With the NFL season kicking off this past week, and with college football concluding its second full week of action, the Federal Open Market Committee (FOMC) will kick off their rate cutting cycle next Wednesday, when their two-day meeting concludes. While the magnitude of the cuts is not known, the direction is. So how does the decline in the fed funds rate, which the FOMC adjusts periodically based on economic conditions, affect the personal finances of Americans? Below are some of the areas that will be impacted:
- Money market funds – the talk of the last year and a half has been the huge influx of assets into money market accounts as the Fed aggressively raised rates, and with most money market funds still yielding north of 5%, it’s no surprise there is still more than $6 trillion sitting in these accounts. However, with the Fed about to embark on what is likely to be a gradual rate-cutting cycle, yields on money market funds will soon be declining.
- Auto Loans – the balances on auto loans for Americans reached a record level of $1.63 trillion at the end of 2nd quarter of 2024. While most auto loans are offered with fixed rates, these loans can be refinanced as rates drop. As is the case with most types of consumer debt, the benchmark is the prime rate – which is 300 bps (3%) above the fed funds rate. As the fed funds rate decreases, the prime rate will follow – if you are shopping around for a vehicle and must finance, patience may be rewarded – auto loans usually take several months to reflect changes in rates.
- Credit card debt – Americans held $1.14 trillion dollars in credit card debt as of the 2nd quarter of 2024. This is the highest balance since the New York Fed began tracking the data in 1999. While I advocate for paying off credit card balances in full each month, those who do carry a balance from month to month may get a slight reprieve from the current 20-25% APY most credit card companies charge. Credit cards’ APR is also tied to the prime rate + a spread card issuers charge– ranging considerably depending on the creditworthiness of the cardholder.
CPI Report – The Bureau of Labor Statistics released the latest Consumer Price Index (CPI) numbers Wednesday. Headline CPI came in as expected with a month over month increase of 0.2%, with core CPI (ex-food and energy) at 0.3% vs. 0.2% expected. This brought the 12-month headline inflation rate to 2.5%, with core at 3.2%. This will reinforce the argument for a 25-basis point (0.25%) cut next Wednesday vs. some economists/strategists arguing for a 50-basis point (0.50%) cut.
Debate
While politics is a taboo subject for many, and the heightened level of anger, frustration and divisiveness in this presidential election cycle is alarming (with the debate having just occurred), I will focus solely on the facts as it pertains to economic policy, specifically taxes.
Where the candidates stand:
Kamala Harris
Individual Income Taxes:
- Exempt tips from income tax **specifics on this are yet to be determined
- Expand the child tax credit to $6,000 for children under age 1, $3,600 for children 2-5, and $3,000 for children 6-16 (current child tax credit is $2,000 per child – regardless of age until 17)
- Expand the earned income tax credit for filers who do not claim children
- $25,000 (average) down payment assistance program for first-time homebuyers, including additional support for first-generation homebuyers
Corporate Taxes:
- Increase the corporate income tax rate to 28% from 21% currently
Capital Gains and Dividend Taxes:
- Increase the top tax rate on long-term capital gains to 28% for those who have taxable income over $1 million (with an enhanced NIIT – all in rate would be 33%)
- Increase the net investment income tax (NIIT) to reach 5% on income above $400,000
Tariffs and Trade
- To Be Determined
Donald Trump
Individual Income Taxes
- Make the expiring individual income tax cuts from the 2017 Tax Cuts and Jobs Act permanent (current rates)
- Exempt tips from income tax **specifics on this are yet to be determined
- Expand the child tax credit to a $5,000 universal credit
Corporate Taxes
- Lower the corporate income tax rate from 21% to 20%
- Lower the corporate income tax rate to 15% for companies that make their products in the U.S.
Capital Gains and Dividend Taxes
- To Be Determined
Tariffs and Trade
- Impose a universal baseline tariff on all US imports of 10-20%
- Impose a 60% tariff on all US imports from China
**Source: The Tax Foundation Harris Tax Plan vs. Trump Tax Plan | Election 2024 (taxfoundation.org)
September 11th
Wednesday marked the 23rd anniversary of the September 11, 2001, terrorist attacks that occurred at the World Trade Center, Pentagon and Shanksville, PA. As politics can bring out the worst in us, I wanted to focus on what brings out the best in us – often times as the result of a tragedy. I watched a 60 Minutes rerun Sunday night of Scott Pelley reporting on the Fire Department of New York (FDNY), and the 343 members of the FDNY who perished that horrific day. The selflessness, courage and bravery these firefighters showed is truly remarkable. The interviews with the survivors, and how they speak of their fellow firefighters who gave the ultimate sacrifice, will undoubtedly move you to tears. Here is a link to the full episode 60 Minutes remembers 9/11: The FDNY - CBS News
Financial Planning/Investment Strategy Corner
With inflation increasing at a gradually slower rate, one area that will affect anyone receiving Social Security benefits is the more modest cost-of-living adjustment (COLA) coming in 2025. While the official percentage increase is not announced until October, prepare for a COLA in the 2.5%-3% range: Social Security COLA Expected to Be 2.6% Next Year - WSJ
Quick Hits
- Building off the sports theme: Top College Football atmospheres (I’m biased to #3 on the list) College football's best stadium atmospheres ahead of 2024 season, ranked (247sports.com)
- Being new to the Portland area, I’ve spent the first couple of months exploring the restaurant scene. Fortunately for me, there are many more months’ worth of places to explore: My top restaurant picks so far: (I am a bit of a foodie)
Breakfast (Portland): Bayside American Café
Lunch (Scarborough): St Joes Café
Dinner (Yarmouth): Royal River Grill House
- More food content: The Weekly Food Report: Latest in Portland's Culinary Scene (portlandoldport.com)
Quote
“It’s when you’re acting selflessly that you are at your bravest” – Veronica Roth
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