The Federal Reserve cut interest rates by 0.50% for the first time in four years on Wednesday, bringing the target interest rate down to 4.75% to 5.0%. Markets and analysts debated whether the initial interest rate cut would be 0.25% or 0.50%.
There are many opinions regarding Federal Reserve policy moves but one prominent market analyst, David Kelly of JPMorgan, who has advocated the Federal Reserve should have started cutting sooner, thinks the Federal Reserve should not have cut aggressively. With the economy still doing well, Kelly feels the Federal Reserve should lower interest rates like you are “lowering a piano out of a fourth floor of a building, slowly and carefully.” Kelly believes cutting interest rates initially hurts the economy for three reasons:
- It reduces interest income. Where money market funds will begin paying less income and consumers will reduce their spending with less income coming in.
- If the Federal Reserve cuts rapidly, it will reduce confidence in the economy. People will speculate what the Fed may know, so they may put off spending or hiring expecting something bad for the economy or a recession around the corner.
- Consumers will put off large purchases like auto loans and mortgages, expecting rates to go lower.
All three of these lead to a reduction in spending, slowing the economy. While lower interest rates are stimulative, they operate on a lag. Kelly makes an analogy to Federal Reserve cutting interest rates fast and medieval medicine, where you wouldn’t want to be treated by a medieval doctor because the medicine they were giving you, would likely kill you. Fed rate cut decision risks investor 'angst' | yahoo.com
Penny(un)wise: In a topic akin to ending daylight savings time, the next hill I may die on is ending the production of the penny. The U.S. has issued 240 billion pennies since its founding and on average every person has around $7.24 of pennies around their house. When handed change (if we even pay with cash – with only 18% of transactions in cash last year), we typically place the change in a jar and bring it to a Coinstar machine months or years later. This act removes most pennies from circulation. Officials say that even if a small fraction returned to circulation, it would be a logistical nightmare where $100 worth of pennies weighs 50 lbs and would likely overwhelm government vaults. Yet, we continue to manufacture and produce pennies every year. For every penny produced, it costs $0.03 to make. According to the Mint, the revenue from producing dimes, quarters, and half dollars is greater than costs (the Federal Reserve buys the coins at face value), while it loses $179 million producing nickels and pennies. The company producing zinc pennies, based in Greeneville, Tennessee, has earned contracts of $1 billion since 2008.
Mint and Treasury officials have urged Congress to stop producing pennies, but Congress hasn’t acted. While a $179 million loss is a small fraction of the U.S.’s $6.13 trillion annual budget, it still matters. Zinc and copper are valuable commodities used in a variety of industries. Mines for both metals are usually open-pit (if you have ever driven by one, you’d know) and require boring or crushing rock. For something that most Americans put in a jar after all this energy is exerted it doesn’t make a lot of ‘cents.’ Jeff Gore, a professor of biophysics at M.I.T., says it simply: “If something is easy to do and it makes the world better, then we should do it.” America Must Free Itself from the Tyranny of the Penny | nytimes.com
Financial Planning/Investment Strategy Corner:
College Considerations: Coinciding with students returning to college, the Wall Street Journal released their metrics for Best Colleges in America: Wall Street Journal’s 2025 Best Colleges In America. Princeton topped the list but a surprise on the list was Babson College (Go Beavers!) at #2. In fact, Babson rose from #126 in 2023. Why such a rise for the busy beavers? The survey added a metric for student success in 2023. With Babson College being a private business school, graduates have a low unemployment rate and high starting salaries due to the industries they are entering. The rank may be a bit overblown compared to other colleges on the list with their undergraduate business school graduates being combined in the survey with other majors. With the cost of college so high, student success is an important metric to consider. The Wall Street Journal also released a survey of the Top U.S. Colleges Offering the Best Value for 2025. This ranking looks at the average net price of college (tuition + room and board + other fees - grants and scholarships) and then compares the early career earnings for college graduates versus the earnings of a high school graduate, to see how long it takes a college graduate for the salary premium to equal the costs. Overall, the decision around attending college and picking the right college is more complicated than these surveys suggest but is a good guide and starting point.
Paying for and planning for the expense of college is an important consideration. A reminder that Maine introduced a Maine State Tax deduction of up to $1,000 per student for contributions made to 529 plans (Maine State Tax Deduction - NextGen). The deduction is available to single filers who earn less than $100,000 a year and joint filers who earn less than $200,000. The deduction is eligible for each beneficiary, so if a parent or grandparent contributes to four 529 accounts, each account would qualify for the $1,000 tax deduction.
Quick Hits:
- Growing up 10 miles away from the Shakers, I was always fascinated with the community: There Are Only Two Shakers Left |The New York Times
- While the penny production story may drive frustration, it’s important, for our health, to avoid cynicism: The Irrationality of Cynicism | Vox
- What to do with green tomatoes: What can I do with under and overripe tomatoes? | The Guardian
- Some nights when making dinner I relax putting on a Tiny Desk Concert and this is a very good list: NPR Tiny Desks: The 50 Best Performances | vulture.com. For fans of rap, Scarface (#7) is a very underrated Tiny Desk concert…(warning explicit language).
- For two years, our chicken order for Red Rangers has been substituted for Cornish Cross, a much larger breed: Why did the chicken…get so big? | Economist
New RSWA Portal: We previously mentioned that we will be switching our reporting software, which will mean a new portal will be established for uploading and sharing documents securely. Watch for emails with the new portal link in the next couple of weeks.
More RSWA News - New South Portland Office: In case you thought switching our reporting software was enough to do, the Portland office is officially moving. Next Friday we will be in our new office at 82 Running Hill Road in South Portland. We look forward to showing it off when we meet, particularly the onsite parking lot.
Quote: “History permits us to be responsible: not for everything, but for something... History gives us the company of those who have done and suffered more than we have.” – Timothy Synder
Thank you for reading RSWA Financial Advisor Insights! We welcome feedback and please forward this to a friend! Be well, take care, and stay safe!
