Avid readers of the Max blog will recall that ever since the pandemic, we’ve been ahead of the curve in terms of predicting the path of short term interest rates. When Federal Reserve Chairman Powell insisted that the inflation that followed the COVID-19 pandemic was “transitory,” our view was that inflation was more structural and thus would be more robust and sustained. The Fed ultimately capitulated, raising rates 11 times between March 2022 and July 2023, for a total of 550 basis points. Later, in the fall of 2023, when many predicted that the Fed would begin to aggressively lower rates, we again dissented, believing that the Fed was unlikely to cut rates at all until the second half of 2024. This was an unpopular view, but one that also turned out to be correct.
Are we great prognosticators? No. We simply looked at the data. And the data showed that in the months that followed the onset of the pandemic, the money supply (as measured by total U.S. commercial bank deposits) had grown by a staggering 36% from February 2020 through May 2022. By contrast, cumulative inflation was less, totaling 18.9% through November 2023. Thus, assuming no change in the velocity of money, our expectation was that inflation would need to run further to catch up to the growth in money supply before an equilibrium could be reached.
Has the U.S. reached that equilibrium? No, not yet. But we seem closer to it now (21.2% cumulative inflation vs. 33% net growth in deposits, as of September 2024). As we indicated in our last blog post in August, entitled What to do during a market correction, the current bout of inflation was demand-driven, not supply-driven, boosted by large sums of stimulus money, lower commuting costs, and a “you only live once” attitude that emerged following the pandemic, boosting spending on travel and entertainment. Against this backdrop, our view was that inflation could only be expected to moderate once consumers began to become more price-sensitive and cut back spending. And that’s precisely what happened in the summer of 2024. When it became clear to us (and the Fed) in August that consumer spending was finally moderating, for the first time we agreed with the market that a rate cut in September was due. And that’s precisely what the Fed did.
What was up for debate was the size of the rate cut. Heading into last week’s Fed meeting, pundits were roughly split between whether a 25 bps vs. 50 bps cut was warranted. On the margin, we sided with a 25 bps cut, in large part because we thought that a 50 bps cut might spook the equity markets. After all, bank earnings calls have started to suggest weakness in consumer credit, which typically precedes a recession. But in its dual mandate to keep low both inflation and unemployment, the Fed seems more concerned now about the unemployment rate. Thus far, the equity markets have cheered the 50 bps cut, although the bond markets have driven the long end of the curve up, perhaps because lower rates now may mean higher inflation longer-term. The upcoming election could also have a big impact on long-term rates, as the Republicans and Democrats have differing views on how much money we should print and how we should tax and spend.
Whatever your view of the long-term path of rates, what’s important is that you pay attention and make sure that your money continues to work hard for you. As an example, the yields on money market funds and brokered deposits — the cash sweep programs used by many broker-dealers — fell nearly instantly by 50 bps following the September 18 rate cut. By contrast, solutions like Max — that enable you to keep your cash in your own FDIC-insured bank accounts — have been able to keep rates higher for longer. Why? Because Max relies on a market-based mechanism, where the forces of supply and demand drive how banks price their deposits. In fact, over the past 10 years, Max has consistently outperformed money market funds, brokered cash sweeps, and even nationally-advertised online banks, by taking cost out of the banking system and creating a marketplace that focuses on one thing: your best interest. Max also allows banks to save on marketing expense and instead pass along higher preferred rates exclusively to Max customers.
Savvy financial advisors from more than 3,000 wealth management firms have registered to use Max with their clients, helping their cash outperform the market for more than a decade. Given the benefits of compounding, it’s important to make sure you’re always earning the highest yield on your money, regardless of the interest rate environment.