americans who live in an area where they need a car to get to work, school, their kids’ activities, and medical appointments,” said Erin Witte, director of consumer protection for the Consumer Federation of America.

“These tariffs will make it much worse, and will significantly reduce Americans’ choices about what car they want to buy,” she said.

Tariffs on specific commodities like aluminum and steel affect consumers indirectly, since the materials are used to manufacture a swath of consumer goods.

White House spokesman Kush Desai pushed back on analyses that prices will spike because of Trump’s tariff policy.

“Chicken Little ‘expert’ predictions didn’t quite pan out during President Trump’s first term, and they’re not going to pan out during his second term when President Trump again restores American Greatness from Main Street to Wall Street,” Desai said in an e-mailed statement.

Trump’s second-term tariffs are orders of magnitude larger than his first term, however.

The first Trump administration put tariffs on about $380 billion worth of goods in 2018 and 2019, according to the Tax Foundation. The tariffs so far imposed in Trump’s second term affect more than $2.5 trillion of U.S. imports, it said.

There’s also evidence that the first-term tariffs raised prices for some consumers.

Retail prices for the typical washing machine and clothing dryer rose by about 12% each — about $86 and $92 per unit, respectively — due to 2018 tariffs on imports of washing machines, according to a study by economists at the Federal Reserve Board and University of Chicago. The increased cost to consumers totaled $1.5 billion a year, the study found.

Tariffs are expected to raise the U.S. inflation rate

Economists also expect the overall U.S. inflation rate to jump due to tariffs.

American businesses that import goods from abroad will be the ones on the hook for paying the cost of tariffs, and economists anticipate that companies will pass at least some of those costs on to consumers.

The tariffs are disastrous for the apparel industry worldwide, but especially for smaller countries with highly specialized garment manufacturing.

Denise Green

director of the Cornell Fashion + Textile Collection

An environment of rising prices for foreign goods may give U.S. businesses cover to somewhat raise their prices, too.

As a result, the consumer price index could jump to 4.5% later in 2025, Capital Economics estimated Thursday. That’s up from 2.8% in February, and roughly double the Federal Reserve’s long-term inflation target.

Personal Finance

What to know before trying to ‘buy the dip’ amid tariff sell-off

Published

1 hour ago

April 4, 2025

Business Finance News

Anchiy | E+ | Getty Images

As the stock market continues to fall, some investors are eager to “buy the dip,” or purchase assets at temporarily lower prices. Financial advisors, however, urge clients to stick with long-term investing plans amid the latest volatility.

U.S. stocks plunged on Thursday after President Donald Trump issued sweeping tariffs on more than 180 countries and territories. The sell-off continued Friday after China unveiled plans to impose a 34% retaliatory tariff on all goods imported from the U.S.

As of Friday afternoon, the Dow Jones Industrial Average was down more than 1,700 points following a 1,679.39 drop on Thursday. Meanwhile, the S&P 500 was off 4.8% after losing 4.84% the previous day. The tech-heavy Nasdaq Composite slid by 4.9% after plummeting 5.97% on Thursday.

If you’re looking for buying opportunities while assets are down, here are some things to consider, according to financial advisors.

Timing the market is ‘impossible’

When asset values fall, there’s often chatter in online communities like Reddit about whether to “buy the dip.” Typically, investors aim to buy at a discount and expect an eventual recovery, which could lead to future gains.

While buying cheaper investments isn’t a bad idea, the strategy can be tricky to execute since, of course, no one can predict stock market moves, experts say.

“We never recommend timing the market, mostly because it is impossible to do without simply getting lucky,” said certified financial planner Eric Roberge, CEO of Beyond Your Hammock in Boston.

Instead, you should “stick to a thoughtful, rules-based investment strategy designed to get you through to your long-term goals,” he said.

Keep a ‘disciplined approach’

When buying assets during a market downturn, you need a “disciplined approach,” according to CFP Jay Spector, co-chief executive officer of EverVest Financial in Scottsdale, Arizona.

For example, some investors linger in cash while waiting for rock-bottom prices. But no one can predict the bottom of the market, experts say.

Waiting on the sidelines can be costly because the best returns can follow the biggest dips, according to research from Bank of America.

Rather than trying to time the bottom, you should consider “dollar-cost averaging,” which systematically invests your money at set intervals, Spector said. The strategy can capture lower prices while reducing risk, he said.