Latest news with #CollinMartin
Yahoo
2 days ago
- Business
- Yahoo
Make your money work for you by ‘laddering' bonds or CDs
If you have a lot of cash on hand, it should be making money for you. One way to ensure it continuously does that is to set up a ladder of Treasuries or FDIC-insured certificates of deposit with staggered maturities (eg, 1 year, 2 years, 3 years, etc.). When a ladder might make sense A laddering strategy can offer low-risk, predictable returns that will help you keep up with — or beat — inflation, while protecting your money during volatile markets and helping you meet your near- and intermediate-term goals. 'Which ladder works for you depends on your needs,' said Collin Martin, a fixed income strategist at Schwab Center for Financial Research. For example, ladders can be useful if you want to: Preserve purchasing power: A fixed income ladder can help if your main concern for a given sum of money is to protect the principal and not let inflation devalue it. Rhode-Island based certified financial planner Sue Gardiner had a client whose goal was to preserve capital and protect purchasing power of money going to beneficiaries of an inherited IRA that had to be fully distributed within 10 years. 'So we used TIPS (Treasury Inflation-Protected Securities) to hedge inflation, but balanced them with Treasuries and brokered CDs to lock in competitive yields and keep annual liquidity,' she said. 'The ladder was designed so each year's withdrawal is funded by maturing securities.' Pay off debt: If you have credit card debt and can secure a zero-rate balance transfer card — which lets you pay off your debt interest free for up to 21 months — a ladder of CDs or bonds can generate additional income to help clear your balance. Say you have $100,000 from the sale of a house or an inheritance. If you don't already have an emergency fund, set aside some of the money into a high-yield FDIC-insured online savings account or a money market fund. Then split the rest evenly across the number of 'rungs' in the ladder you choose. For instance, a three-month CD or Treasury, another one maturing in six months and a third one maturing in a year. As a CD or Treasury comes due, direct the income it throws off plus some or all of the principal to pay down your 0% credit card debt, Gardiner suggested. Grow savings for a specific end dat e: Or, say you want to have enough money to make a down payment on a home in five years. 'If the goal has a finite date, ladder the strategy so all the money is available for the down payment [on that date],' Gardiner said. Set up a cash flow stream: If you're about to retire but won't claim Social Security for a few years, you might consider a laddered bonds strategy to provide a steady income stream between now and then or even for longer. 'It provides stability and predictability while bridging the gap until larger income sources like Social Security kick in, or to create a predictable foundation while other assets are positioned for growth,' Wade Pfau, founder of the site Retirement Researcher, wrote in an article about bond laddering. 'As one (bond) matures, the principal is returned and can be reinvested or spent, depending on your needs at that time.' Questions to ask To set up a laddering strategy that works for you, consider these questions: How long before I need the money? Be very clear what your liquidity needs will be for the money you're investing. Once a ladder of investments with staggering maturities is set up, if you tap any before they come due, you may have to pay a penalty in the case of CDs that you buy directly from a bank; or you might lose some of your principal if you're selling a bond (or a CD purchased through a brokerage) when you sell it back into the secondary market. 'Make sure you match up maturities of those holdings with what your time horizon is. You don't want to suddenly need all of it and be forced to sell at a loss,' Martin said. Also know that any investment on your ladder that is labeled 'callable' means the issuer can recall it and pay you back your principal before the instrument comes due, plus any income owed up until that point. So ideally, you will only invest in non-callable CDs or bonds, otherwise you might need to reinvest it sooner than you think. Does it make more sense to invest in CDs or bonds? What you'll net after taxes from your investment is a key consideration. The income you earn from a CD is taxable at the federal, state and local level. If you invest in Treasuries, the income is exempt from state and local taxes. So if you live in a high-tax area, they may be a better bet. But if you live in a state with no income tax or very low income taxes and the yield on a CD is better than a bond of similar duration, the CD may be your better bet. Do I want to manage the ladder myself? If you're setting up a ladder of CDs or Treasuries for a one-time, date-certain purpose and your plan is to use the money as it comes due, that might be the simplest thing for you to set up and manage. But if your plan is to use a ladder on an ongoing basis for income, that will mean you have to keep track of everything and be proactive about reinvesting your money whenever it comes due to maximize your income potential. Alternatively, there are now some ETFs that ladder bonds, which can do the work for you if they're structured in a way that meets your goals. If you're building you own ladder, your brokerage may offer model laddering strategies that will help you set one up and then can automatically do the reinvesting for you if you choose. If, however, you're considering laddering municipal bonds for their tax advantages or corporate bonds to maximize yield, you might consult a fixed income adviser or have an investment professional manage your ladder for you because those instruments require a little more research to make sure you're getting the risk-reward trade-off. 'You don't want to blindly invest in those,' Martin said.
CNN
2 days ago
- Business
- CNN
Make your money work for you by ‘laddering' bonds or CDs
If you have a lot of cash on hand, it should be making money for you. One way to ensure it continuously does that is to set up a ladder of Treasuries or FDIC-insured certificates of deposit with staggered maturities (eg, 1 year, 2 years, 3 years, etc.). A laddering strategy can offer low-risk, predictable returns that will help you keep up with — or beat — inflation, while protecting your money during volatile markets and helping you meet your near- and intermediate-term goals. 'Which ladder works for you depends on your needs,' said Collin Martin, a fixed income strategist at Schwab Center for Financial Research. For example, ladders can be useful if you want to: Preserve purchasing power: A fixed income ladder can help if your main concern for a given sum of money is to protect the principal and not let inflation devalue it. Rhode-Island based certified financial planner Sue Gardiner had a client whose goal was to preserve capital and protect purchasing power of money going to beneficiaries of an inherited IRA that had to be fully distributed within 10 years. 'So we used TIPS (Treasury Inflation-Protected Securities) to hedge inflation, but balanced them with Treasuries and brokered CDs to lock in competitive yields and keep annual liquidity,' she said. 'The ladder was designed so each year's withdrawal is funded by maturing securities.' Pay off debt: If you have credit card debt and can secure a zero-rate balance transfer card — which lets you pay off your debt interest free for up to 21 months — a ladder of CDs or bonds can generate additional income to help clear your balance. Say you have $100,000 from the sale of a house or an inheritance. If you don't already have an emergency fund, set aside some of the money into a high-yield FDIC-insured online savings account or a money market fund. Then split the rest evenly across the number of 'rungs' in the ladder you choose. For instance, a three-month CD or Treasury, another one maturing in six months and a third one maturing in a year. As a CD or Treasury comes due, direct the income it throws off plus some or all of the principal to pay down your 0% credit card debt, Gardiner suggested. Grow savings for a specific end date: Or, say you want to have enough money to make a down payment on a home in five years. 'If the goal has a finite date, ladder the strategy so all the money is available for the down payment [on that date],' Gardiner said. Set up a cash flow stream: If you're about to retire but won't claim Social Security for a few years, you might consider a laddered bonds strategy to provide a steady income stream between now and then or even for longer. 'It provides stability and predictability while bridging the gap until larger income sources like Social Security kick in, or to create a predictable foundation while other assets are positioned for growth,' Wade Pfau, founder of the site Retirement Researcher, wrote in an article about bond laddering. 'As one (bond) matures, the principal is returned and can be reinvested or spent, depending on your needs at that time.' To set up a laddering strategy that works for you, consider these questions: How long before I need the money? Be very clear what your liquidity needs will be for the money you're investing. Once a ladder of investments with staggering maturities is set up, if you tap any before they come due, you may have to pay a penalty in the case of CDs that you buy directly from a bank; or you might lose some of your principal if you're selling a bond (or a CD purchased through a brokerage) when you sell it back into the secondary market. 'Make sure you match up maturities of those holdings with what your time horizon is. You don't want to suddenly need all of it and be forced to sell at a loss,' Martin said. Also know that any investment on your ladder that is labeled 'callable' means the issuer can recall it and pay you back your principal before the instrument comes due, plus any income owed up until that point. So ideally, you will only invest in non-callable CDs or bonds, otherwise you might need to reinvest it sooner than you think. Does it make more sense to invest in CDs or bonds? What you'll net after taxes from your investment is a key consideration. The income you earn from a CD is taxable at the federal, state and local level. If you invest in Treasuries, the income is exempt from state and local taxes. So if you live in a high-tax area, they may be a better bet. But if you live in a state with no income tax or very low income taxes and the yield on a CD is better than a bond of similar duration, the CD may be your better bet. Do I want to manage the ladder myself? If you're setting up a ladder of CDs or Treasuries for a one-time, date-certain purpose and your plan is to use the money as it comes due, that might be the simplest thing for you to set up and manage. But if your plan is to use a ladder on an ongoing basis for income, that will mean you have to keep track of everything and be proactive about reinvesting your money whenever it comes due to maximize your income potential. Alternatively, there are now some ETFs that ladder bonds, which can do the work for you if they're structured in a way that meets your goals. If you're building you own ladder, your brokerage may offer model laddering strategies that will help you set one up and then can automatically do the reinvesting for you if you choose. If, however, you're considering laddering municipal bonds for their tax advantages or corporate bonds to maximize yield, you might consult a fixed income adviser or have an investment professional manage your ladder for you because those instruments require a little more research to make sure you're getting the risk-reward trade-off. 'You don't want to blindly invest in those,' Martin said.
CNN
2 days ago
- Business
- CNN
Make your money work for you by ‘laddering' bonds or CDs
If you have a lot of cash on hand, it should be making money for you. One way to ensure it continuously does that is to set up a ladder of Treasuries or FDIC-insured certificates of deposit with staggered maturities (eg, 1 year, 2 years, 3 years, etc.). A laddering strategy can offer low-risk, predictable returns that will help you keep up with — or beat — inflation, while protecting your money during volatile markets and helping you meet your near- and intermediate-term goals. 'Which ladder works for you depends on your needs,' said Collin Martin, a fixed income strategist at Schwab Center for Financial Research. For example, ladders can be useful if you want to: Preserve purchasing power: A fixed income ladder can help if your main concern for a given sum of money is to protect the principal and not let inflation devalue it. Rhode-Island based certified financial planner Sue Gardiner had a client whose goal was to preserve capital and protect purchasing power of money going to beneficiaries of an inherited IRA that had to be fully distributed within 10 years. 'So we used TIPS (Treasury Inflation-Protected Securities) to hedge inflation, but balanced them with Treasuries and brokered CDs to lock in competitive yields and keep annual liquidity,' she said. 'The ladder was designed so each year's withdrawal is funded by maturing securities.' Pay off debt: If you have credit card debt and can secure a zero-rate balance transfer card — which lets you pay off your debt interest free for up to 21 months — a ladder of CDs or bonds can generate additional income to help clear your balance. Say you have $100,000 from the sale of a house or an inheritance. If you don't already have an emergency fund, set aside some of the money into a high-yield FDIC-insured online savings account or a money market fund. Then split the rest evenly across the number of 'rungs' in the ladder you choose. For instance, a three-month CD or Treasury, another one maturing in six months and a third one maturing in a year. As a CD or Treasury comes due, direct the income it throws off plus some or all of the principal to pay down your 0% credit card debt, Gardiner suggested. Grow savings for a specific end date: Or, say you want to have enough money to make a down payment on a home in five years. 'If the goal has a finite date, ladder the strategy so all the money is available for the down payment [on that date],' Gardiner said. Set up a cash flow stream: If you're about to retire but won't claim Social Security for a few years, you might consider a laddered bonds strategy to provide a steady income stream between now and then or even for longer. 'It provides stability and predictability while bridging the gap until larger income sources like Social Security kick in, or to create a predictable foundation while other assets are positioned for growth,' Wade Pfau, founder of the site Retirement Researcher, wrote in an article about bond laddering. 'As one (bond) matures, the principal is returned and can be reinvested or spent, depending on your needs at that time.' To set up a laddering strategy that works for you, consider these questions: How long before I need the money? Be very clear what your liquidity needs will be for the money you're investing. Once a ladder of investments with staggering maturities is set up, if you tap any before they come due, you may have to pay a penalty in the case of CDs that you buy directly from a bank; or you might lose some of your principal if you're selling a bond (or a CD purchased through a brokerage) when you sell it back into the secondary market. 'Make sure you match up maturities of those holdings with what your time horizon is. You don't want to suddenly need all of it and be forced to sell at a loss,' Martin said. Also know that any investment on your ladder that is labeled 'callable' means the issuer can recall it and pay you back your principal before the instrument comes due, plus any income owed up until that point. So ideally, you will only invest in non-callable CDs or bonds, otherwise you might need to reinvest it sooner than you think. Does it make more sense to invest in CDs or bonds? What you'll net after taxes from your investment is a key consideration. The income you earn from a CD is taxable at the federal, state and local level. If you invest in Treasuries, the income is exempt from state and local taxes. So if you live in a high-tax area, they may be a better bet. But if you live in a state with no income tax or very low income taxes and the yield on a CD is better than a bond of similar duration, the CD may be your better bet. Do I want to manage the ladder myself? If you're setting up a ladder of CDs or Treasuries for a one-time, date-certain purpose and your plan is to use the money as it comes due, that might be the simplest thing for you to set up and manage. But if your plan is to use a ladder on an ongoing basis for income, that will mean you have to keep track of everything and be proactive about reinvesting your money whenever it comes due to maximize your income potential. Alternatively, there are now some ETFs that ladder bonds, which can do the work for you if they're structured in a way that meets your goals. If you're building you own ladder, your brokerage may offer model laddering strategies that will help you set one up and then can automatically do the reinvesting for you if you choose. If, however, you're considering laddering municipal bonds for their tax advantages or corporate bonds to maximize yield, you might consult a fixed income adviser or have an investment professional manage your ladder for you because those instruments require a little more research to make sure you're getting the risk-reward trade-off. 'You don't want to blindly invest in those,' Martin said.
Yahoo
5 days ago
- Business
- Yahoo
Why bonds matter now for every investor
Listen and subscribe to Stocks In Translation on Apple Podcasts, Spotify, or wherever you find your favorite could be your portfolio's next secret this episode of Stocks in Translation, Schwab Center for Financial Research fixed income strategist director Collin Martin joins host Jared Blikre and Senior Reporter Brooke DiPalma to discuss yield curves, the bond market, and why they can impact investors' wallets. Martin breaks down some of the key benefits of bonds. The trio also takes a look at Fed rate cuts and provides insight for how investors should navigate interest rate shifts and market risks. Twice a week, Stocks In Translation cuts through the market mayhem, noisy numbers and hyperbole to give you the information you need to make the right trade for your portfolio. You can find more episodes here, or watch on your favorite streaming service. This post was written by Lauren Pokedoff Welcome to Stocks and Translation, Yahoo Finance's video podcast that cuts through the market mayhem, the noisy numbers, and the hyperbole to give you the information you need to make the right trade for your portfolio. I'm Jared Blicky, your host, and with me is Yahoo Finance senior reporter Brooke De Palma. She is here to keep the discussion simple and pointed toward you, the we're going to be focusing on the bond market and the economy. If you care about your mortgage rate, your car payment, or whether stocks keep climbing, you care about bonds. And our phrase of the day folds in, it is yield curve. We tackle it bit by bit what it means for investors and what it helps predict for markets and the this episode is brought to you by the number 1951. That was the year of the so-called Fed Treasury accord when the Federal Reserve stopped guaranteeing lower longer term interest rates as a dedicated buyer of Uncle Sam's bonds. It established Fed independence, which is now a major policy today we are welcoming Colin Martin. He is a director and fixed income strategist at the Schwab Center for Financial Research. Colin specializes in translating bond market moves into plain English for everyday investor, and that is perfect for telling us what today's, uh, Fed decisions and the yield curve mean for your wallet, not just Wall Street. So we're gonna dig into the yield curve explanation in a minute, but just give us your overview. Why should investors care about bonds right now? Well, we think investors should always care about bonds. We really see 3 key benefits to bond investing regardless of the interest rate environment, the income they provide, because that's a, that's a key feature of bond investing. For those who aren't too familiar, they make, you know, regular interest payments where if you look at stocks, a lot of them pay dividends, but they're more discretionary. So, you know, less, less safe you could you also get capital preservation, especially if you're focusing on high quality bonds, the idea that you're gonna get your money back. I think that's really important. It can be great for planning purposes. And then the third key benefit is diversification. You want to have investments that aren't all moving in the same direction at the same sound great if everything's going up, but when things are going down, especially if we see a stock market decline, you want something that's gonna help serve as a buffer in your portfolio, and high quality bond investments can help can help do that. Great. And we're gonna circle back to a lot of those points and let's get into our phrase of the day right now, which is yield curve. It is a timeline of interest rates moving from the near term to decades out, showing the going rate of what money costs at point, it's it's shape basically signals inflation expectations, growth expectations, and I should also say that we're talking usually about the treasury yield curve, so that's government bonds, but you can also have a corporate yield curve for a company like Apple or McDonald's, whatever. So we're gonna focus on the treasury yield curve here and just kind of break it down why this matters for investors and then kind of how to interpret it. Well, yeah, let's look at it from two ways. What, what, what matters for investors? So what we hear about the yield curve, we talk about the yield curve. I think a lot of investors might not really get what it is. So it's, it's a line that connects the dots of treasuries of all maturity. So we start with short term maturities as you referenced and all the way out to long term maturity. So maybe you start with a 1 month treasury bill all the way out to a 30 year Treasury bond, and that just connects the dots of the yields they sometimes long term rates are higher than short term rates. Sometimes long term rates are lower than short term rates, and that can be confusing for a lot of investors because when you're looking at that yield curve, it's basically a menu of options, right? And it's not always a curve. Sometimes it could be flat. It can be flat. There can be kinks in the yield curve, and we're kind of seeing that right now. So that' is for investors how you want to approach it, but it can tell us things. And a lot of times when it's inverted, which it's not kind of inverted now, parts of it are inverted now, but when the yield curve is inverted again when that's long term rates lower than short termrates, which is not intuitive because the longer term money is then cheaper than the short term money, right? It doesn't make much sense. It doesn't make much sense for us as investors, right?Why would I accept a lower yield on, say, a 10 year Treasury note locking my money up for 10 years when I can get a higher rate with say a 3 month T bill that has much less volatility. It doesn't make much sense, but it's usually based on expectations. And when there's expectations for the Federal Reserve to cut rates, uh, usually due to to declining inflation or maybe a weakening labor market, that sends longer term yields down in anticipation of those potential rate cuts. And I guess what should investors be eyeing right now with that September meeting in mind? How should they be thinking aboutthis? The main thing we're looking at with the potential for a September rate cut, it's what we expect at Charles Schwab is the idea that the short-term investments that that you may be holding, you might start facing reinvestment risk. This is something that this is something that's that's really interesting, but reinvestment risk is the risk thatAnd a bond or investment you have comes due that you might have to reinvest those proceeds. You want to get that. You want to get back in and ultimately that could cause you might you won't get it at 4% anymore. Maybe you'll get it at say 3.75% if you know the Fed cuts 25 basis points so yeah, that's the best way. Thank you. That's the best way of describing it right now, let's say you can get a T, 3 month T bill, we'll say at 4.25% close to the Fed funds a few months when that comes due, maybe it's 4% or maybe it's less so reinvestment risk, you know, declining short term interest rate environment means that if you're holding short term investments, you might see your income decline over time and that could be a savings account too. Money market funds when we talk about the yield curve, it depends on where you are in the yield curve, but on the very short end, a lot of times we're talking about savings account rates or money market funds, then you go out to 6 months a year, maybe you're talking about CDs and then you go out to 5, 10 years, you're talking about auto loans, mortgages, that kind of thing. So I guess, um, breakdown maybe for us some of the misconceptions that people might have about the yield curve or just bonds in general, like what, what do people have, uh,How can you help people understand them a little bit better because there is a lot of information but really misunderstandingsabout them. I do think there's a lot of misunderstanding out there. I'd say the biggest one is that a move by the Federal Reserve, whether up or down, is going to directly influence mortgage rates, and that's not the case. And we saw that last year. So in September, the Federal Reserve cut interest rates by 50 basis points and actually over the next two meetings cut by another 25 basis. And then what happened? mortgage rates went higher. So I think that's really, really important because mortgage rates are not based on the federal funds rate in the here and now. It's based on expectations of the next 10 to 30 years because that's usually how long a mortgage is. And even though the markets tend to act in advance of those rate cuts, so we saw that mortgage rates had fallen a little bit last fall, and then when the rate cuts was there was this idea that maybe we didn't need to cut rates as much and if more rate cuts than expected actually resulted in kind of more consumer spending, maybe there was some pent up demand that got kind of released there, maybe that would result in inflation reaccelerating a little bit. It didn't really happen yet, but I think that's what caused mortgage rates to actually rise despite those those cuts to the Fed funds rate. Lots of nonintuitive stuff. Wanted to ask you about corporate bonds and how to invest in those, because it's not just buying Uncle Sam's debt. You can buy the debt of even Nvidia or Apple or whatever, and we talk about high yield versus investment grade just kind of walk us through those terms. Well, the whole bond market is really large and complex. I think that's probably what scares a lot of potential bond market investors away because it's not as simple as the stock a lot of different types of bonds out there whether it's US Treasuries like we've talked about certificates of deposit. Those are, that's a bond investment, a fixed income investment. Then there's corporate bonds, so they're issued by corporations, but the credit quality of the issuer, the fundamentals of the issuer, uh, can vary. So it's really broken up into two markets. There's the investment create corporate bond market, and ratings of triple B or above. Those are safe. So the way we look at it is, it's, it's low to moderate risk because investment grade can be as high as AAA and then down to triple B. So the highest two rungs, that's pretty low risk. And then when you get to single A and tripleB, which are still investment grade rated, it's risk below that, so double B or below is what we call high yield or junk bonds. Um, junk bonds obviously is is a popular term out there. Those are, you know, riskier companies. They have a lot more debt relative to their earnings. They have more volatile cash flows and usually you earn higher yields by by lending to them or investing in that's true today, but, but the relative yields are relatively low, so you're not getting compensated too well for the risks and in an environment where we're worried about potential economic growth moderating, corporate profit growth moderating, if you're not being compensated well for those risks, we, we don't think it makes too much sense. So we're a little bit more cautious on high yield bonds. We don't say you, you have to avoid them, but just consider them in investment grade corporates, you know, low to moderate credit risk, we think can make a lot of sense. You can get average yields around 4.5 or 5%.That's still well above levels we could have seen, say from 2010 to 2022 for the most part. So I think yields are still really attractive and you can earn those without taking too much risk. For aninvestor who is interested in learning the ratings right now of these potential corporate bonds, where do they understand, where do they go to learn where the most risk is versus risk off? Well, if, if you're interested inIndividual bonds, which I will say is is tricky. If you're buying individual bonds, whether it's corporate bonds, municipalities, you need to do a lot of work yourself harder than stockpicking. Yeah, I think so. I mean, you mentioned Apple before. If you want to buy Apple stock, I think it's AAPL. I'm a guy, not a guy, but I think that's what the ticker. If you're looking for an Apple, there's there's a lot. I don't know how many there are, but there's different coupon rates, the credit ratings, I think should be the same, um, depending on subordination, but there's a lot of different options out there. And then consider the fact that then there's just a lot of issuers out there. So which issuer do I want? What credit rating is the sweet spot? It's, it's pretty difficult. So what we would suggest if you're an investor looking to buy individual bonds and you know whatever, you know, your brokerage account, if you're looking and always caution against screening for the highest yielding ones. That usually means that there might be more risk than the credit rating suggests. So you have to do your homework. Yeah. Andthen also too, I do want to take a step back because bond markets got so much attention earlier this year as investors or rather there was this overall the government wouldn't be able to pay back bonds, is that fear valid after thinking back? Is hindsight2020? So we don't think that fear is valid. We hear about concerns about our fiscal trajectory. We hear concerns about a failed Treasury auction. That's how the Treasury issues debt. There's an auction.A failed treasury auction for us, it's not the idea that they literally can't issue debt, that there's no buyers. A failed auction is just demand isn't as strong as as we would like because peopleare ultimately selling them because of the potential implications of tariffs, potentially. I don't know if it's so much selling or just are the buyers that were hoping will step up to buy, are they still around? And we, you know, we've never found too much of a relationship between our debt levels, deficit levels, and what that means for the level of treasury yields, and that sometimes that ruffles some people's feathers because there's this idea that if if our debt continues to grow, there has to be an impact on yields. Our yields need tosurge. I mean, we see it around the debt ceiling sometimes because that's a very immediate problem, but to your point, over the long term, I do think II, I hear you there. It's not necessarily a big a factor as we might think when you hear these 10 $20.30 trillion dollars dollar deficits and debt and all that kind of stuff. We do need to pause right here. We're gonna take a short break, but coming up we're gonna be talking Federal Reserve independence, how we got in it in the first place and why it's a big deal these days and calling all home buyers. We've got a runway showdown featuring two different styles of mortgage rates. Stay episode is brought to you by the number 1951. That was the year of the so-called Fed Treasury accord. The Federal Reserve had been a guaranteed buyer of US debt for over a decade since World War II, and this guaranteed low interest rates for the US government. So mortgage rates were also kept low, but a big downside was that the Fed didn't have much control over price this accord or agreement, it meant that the Fed would no longer fix long term rates, uh, interest rates, and instead they would just worry about short term rates, and it established Fed independence, the idea that decision making in America's central bank would not be subject to the policies and spending of the US break it down for us. This is an issue that's kind of come to the forefront now because people say, well, this is the way things have been for decades, and they've kind of been good this way. But then you have a president who's calling for more explicit control over the Federal Reserve's action. How does it all come together? So that we, the way weright now is, you know, and we talk about Fed independence and why we think it matters and we talk, I think you made a really good point that when we talk about Fed independence, it wasn't always the case. We saw coordination between fiscal policy and monetary policy, especially after the World Wars, but then that's that shifted in 1951. The way we view it is if if monetary policy starts working with fiscal the short term benefit of a given administration that can have negative long term effects and and who knows what's gonna happen over the next few months, few quarters, but we're in an environment right now where inflation is still high, um, down a little bit over time than the Fed's target of 2%. It's above the Fed's target of 2% and over the past month or two moving in the wrong direction. Now in the flip side that, yes, moving higher, not lower. Then you have a labor market that is weakening a little bit, but with inflation so high, if the Fed were to cut rates either modestly or that stimulated demand and that and as a result of that if consumers started borrowing more to spend or businesses started borrowing more to invest and hire new people that might spur more inflation and that goes against one of the Fed's mandates their dual mandates are price stability and maximum employment. So if you do things that are might help in the short run, hey, the economy would would probably grow more than it would have otherwise, but the negative effect could be higher inflation, could be higher long-term interest rates because of that inflation, and it could be a decline in the dollar if there's a loss of confidence in our economy. Go ahead. I was going to say looking out, all the discussion has been around Jerome Powell's finishing come May, I believe it is. And then on top of that, I mean, President Trump has been in office for now more than 200 days, and we still in the next 4 years. But when you think about long term implications, how long are we talking about? How long could that impact interest rates?Beyond President Trump's time in office. Well, I think it could for long term that's a great point. It can vary. We think what it could do is create a lack of confidence. If you're investing in an economy, whether it's in our economy by investing in businesses or holding our treasuries, you want you want trust in the data and that they're gonna follow what what their congressionally mandated uh mandate is and if if they stray from that, that can just result in in again that weaker dollar and higher long term yields. I don't have a time frame for that, but just the idea that investors might demand more of a risk premium to hold something if they're less uncertain about what the policies might look like in the coming years. I want to throw, I want to introduce some other terms here, and I hope this doesn't get too far off track, but whoever the next Fed chair is and we'll know that next, we know that before next year, hopefully, um, they're going to be dealing with very high debt levels and there's gonna be a lot of pressure for them to maybe enact some policies that we haven't seen in a while. One would be quantitative that's kind of letting the balance sheet grow. The Fed would buy bonds and right now they're running those bonds off of their balance sheet, so they're doing the opposite right now, quantitative tightening. But then there's another thing called yield curve control, and that's where the Fed acts not only on short term rates, but also on longer term rates, and that sounds a lot like pre-1951, you know, that's, that's when, you know, the Fed is also trying to keep down those longer term rates and so then does that call into question Fed independence? I, I'd say it depends on what the reason is. So you said, mentioned quantitative easing. That's when the Federal Reserve buys long-term securities to pull down those rates, and they did that following the financial crisis. They did that in 2020 during the COVID-19 pandemic. I would say those would be characterized as as emergencies or near emergencies to use that in know, still growing economy and to do it just to lower the potential interest expense of the government, I think that's a risk and what we think could happen, well, it'd be tough to know what happened because if they actually do embark on a QE and the Fed is buying long term rates that that pushes prices up and yields down. But we worry about where are the rest of the buyers and I alluded to this before, if, if there is a lack of confidence to foreign maybe step away a little bit if they're less certain about what they can expect over the coming years. And if those buyers aren't there as much as they as they've used to be, that could result in in long term yields drifting a little bit higher, which would, which would do the opposite of what the administration might be looking for. And so ultimately it's important at the end at the end of the day that this dual mandate of them just focusing solely on that staysin place. I hope so. Also, I think it could just be a moot point because Fed Chair Powell's term is up in May of next year. Expectations that we get from the Fed fund's futures market is that themight cut 3 or 4 times by then. Now that wouldn't be to the 1 or 2% level that President Trump wants suggests the rate should be at, but that'd be a full percentage point of easing by the time that happens. So maybe the pressure isn't there as much because yields have already would have already fallen. Also it's a even if we do get a new chair that is trying to push that agenda of sharply lower interest rates and a Fed funds rate that needs to be at 2% or below, I'm not sure that that new chair would get the support of the rest of the committee members. Right. All right, we got to pivot a little bit, but we're gonna stick with the bond market discussion here because on today's wore it, we have two households for a morerate uh hitting the runway right now. So on the left catwalk, we have the fixed rate mortgage, lock it in, same payment every month, zero surprises, that is peace of mind that you can't budget. On stage right, we have the adjustable rate mortgage or arm, usually starts lower, then it resets. It can drop when the Fed cuts, but it can also jump if inflation or other market forces, they push longer term rates here's the bond market translation. Fixed means lock a yield in right now and ride it. RM means let your rate reset with policy moves. So if cuts arrive and stick, AM fans may save a little bit more, and if rates pop back up, that fixed rate, it can quietly Colin, what do you think is better for the current economy and market? Is it a fixed or an adjustable rate? In, in the current economy, I, I, I think I would favor an adjustable rate, uh, especially if they're more tied to short term interest rates. They'd likely see that rate fall a little bit. And as we've discussed in a fixed if the Fed cuts rates, we're not sure how much fixed rate mortgage rates will fall in that situation, and you'd be locking in at the current rate right now. So adjustable, uh, from a high level would would make more sense in a in a in a federal rate cut environment. Yeah, and just to knock off people who are quite literally waiting to get into this market as they hear murmurs of a potential rate cut, what would be your message to those potential new home buyers isIs it worth even waiting? Well, that would depend on each homebuyer. I, I don't know. I answer the question. So what, what I, I would temper expectations and going back to our, our Treasury outlook because mortgage rates, uh, they tend to follow the direction of the 10-year Treasury yield and as if we get the Fed rate cuts that we expect, and let's say they cut rates 2 times this year and maybe a total of a full percentage point over the next 12 months, which is kind of our baseline right not sure we'd see the 10 year treasury yield fall by that same 100 basis points or full percentage point that the Fed funds rate might fall might still fall, but not as much. So I think temper expectations, regardless of what happens with a new Fed chair, how the economy evolves, we don't expect the Fed to get back to that near zero level that we saw for a while. I think that's a good thing. It's good for savers who are who earn income from various investments, but if you're a potential home buyer and you're, you know, hoping you're going to see that 3 or 4% mortgage rate, I don't think we're going to low, yeah. Great explanation here. And just to briefly recap, I mean, we, we went through, we started with the entire yield curve and I think one of the points that I would underscore is that interest rates affect different vehicles for investment across the yield curve. So at the very short end you got savings rate, you got money market rates, then you go to get a little bit longer, you got CDs, then auto loans are affected after 5, 10 years, then you have mortgage rates as well. And I think one of the key things we're talking a lot about here is there is a tremendous demand for housing and people who want to get those low mortgage rates. It's an open question of whether or not those are going to come anytime soon. But as our guest here said, there is priced into the market for additional rate cuts going into the end of Fed Chair Paul's term, which ends next May. So having said that, I think we have wound things down here at Stocks and Translation. Make sure you check out all our other episodes of the video podcast on the Yahoo Finance site and mobile app.
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Fed cut isn't the 'easy layup' Trump says it is, CPI data shows
July's Consumer Price Index (CPI) report was roughly in line with expectations on a monthly basis. Headline inflation rose 0.2% month over month, while core CPI gained 0.3% from the prior month. New Century Advisors chief economist and former Federal Reserve Board economist Claudia Sahm, RSM chief economist Joe Brusuelas, and Schwab Center for Financial Research fixed income strategist Collin Martin sit down with Julie Hyman on Morning Brief to share their instant reactions to the economic data print. To watch more expert insights and analysis on the latest market action, check out more Morning Brief. So, uh, Joe, I'm going to go to you first. What's your first blush reaction here to these numbers? The core inflation came in a little hotter than expected. Moreover, the top line was flattered by a 1.1% decline in gasoline prices. So, once we begin to dig deeper, what my sense is is you're going to see goods inflation moved up and sticky service sector inflation. This is not conducive to arguments that there's no inflation via the trade channel. Basically, tariffs look like they're going to be all over this report. And Claudia, this would seem to make the Fed's job a lot tougher. The Fed's job is always tough, but it's certainly, you know, we do see an inflation moving up, but in terms of the component, for them, if it's largely this tariff effect, if it's a good effect, goods effect, well, then that is something that there's a case to quote-unquote look through it. Like that we're doing a one-time price adjustment and that'll cause rising inflation, but once that adjustment's done, it'll, you know, subside. You know, the core services numbers did firm a little bit relative to last month, but really they've not seen the pickup. Like this is really coming, you're getting the lift is coming here from the tariff effects. Um, to your point, I'm noting in here, the index for shelter was up 0.2%, and the statement saying that was the primary factor in the all items monthly index. So, um, that perhaps, Claudia, particularly problematic here because we had been looking at that number moderating. Right. Well, that actually at 0.2% for shelter, that's a good number. Uh, we're, and we've, it just shelter looms so large in the CPI that it's going to be a big contributor of, you know, of inflation. So, I think actually the shelter is doing what we had actually been looking for it to do for quite some time, which is kind of get back to a pace that's that is pre-pandemic. Um, so I think that one actually here looks looks pretty good. But you're right, it is it's a big piece of inflation and for regular people, like the housing affordability, all those issues, that looms large, no question. Um, I'm also looking at some of the other commentary here. Um, indexes that increased over the month, medical care, airline fares, recreation, household furnishings, as we were looking for, and operations, household furnishings and operations, and used cars and trucks as well. Um, it looks like the indexes for lodging away from home and communication were among the few major indexes that decreased in July. Um, Colin, I want to get you here in here on this as well and sort of how you're thinking about the effect on the rates market and the Fed also by extension. Yeah, well, I think Joe and Claudia both made some really good points where we don't just want to look at those headline numbers. We want to look at the breakdown between goods and services, and because services really does do make up a much larger share of inflation than goods do. So I agree with Claudia that we see the tariff impact in in goods. But what is the impact of the softening labor market? What's that going to do to the services side of the equation? Because if you look at tariffs, that's trade policy, that's not really monetary policy. The Fed can't do too much there. But if we start to see more of that softness in services, in consumer spending, and the cyclical areas like that, I think the Fed might start to focus right there. But just looking at this number specifically, a core reading of 3.1% year over year, obviously there's so many numbers that we can point to, that's probably going to scare some officials because we have a number of officials who are talking about the weaker labor market right now and hinting that they might be open to cuts, some more explicitly, others more implicitly. But then there's others who are talking about the fact that inflation is still too high and frankly above target. So I'd say this probably does confuse the outlook a little bit, and we'll have to see how the PCE report and then the August CPI release comes out. Right, and that's a good point because we all focus very heavily on the CPI report. It is important, but the gauge that the Fed focuses most heavily on is that PCE report, which we don't have yet. Joe, I can see you busily on your phone over there, going through all of the numbers. I know there's some stuff you want to pursue. So core services ex-energy was up 0.4%. That's 3.6 on a year-ago basis. That's that sticky service sector inflation that we worried about. Moreover, you can see it in transportation services, which jumped 0.8%, as did medical care services. After increasing 0.6% last month, it's up 0.8%, and that's up 4.3 on a year-ago basis. As I'm digging through the data just here on the first blush, you know, guys, this is a meaningful increase in inflation. This is going to require a reconciliation of the Fed's dual mandate. You know, you've got inflation rising, you've got job gains that are going to probably continue to be soft. This is going to recreate a real problem as we head towards the September meeting. Now, my sense is that when you get a challenge of the dual mandate, you get tension inside of it. You lean towards the portion that's furthest from its mandate, and that's inflation. So that means more patience, not the 80% chance of a rate cut that I saw in the federal funds market before we came on air this morning, right? Moreover, look, service inflation looks like it's just real sticky, and we're not really seeing the big pass-through from tariffs just yet. This is when we thought it would start. We've been able to see it in the granular data, apparel, toys, appliances, that sort of thing. And with the tariffs finally being set, the effective tariff is 17.6%, it's going to start showing up materially in October, November, December. This is not the easy layup that many market players and investors are portraying in terms of Fed rate cuts, whether it be one, two, three, or whatever, right? So the detail is definitely in the data here this morning, and this is going to, I think, lead to a certain reassessment of those Fed rate cut probabilities.
