Responding to the Fed Rate Cut

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Written By Scott Kubie
 

The Federal Reserve believes the battle against COVID-related inflation is ending, so it cut interest rates by 0.50 percent last week.[1] Stewards of investment portfolios and church budgets should adjust their expectations for interest rates and recognize who is affected by the changing economic climate and lower rates.

We are all impacted by the actions of our government’s regulatory agencies. Rate cuts can have both positive and negative effects on our personal finances and will also create opportunities for churches to walk their people through these potentially challenging financial times.

The Federal Reserve and the Slowing Economy

The Federal Reserve is responsible for setting short-term interest rates in the U.S. to balance inflation and employment. On September 18, it cut rates from 5.25-5.50 percent to a new range of 4.75-5.00 percent. It was their first move since increasing rates in July 2023. The Fed often adjusts rates by 0.25 percent, so a double-sized move signals a significant change in interest rate policy. Inflation trends support the move. Recent data show inflation is increasing 2.5 percent annually, just 0.5 percent above the Fed’s target. Inflation peaked at over 7 percent during the pandemic.[i]

Slowing inflation required slowing down the economy. There are multiple signs that the economy is slowing:

  • Only 142,000 new jobs were created in August, which is slightly less than the number needed to hire workers entering the labor force.[ii]

  • Dollar General’s earnings and sales growth are slowing as its lower-income customer base feels financially constrained after the retail chain benefited from large salary increases during COVID and stimulus checks.[iii]

  • “Loud budgeting,” a term for sharing ideas on how to save money, has been trending on TikTok much of this year.[iv]

In driving terms, the Fed has been pumping the brakes. With this cut, they are still pumping, just not quite as hard.

The Effects of the Rate Cut

How will the Fed’s decision affect different groups? Accounts used for short-term savings or reserves, including the investment account offered by Orchard Alliance, will, in most cases, pay lower rates. Retirees, who often have no debt and rely on interest to fund some of their spending, will see declines in income. However, a projected stabilization of inflation will help soften that blow.

The Fed’s rate cut is unlikely to create a flood of borrowing. Mortgage rates have fallen but are still over 3 percent above the recent lows.[v] Many people are reluctant to move because their current mortgage is around 3 percent, compared to today’s low-6 percent rate.[vi]  Markets expect another 2 percent drop in rates by the end of 2025. The Fed isn’t done.

How should stewards react to the change? Here are some key takeaways:

[1] The Federal Reserve cuts interest rates for first time since 2020 : NPR

  • For most investors, no major changes are needed. The after-inflation return on your accounts may be getting better because inflation has fallen pretty quickly. You also maintain reserves for a reason, and chasing risks with your emergency fund isn’t wise.

  • Some investors who have focused only on short-term investments may want to extend the duration of their fixed-income portfolio.

  • Demand for church loans is increasing in The Alliance. Orchard Alliance would welcome serving investors with reserve funds or supplemental savings allocations that can help fund more church loans.

  • The need for financial discipleship is more pronounced in times of rate decline. Orchard Alliance works with Alliance churches and individuals to help people become better stewards and more devoted financial disciples.

An Opportunity for the Church

The recent changes in the U.S. economy are driving household financial decisions that could adversely impact people’s giving. A decline in giving can indicate a financial struggle that may warrant a check-in from a church leader. Retirees, for instance, will be receiving less interest on their investments and smaller Social Security increases. They are more vulnerable than the average person to increased rate declines.

As a result, churches should be prepared for more benevolence requests. Most families in lower-income brackets were able to weather the aftermath of the COVID-19 storm, but the Dollar General report and other data suggest the trend is reversing.

Given these new realities, it may be prudent for church leaders to check in on some attendees who may be experiencing financial distress. People are often unwilling to ask for help, but there are ways to discern who may be struggling and find opportunities to come alongside them. As a church leader, shepherding your people through times of financial uncertainty is a beautiful reflection of Christ’s compassion and care for His Body.

As God’s people, let’s prayerfully consider how these rate changes will impact our financial decisions and how we may provide wise counsel to those who may be struggling, assuring them of God’s care and provision in lean times. As always, Orchard Alliance is here to help you navigate these waters.

 
Scott Kubie
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