Personal Finance

Vance, Trump double down on presidential influence on Fed policy

Published

2 months ago

August 12, 2024

Republican presidential candidate former President Donald Trump speaks during a press conference at his Mar-a-Lago estate on August 08, 2024, in Palm Beach, Florida.

Joe Raedle | Getty Images

When it comes raising and lowering interest rates, Republican presidential nominee Donald Trump says the president should “at least have a say.”

“They’ve gotten it wrong a lot,” Trump said of the Federal Reserve‘s decision-making during a news conference on Thursday at his Mar-a-Lago residence in Florida.

“In my case, I made a lot of money, I was very successful, and I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman,’ Trump said.

Sen. JD Vance of Ohio, the Republican vice presidential nominee, echoed this opinion in a CNN interview that aired on Sunday, saying that interest rate policy “should fundamentally be a political decision.”

Also over the weekend, Vice President Kamala Harris told reporters in Arizona that she “couldn’t… disagree more strongly” with Trump’s suggestion that the president should have a voice in the central bank’s monetary policy moves.

“The Fed is an independent entity, and as president, I would never interfere in the decisions that the Fed makes,” Harris said.

The president has no direct control over interest rates

As it stands, the president exerts no direct control over interest rates. The Federal Reserve sets interest rates, and it operates independently of the White House.

“While the Fed’s day-to-day operations are intentionally removed from partisan political input to protect the central bank’s integrity, the Fed and its conduct of monetary policy remain democratically accountable,” said Brett House, economics professor at Columbia Business School.

Through the Federal Reserve Act, the legislative and executive branches of the government set the mandate of the Fed to promote maximum employment, keep prices stable and ensure moderate long-term interest rates, House explained.

“If a president wants to change this mandate, they always have the option to marshal support in Congress for an amendment of the act or new legislation,” he added.

However, this is not the first time Trump has contested that the relationship between the executive branch and the Fed shouldn’t necessarily work that way.

Last month, Trump said, if elected, he would “bring interest rates way down.”

Inflation and high interest rates are “destroying our country,” the Republican presidential nominee said at the National Association of Black Journalists‘ annual convention in Chicago.

“I bring inflation way down, so people can buy bacon again, so people can buy a ham sandwich again, so that people can go to a restaurant and afford it,” he said.

A rate cut is coming

Inflation has been a persistent problem since the Covid-19 pandemic, when price increases soared to their highest levels in more than 40 years. The Fed responded with a series of rate hikes to effectively pump the brakes on the economy in an effort to get inflation under control.

The federal funds rate, which sets overnight borrowing costs for banks but also influences consumer borrowing costs, is currently targeted in a range of 5.25% to 5.50%, the result of 11 rate increases between March 2022 and July 2023.

Now, recent economic data indicates that inflation is falling back toward the Fed’s 2% target, paving the way for the central bank to lower its benchmark rate for the first time in years. The personal consumption expenditures price index — the Fed’s preferred inflation gauge — showed a rise of 2.5% year over year in June.

Markets have fully priced in the likelihood of at least a quarter percentage point rate cut in September and a strong likelihood that the Fed will lower by a full percentage point by the end of the year.

Once the fed funds rate comes down, consumers may see their borrowing costs start to fall as well.

Trump has a contentious history with the Fed

Trump, who nominated Jerome Powell to head of the nation’s central bank in 2018, has been advocating for lower rates for years. The former president was a fierce critic of the Fed chief and his colleagues while he was in the Oval Office, skirting historical precedent by repeatedly and publicly berating the Fed’s decision-making.

During that time, Trump complained that the central bank maintained a fed funds rate that was too high, making it harder for businesses and consumers to borrow and putting the U.S. at an economic disadvantage to countries with lower rates.

Ultimately, though, Trump’s comments had no impact on the Fed’s benchmark.

“Any chairman is going to remain loyal to the Fed’s mandate over any browbeating from the White House,” House said.

Now, however, Trump has cautioned against the Fed lowering rates shortly before the presidential election in November.

Trump told Bloomberg Businessweek in an interview in July that cutting rates in September, just weeks ahead of the election is “something that [central bank officials] know they shouldn’t be doing.”

Earlier this year, the former president also told Fox Business that he would not reappoint Powell to lead the Fed.

“I think he’s political,” Trump said. “I think he’s going to do something to probably help the Democrats, I think, if he lowers interest rates.”

Fed Chair Powell: We are a non-political agency, don't want to be involved in politics in any way

When asked about these comments during a press conference after the FOMC meeting last month, Powell underscored the Fed’s singular focus on the economy.

“We don’t change anything in our approach to address other factors like the political calendar,” Powell said. “We never use our tools to support or oppose a political party, a politician or any political outcome.”

According to Greg McBride, chief financial analyst at Bankrate.com, “the Fed’s independence will remain paramount — regardless of who is president.”

A ‘consequential year’ for monetary policy

The central bank is an independent agency that governs decisions about monetary policy without interference from the president or any branch of government. Therefore, it is theoretically free from political pressure.

Still, the stakes are high in 2024.

In January, Fed Chair Powell said at a press conference that this was going to be “a highly consequential year for, for the Fed and for monetary policy.”

In the months that followed, signs of economic growth and cooling inflation laid the groundwork for a widely anticipated rate cut, which is welcome news for Americans struggling to keep up with sky-high interest charges.

After July’s Federal Open Market Committee meeting, Powell said that central bankers would cut rates as soon as September, if the economic data supports it.

How the Fed adjusts policy during election years

In previous presidential election years, the Fed has maintained its charted course through the election, whether that was tightening as in 2004, cutting in 2008 or remaining on hold as in 1996, 2012 and 2020, according to a research report by Wells Fargo released in February.

Further, since 1994, the Fed adjusted its policy rate roughly the same number of times in presidential election years as in non-election years, the report said.

A separate research note by Barclays also found “no compelling statistical evidence that Federal Reserve policy is conducted differently during presidential elections.”

The Fed probably should have cut rates this week, strategist says

“The Fed’s independence will remain paramount,” McBride said. Going forward, “what will influence what the Fed does is what is happening in the broader economy.”

And yet, Fed board members are nominated by the president and must be approved by the Senate. Powell will conclude his second four-year stretch as chair in 2026 — opening the door to a potential change in leadership — and, possibly, the direction of monetary policy — smack in the middle of the next presidential term.

The Trump campaign did not respond to CNBC’s request for comment.

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Personal Finance

Maximum Social Security retirement benefit: Here’s who qualifies

Published

19 hours ago

October 17, 2024

Business Finance News

Twenty47studio | Moment | Getty Images

Millions of Social Security beneficiaries will benefit from the 2.5% cost-of-living adjustment for 2025, set to take effect in January.

With that increase, the maximum Social Security benefit for a worker retiring at full retirement age will jump to $4,018 per month, up from $3,822 per month this year, according to the Social Security Administration.

But while those maximum benefits will see a $196 monthly increase, retirement benefits will go up by about $50 per month on average, according to the agency.

The average monthly benefit for retired workers is expected to increase to $1,976 per month in 2025, a $49 increase from $1,927 per month as of this year, according to the Social Security Administration.

Who gets maximum Social Security benefits?

The highest Social Security benefits generally go to people who have had maximum earnings their entire working career, according to Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities.

That cohort generally includes a “very small number of people,” he said.

Because Social Security retirement benefits are calculated based on the highest 35 years of earnings, workers need to consistently have wages up to that threshold to earn the maximum retirement benefit.

“Very few people start out at age 21 earning the maximum level,” Van de Water said.

Social Security is a key issue for voters, survey finds: Here’s how to maximize benefits

Workers contribute payroll taxes to Social Security up to what is known as a taxable maximum.

In 2024, a 6.2% tax paid by both workers and employers (or 12.4% for self-employed workers) applies to up to $168,600 in earnings. In 2025, that will go up to $176,100.

Notably, that limit applies only to wages that are subject to federal payroll taxes. If a wealthy person has other sources of income, for example from investments that do not require payroll tax contributions, that will not affect the size of their Social Security benefits, said Jim Blair, vice president of Premier Social Security Consulting and a former Social Security administrator.

How can you increase your Social Security benefits?

There are beneficiaries who are receiving Social Security checks amounting to more than $4,000 per month, and they usually have waited to claim until age 70, according to Blair.

“Technically, waiting until 70 gets you the most amount of Social Security benefits,” Blair said.

By claiming retirement benefits at the earliest possible age — 62 — beneficiaries receive permanently reduced benefits.

At full retirement age — either 66 or 67, depending on date of birth — retirees receive 100% of the benefits they’ve earned.

And by waiting from full retirement age up to age 70, beneficiaries stand to receive an 8% benefit boost per year.

By waiting from age 62 to 70, beneficiaries may see a 77% increase in benefits.

However, because everyone’s circumstances are different, it may not always make sense to wait until the highest possible claiming age, Blair said.

Prospective beneficiaries need to evaluate not only how their claiming decision will impact them individually, but also their spouse and any dependents, he said.

“You have to look at your own situation before you apply,” Blair said.

Also, it is important for prospective beneficiaries to create an online My Social Security account to review their benefit statements, he said. That will show estimates of future benefits and the earnings history the agency has on record.

Because that earnings information is used to calculate benefits, individuals should double check that information to make sure it is correct, Blair said. If it is not, they should contact the Social Security Administration to fix it.

Personal Finance

Inherited IRA rules are changing in 2025 — here’s what to know

Published

19 hours ago

October 17, 2024

Business Finance News

Jacob Wackerhausen | Istock | Getty Images

What to know about the 10-year rule

Before the Secure Act of 2019, heirs could “stretch” inherited IRA withdrawals over their lifetime, which helped reduce yearly taxes.

But certain accounts inherited since 2020 are subject to the “10-year rule,” meaning IRAs must be empty by the 10th year following the original account owner’s death. The rule applies to heirs who are not a spouse, minor child, disabled, chronically ill or certain trusts.

Since then, there’s been confusion about whether the heirs subject to the 10-year rule needed to take yearly withdrawals, known as required minimum distributions, or RMDs.

“You have a multi-dimensional matrix of outcomes for different inherited IRAs,” Dickson said. It’s important to understand how these rules impact your distribution strategy, he added.

After years of waived penalties, the IRS in July confirmed certain heirs will need to begin yearly RMDs from inherited accounts starting in 2025. The rule applies if the original account owner had reached their RMD age before death.

If you miss yearly RMDs or don’t take enough, there is a 25% penalty on the amount you should have withdrawn. But it’s possible to reduce the penalty to 10% if the RMD is “timely corrected” within two years, according to the IRS.

Consider ‘strategic distributions’

If you’re subject to the 10-year rule for your inherited IRA, spreading withdrawals evenly over the 10 years reduces taxes for most heirs, according to research released by Vanguard in June.

However, you should also consider “strategic distributions,” according to certified financial planner Judson Meinhart, director of financial planning at Modera Wealth Management in Winston-Salem, North Carolina.

“It starts by understanding what your current marginal tax rate is” and how that could change over the 10-year window, he said.

Roth conversions on the rise: Here's what to know

For example, it could make sense to make withdrawals during lower-tax years, such as years of unemployment or early retirement before receiving Social Security payments.

However, boosting adjusted gross income can trigger other consequences, such as eligibility for college financial aid, income-driven student loan payments or Medicare Part B and Part D premiums for retirees.

Personal Finance

Nearly 2 in 5 cardholders have maxed out a credit card or come close

Published

23 hours ago

October 17, 2024

Business Finance News

Asiavision | E+ | Getty Images

Between higher prices and high interest rates, some Americans have had a hard time keeping up.

As a result, many are using more of their available credit and now, nearly 2 in 5 credit cardholders — 37% — have maxed out or come close to maxing out a credit card since the Federal Reserve began raising rates in March 2022, according to a new report by Bankrate.

Most borrowers who are over extended blame rising prices and a higher cost of living, Bankrate found.

Other reasons cardholders blame for maxing out a credit card or coming close include a job or income loss, an emergency expense, medical costs and too much discretionary spending.

“With limited options to absorb those higher costs, many low-income Americans have had no choice but to take on debt to afford costlier essentials — at a time when credit card rates are near record highs,” Sarah Foster, an analyst at Bankrate, said in a statement.

As prices crept higher, so did credit card balances.

The average balance per consumer now stands at $6,329, up 4.8% year over year, according to the latest credit industry insights report from TransUnion.

At the same time, the average credit card charges more than 20% interest — near an all-time high — and half of cardholders carry debt from month to month, according to another report by Bankrate.

Carrying a higher balance has a direct impact on your utilization rate, the ratio of debt to total credit, and is one of the factors that can influence your credit score. Higher credit score borrowers typically have both higher limits and lower utilization rates.

Credit experts generally advise borrowers to keep revolving debt below 30% of their available credit to limit the effect that high balances can have.

As of August, the aggregate credit card utilization rate was more than 21%, according to Bankrate’s analysis of Equifax data.

Still, “if you have five credit cards [with utilization rates around] 20%, you have a lot of debt out there,” said Howard Dvorkin, a certified public accountant and the chairman of Debt.com. “People are living a life that they can’t afford right now, and they are putting the balance on credit cards.”

Generation X at risk

Gen X most likely to max out their credit cards, survey finds

More than any other generation, Gen Xers in their 40s and 50s are most likely to have maxed out a credit card or come close in the past two and a half years, according to Bankrate’s report.

Of Gen Xers, 27% have maxed out their credit cards compared to 23% of millennials and 17% of Baby Boomers. Young adults in Gen Z are the least likely to have maxed out a card, according to the survey, which polled more than 3,500 adults, including 3,015 who are credit cardholders and 1,104 who have either maxed out their credit cards or come close.

Gen X, the so-called “sandwich generation,” must contend with supporting the generations ahead of them and their children at a time when the costs of higher education and health care have never been higher, studies also show.

Potential problems ahead

Cardholders who have maxed out or come close to maxing out their credit cards are also more likely to become delinquent.

Credit card delinquency rates are already higher across the board, the Federal Reserve Bank of New York and TransUnion both reported.

“Consumers have been measured in taking on additional revolving debt despite the inflationary environment over the past few years, although there has been an uptick in delinquencies in recent months,” said Tom McGee, CEO of the International Council of Shopping Centers.

A debt is considered delinquent when a borrower misses a full billing cycle without making a payment, or what’s considered 30 days past due. That can damage your credit score and impact the interest rate you’ll pay for credit cards, car loans and mortgages — or whether you’ll get a loan at all.

Some of the best ways to improve your credit standing come down to paying your bills on time every month, and in full, if possible, Dvorkin said. “Understand that if you don’t, then whatever you buy, over time, will end up costing you double.”