Chapter 1: What is the main topic discussed in this episode?
Hello, everyone. I'm Kimberly Adams. Welcome back to Make Me Smart, where none of us is as smart as all of us. Today, we're talking about the Federal Reserve's decision this week to cut interest rates by a quarter of a percentage point.
Now, this is the third cut this year, and it comes as the president continues to put pressure on the supposedly independent agency to move the economy the way he wants. And as some changes are coming down the pipeline for the Fed's membership. So here to unpack all of this with us is our resident Fed expert and my D.C. Bureau office buddy, Marketplace correspondent Nancy Marshall-Genzer.
Hey, Nancy. Hello. So yesterday, the Federal Reserve cut interest rates by the quarter of a percentage point, like we said, but it was a pretty divided decision. Why were the FOMC members, the Federal Open Market Committee, why were they so conflicted?
Well, Stephen Myron, who is a Fed governor appointed by President Trump on leave from his position as head of the Council of Economic Advisors, he has been dissenting pretty consistently. He definitely wants lower interest rates, lower than the quarter percentage point the Fed cut yesterday.
Chapter 2: Why did the Federal Reserve cut interest rates this week?
But there's also just a lot of uncertainty, Kimberly. At the last Fed meeting, Chair Powell described it as driving in the fog. And he said yesterday that he really could have made a case for either lowering more or staying the same, just because the economy is so uncertain. There's just no certain path right now. And there were a couple of other dissents as well, yeah? Yeah. Yes, there were.
We had two other dissenters, Austin Goolsbee, who is the president of the Chicago Fed. He dissented. Also, Jeffrey Schmidt, the head of the Kansas City Fed, he dissented. But, Kimberly, they didn't want lower rates. They actually... wanted rates to stay the same.
They're known as hawks, and they're worried about inflation and they're worried that if the Fed lowers rates too much, that will fuel the economy too much and inflation will get out of control. There's also a little bit of uncertainty about government data. Of course, it's been delayed by the shutdown. But the Bureau of Labor Statistics always kind of issues a caveat with the jobs numbers.
You know, every month it gives us the unemployment rate, but it also tells us how many jobs were created. And it always revises that. But it's hard to estimate because the BLS is trying to account for businesses that either were started in a particular month or or closed in a particular month, and it has to revise them. And it's making some revisions to the model, but things are still not exact.
And Powell talked about that yesterday. It's very difficult to estimate job growth in real time. They don't count everybody. They have a survey. And there's been something of a systematic overcount. And so we expected, and they correct it twice a year. So the last time they corrected it, we thought the correction would be 800,000 or 900,000. I won't get the numbers exactly right.
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Chapter 3: What factors led to dissent among FOMC members regarding the rate cut?
And that was exactly what happened. So we think that that has persisted. And so there's an overcount in the payroll job numbers, we think, continuing. And it will be corrected. I don't have the exact month in my head right now. And that's just, again, I think forecasters generally understand that.
You know, it's interesting, Nancy, because this is kind of a separate issue of just like the systemic overcount from the fact that we were missing a lot of data from the government itself due to the shutdown. So how did the Fed kind of taking all this into consideration land on the quarter percentage point?
You know, as I said, Chair Powell said you could have gone either way, but they do have some private data that they've been looking at as far as job creation. And they also, you know, each Fed bank has very good contacts in their region. And they, of course, put together the Beige Book and talk about what their contacts are telling them about the economy.
So Powell said he feels like they have a pretty good idea of how things are looking. But he also said, look, you know, we're not in a rush. to cut next year. You know, we're in a really good place where we can just kind of stand pat.
If you look at what's known as the summary of economic projections, which is basically Fed officials' gut feeling about, you know, the coming year on, you know, what we'll see on inflation and interest rates, unemployment, their projections really just indicated one interest rate cut next year. So, you know, Powell said, look, you know, we're content.
We did some cutting and then we paused for a while to work our way through what was happening in the middle of the year. And then we resumed cuts in September and we've cut now three. We've now cut a total of 175 basis points. And as I mentioned, you know, we feel like where we're positioned now, we're well positioned to wait and see how the economy evolves from here.
Powell's leadership of the Fed is winding down and President Donald Trump is reportedly in final interviews with his potential successors. Talk about that. Who are the top contenders and why does this job matter so much? Yeah, I mean, the top contender at this point is Kevin Hassett.
He's the National Economic Council director at the White House, kind of President Trump's right-hand man on the economy. And, you know, as you said, President Trump is very clear he wants lower interest rates. Kevin Hassett said in an interview this week that he would not, lower interest rates would not be in favor of lowering interest rates. If
You know, if it weren't warranted, if the economy was running hot. There's also Kevin Warsh. He's a bank executive. He was on the Federal Reserve Board of Governors from 2006 to 2011. And then there are current board members, Christopher Waller and Michelle Bowman. You know, Kimberly, you know this.
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Chapter 4: How does uncertainty in economic data impact the Fed's decisions?
Although to get the best rate, you need to have a loan less than five years. And a lot of people are having loans longer than that. As in the length of the overall loan needs to be less, fewer than five years. Yeah. The length, yeah. There's 60-month loans, five-year loans out there now, and they don't qualify for the lowest rate. Then there is the matter of housing.
And Powell was asked about this yesterday, and he said, look, you know, I'm not sure how much our tools are really going to work here. Yeah, so the housing market faces... some really significant challenges. And I don't know that, you know, a 25 basis point decline in the federal funds rate is going to make much of a difference for people. You know, housing supply is low.
Housing is going to be, you know, a problem. And, you know, really the tools to address it are we can raise and lower interest rates, but we don't really have the tools to address, you know, a secular housing shortage, a structural housing shortage. Yeah, this thing about, you know, whether or not a 25 basis point decline is really going to make much of a difference.
People who ended up in these mortgages was, you know, relatively high interest rates compared to what folks were used to. Obviously not that high historically, you know, but they've been really struggling with this. And the Fed's rate cut might have a lot of people with these high mortgages thinking about, you know, like refinancing or something like that.
Yeah, I mean, you could get a home equity line of credit, a HELOC. They are pegged to the prime rate. They're also adjustable rate mortgages. They adjust once a year. I mean, frankly, though, Kimberly, a quarter percentage point, that's not going to make a whole big difference. I don't know that it would be worth it to refinance.
But you have to be careful because, you know, your bank might call you or email you and say, hey, let's refinance, you know, because your bank's job is to make money. You know, this actually happened to a relative of mine where, you know, she just recently refinanced within the last year, but then got a call from her lender and they're like, oh, the Fed cut interest rates.
We can lower your payment and it's not going to cost you anything. And, you know, it turned out it was like a predatory lending thing because it did cost her to the tune of like 15 grand. They just bundled it into her mortgage and made a longer mortgage. And it lowered her monthly payment a little bit. But in the longer term, it's going to cost her a lot more.
And, you know, I've heard from several of my friends that their parents, particularly it seems like they're doing this a lot to older folks, are getting these calls from lenders been like, oh, rates went down. You should refinance whether it makes sense for them or not.
Yeah, you know, actually, Kimberly, David Brancaccio, the host of our Marketplace Morning Report, he talked about this yesterday with Jacob Faber. He's an associate professor of sociology and public service at New York University. And here's what Jacob Faber had to say about this. anything that sounds strange or too good to be true, this is going to cost nothing, is a pretty big flag.
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