Chris: Meghan, it is Wednesday, June 24th, and we decided to have an episode around some headlines that are going on in the world. There is a lot to choose from, from the war in Iran to oil prices. But the most interesting one I wanted to pull forward has to do with the Fed choosing not to raise interest rates, but also indicating it might need to raise rates later this year. I think that is the one most tied to investment decisions, how it affects our clients, inflation, and so on.
Meghan: Lucky for you, all those headlines are technically tied together. So we can talk about all of them.
Chris: Why do you think the new Fed chair came in saying interest rates should be lower, and now comes out of one of his first meetings saying we need to keep rates where they are, or potentially raise them? Why the switch?
Meghan: Hopefully it is because he is actually good at math. I think to back up a second, a lot of people were surprised when the president picked him to be Fed chair, because he has been more willing to raise rates in different environments. He has talked about debt, inflation, and controlling some of these things more strongly than others. There were other candidates who were much more dovish, more willing to take rates down more quickly. So he was a surprising pick given how adamant the administration has been that rates need to be lower.
Chris: He wants fiscal stability. He is a strong advocate for a strong dollar and for having more control over the federal deficit. We are talking about 39 to 40 trillion dollars in debt. That was part of why I found it an interesting pick. I am excited about it.
Meghan: Once he was selected, the narrative shifted to rates coming down. He seemed to be toeing that line. But now he is backed into a corner. With everything happening in the world and inflation ticking higher, he cannot lower rates the way the administration wants because there are too many other pressures he cannot ignore.
Chris: You have the war in Iran, energy costs rising, which causes inflation across a number of products. Things are more expensive. The economy is actually doing reasonably well by a number of metrics, though it is bifurcated. Not everyone is doing well. But unemployment is relatively low, inflation is a little high, and the Fed is looking at it saying we need to get ahead of this before it gets away from us.
Meghan: I think the justification for lowering rates was more political in nature, because when you look at everything as a whole, we are not in a situation where we need to stimulate the economy to drive massive growth. We are not in a recession. We do not have those kinds of problems. So the idea of cutting rates now, when you already have upward pressure on inflation, felt wrong in terms of what is right for the country long term. Him taking a step back and saying let us wait and see is definitely the right move.
Chris: As interest rates remain slightly elevated, and I want to be careful here because it is all relative, we got very spoiled with zero percent interest rate policy for a long time. There is a part of me that loves zero percent rates. You can borrow very cheaply. If you can borrow at a very low cost, you are going to borrow a lot.
Meghan: Free money is great. Everyone loves free money. But this is one of the reasons we are in the situation we are in with trillions of dollars of deficit. When rates were at zero, money was easy and cheap. People borrowed more, which stimulates the economy in theory, but also pushes up inflation. When you raise rates, people borrow less. It costs more to take out a mortgage. Some prices come down somewhat and that slows inflation. Now we are in an environment where growth is not super strong but not terrible, and the Fed really should be focused on making sure inflation, especially with energy prices, does not get out of control.
Chris: They are also in a tough spot because the interest cost on the debt is already expensive. With all the other spending we do as a country, we can barely afford the interest cost on existing debt. So from my perspective, there may be a quiet willingness to let inflation run a little bit, so that 30 or 40 trillion dollars starts to look more manageable down the road.
Meghan: Jeff and I have talked about this on other episodes. The path of least resistance to handling this debt is to inflate it away. If inflation runs a little too hot for a while, and interest rates stay just below that level, over time the value of the dollar drops and you are paying back those trillions in future dollars that are worth less. It is not obvious to anyone living through it, but that is how it gets done. At this point, if rates are too high, that strategy does not work as well. And if they keep rates here for too long, the interest cost just keeps compounding and becomes harder to service.
Chris: And then our government goes into more and more debt, even if they are not spending more, just because the interest cost keeps accruing.
Meghan: That is part of the problem. We feel like we have reached a tipping point where this is no longer something that is easy to unwind. Even with the political will to say we are going to spend less than we make and pay this debt down, the numbers are just extraordinary at this point. The cost of getting it under control feels like it is meaningfully out of hand.
Chris: So if you are an individual and you are worried about higher interest rates or inflation, investing is one of the best choices available to you.
Meghan: It is kind of your only choice to a meaningful degree. Inflation is a sneaky tax. If you sit on money under your mattress and come back in ten years, you will be able to buy meaningfully less stuff than you can today. The only way to preserve your purchasing power, not necessarily grow it but preserve it, is to invest that money so it at least keeps up with inflation. If you are happy with your lifestyle today and just want to maintain it, you still need your money working to keep pace.
Chris: The average consumer is genuinely frustrated right now. I had a weird weekend a couple of weeks ago. On Saturday I went to Costco, my kids wanted a hot dog, and it was a dollar fifty. The next night they wanted In-N-Out. For four of us it was seventy dollars.
Meghan: I have another one. I was late getting a Father's Day card and went to Amazon for same-day delivery. The card options were eight or nine dollars. I feel like cards were two dollars not long ago. It is sneaky. And those small things add up. Especially now when you look at grocery bills and filling up a tank of gas. For people with a certain level of wealth, these things are annoying but manageable. For people who do not have assets to grow over time, genuinely cannot afford these increasing costs. That is where the wealth gap just keeps widening.
Chris: That is a real challenge, and I have talked about what the long-term ramifications might look like. I will save that for a different episode. I do not think it is the end of the world. But it is a serious situation.
Meghan: There is a great book title called The End of the World is Just Beginning. Maybe it is more like that.
Chris: Going back to what people can do: stocks over a long period of time have historically been able to hedge or outpace inflation. You have real estate, though at higher interest rates some deals do not pencil out. You have gold. Jeff tells the story of an ounce of gold being twenty dollars in the early 1900s, enough to buy a really nice Italian suit. Today it is around four thousand one hundred dollars an ounce. Guess what? It can still buy a really nice Italian suit. That is very different from putting dollars under a mattress. The key is not leaving money sitting in cash on the sidelines.
Meghan: Short-term cash is fine. This is not a message to panic and pull everything out of the bank. It is more that for the majority of your net worth, you want it working for you. It does not have to be aggressive. It just needs to be invested in something that is trying to keep up. Real assets, things like real estate or gold, should hold value better than financial assets over the long term in theory. Stocks can keep up in certain environments because the company has the potential to grow or pass on cost increases. Bonds are trickier. If you are in short-term bonds at moderate rates and inflation picks up, you will not keep up. We try to avoid locking money into rates we do not think will hold up over time, and instead look for shorter-duration private credit that pays reasonably well and keeps us flexible.
Chris: So if interest rates go up or down, you can be more nimble.
Meghan: Exactly. Staying short-term lets you adapt. Going out and buying a ten or twenty-year bond locks you in. People say you can sell it, and that is true, but if rates go up and inflation expectations rise, the value of that bond drops. So you would have to sell at a loss to redeploy into something with better income. You want to stay flexible rather than locking in on one outcome.
Chris: I know this is not the most exciting topic, but one reason I really wanted to do this episode is because I keep hearing from real estate agents, mortgage brokers, and friends saying rates will eventually come down and I will be able to refinance. I do not have a crystal ball. I do not know what rates will do. But I would not be making big decisions based on the assumption that rates are going to fall.
Meghan: And they might. Recency bias is strong. Rates were at zero. Current rates feel high in comparison, even though historically they are not extreme. But the point is not to make decisions assuming one outcome. That is a lot of what we do: scenario analysis. If this goes in any direction, are we okay? Can we adapt? You have to stay flexible rather than locking in on a single view of the future.
Chris: I love it. Thanks so much, Meghan.
