Family Update |
First, good news on our sweet Penny. As you may remember, she got into a bottle of allergy pills and ate about 120 of them. I’m happy to report she’s fully recovered. In fact, she was back to full strength in just two days.
This week I took my mother-in-law to the eye surgeon to look into cataract surgery. We sat in the waiting room for two hours, and we didn't walk out the door until nearly three hours later. I can understand an hour, but three hours? Here’s an idea: schedule fewer appointments. I’ll admit I was a little crabby by the end.
I’ve been helping my father-in-law organize his finances, and we found an account he had completely forgotten about. In 1995, he agreed to put $43 a month into a fixed account earning 4.5%, and he’s earned that rate ever since. When we found the statement, it was worth over $40,000. He was totally shocked. It’s a great reminder that setting aside a little money each month can make a big difference over time.
And finally, our cat Coconut. She has always been Chris’s best friend and never had much use for the rest of us. Chris left for college a couple of months ago, and last night, for the first time ever, Coconut walked up and let me pet her. I’d like to think it’s my charm, but I suspect she’s just getting desperate.
Below is the mysterious Medusa orchid. Always blooms around Halloween.
When the Fed Turns Down the Heat
In the fall of 1907, panic swept through New York. Rumors spread that banks were going bankrupt; people freaked out (wouldn’t you?), so they lined up around the block to withdraw their savings. Banks that were perfectly healthy on Monday were out of cash by Friday, simply because everyone showed up at once. No one stepped in to stop it.
So one man did. J.P. Morgan, America's richest banker, called the city's top bankers into his library one night and, as the story goes, locked the door. Nobody left until they agreed to pool their money and prop up the shaky banks. It worked. But the country realized something unsettling: our entire financial system had just been rescued by one private citizen in his living room. What happens when there's no Morgan?
Six years later, in 1913, Congress created the Federal Reserve. Its job was to rescue the banks if too many people wanted their money at once. Over time, the Fed took on a second job, the one you hear about on the news: setting interest rates. And the best way to understand that job is another story.
By 1980, inflation was eating America alive. Prices were rising more than 13% a year. If you were retired on a fixed income, your grocery bill was climbing faster than your savings could keep up. Something had to give.
The Fed chairman at the time, Paul Volcker, decided to stop it the only way he could. He raised interest rates, and then raised them again, until they hit levels most of us can barely imagine. Mortgage rates topped 18%. Car loans and business loans became painfully expensive. My grandmother got a CD that was paying 18% for 5 years.
People were furious. But here's the thing: it worked. When people and businesses borrow less and spend less, prices stop running away. Inflation came down, and America enjoyed nearly two decades of steady growth afterward. Volcker took enormous heat for doing the unpopular thing, and history mostly thanks him for it.
That's really all the Fed is doing when it changes rates. Think of it like a home thermostat. When the economy runs too hot and prices start climbing, the Fed turns down the heat by raising rates. Borrowing gets more expensive, and people spend less.
You can see this right here in our area. Higher rates mean higher mortgage payments, so fewer people can afford to buy. With fewer buyers and more homes sitting on the market, sellers have to lower their prices.
When things get too cold and people start losing jobs, the Fed turns up the heat by lowering rates. If rates drop to 3%, more people can afford mortgages because payments are lower, which pushes up home prices.
Which brings us to today.
Last month, the Fed turned down the heat again for the first time since 2023, nudging its target rate up to between 3.75% and 4%. Part of the reason is trouble in the Middle East, which has pushed oil above $100 a barrel and kept pump and grocery prices stubbornly high.
So what does this mean for you?
If you have money in CDs, savings, or money market accounts, this is good news. You're getting paid to save again, something retirees went without for over a decade.
And the stock market? It has lived through panics, Volcker's 18% mortgages, and everything in between, and it has kept moving forward.
That's exactly why we don't build your plan around guessing what the Fed will do next. Nobody knows, including the Fed. We build it to hold steady whether the Fed turns the heat up or down.
If anyone can find a bank CD paying 18%, let me know, and I will pass the information on to my readers.
Be Blessed,
Dave