Cut To The Chase

The Fed decided not to raise interest rates this week. Fed Chair Jerome Powell’s views on unemployment and inflation are slightly optimistic but leave much more to be accomplished.

A key measure of labor market tightness, the so-called jobs-to-workers gap has narrowed substantially. We visualize this progress and talk about its meaning.

By threatening to cancel subscriptions you use, you can convince companies to give you a “retention discount” to save hundreds of dollars.

If you contribute to an HSA this year thinking the only thing you need to qualify is a high deductible, you may get fined at tax time if your out-of-pocket maximum is higher than the limit. HSA-eligible accounts must have an OOPM of less than $7,500 (single) or $15,000 (family).

While the markets may not believe it, the Federal Reserve has indicated rates will remain higher for longer. We take a look at the Fed’s projections for the Federal Funds Rate over the next few years, and what that means for those looking to borrow money.

Finally, we are approaching the end of the year. This is the best time to see how much you’ve allocated to your tax-advantaged accounts, and what changes you need to make to maximize each dollar earned.

Inflation and a Fed update ^TIMELY

From Bennett Fees, Economic Research Associate

The Federal Reserve decided not to raise interest rates this week. Let’s look at two factors informing his decision, unemployment and inflation.

Powell noted in his press conference how the unemployment rate remains low at 3.8 percent, followed by an explanation of how the labor force participation rate increased. While this is slightly higher than at the beginning of the year, remember that unemployment can rise due to a decrease in the employment-to-population ratio (people losing jobs/decrease in supply) or due to a rise in labor force participation (more people looking for work/increase in demand). In other words, some of the increase in unemployment is not exactly a weakening of the labor market. This has been concentrated in individuals aged 25 to 54 as well as through immigration. 

Second, take a look at Core PCE, which excludes the more volatile food and energy categories. Here we see Core PCE rising 3.7 percent in September versus a year ago. Total PCE, not pictured, rose 3.4 percent. While still above the Fed’s 2 percent target, there has been a notable deceleration in recent months. 

So what does this mean?

Well, maybe nothing. Powell continued to reiterate that “a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal”. In other words, we are headed in the right direction but aren’t out of the woods yet. The most hopeful line is that Powell thinks that “the risks are getting more balanced” as it relates to overshooting versus undershooting inflation targeting. That is, the principle judgment the Fed has to make, whether their policy position is sufficiently restrictive enough, is becoming clearer.

Back into balance? A look at the jobs gap  ^LUMINARY

One of the many themes frequently referenced by Fed Chair Jerome Powell is “labor market tightness”, a key example being the number of people unemployed compared to the number of available jobs, the so-called “jobs-to-workers gap”. Powell mentioned it again this week when he said “Although the jobs-to-workers gap has narrowed, labor demand still exceeds the supply of available workers”.

As such, I thought it would be good to visualize the progress on the jobs-to-workers gap. The following graph shows the year-over-year percent change of job openings and unemployment plus other groups affected by a weakened labor market. For the curious, one of these is the number of persons employed part-time for economic reasons. These are people who would prefer to work full-time but are currently working part-time because of an inability to find a job or due to reduced hours. Another is persons marginally attached to the labor force or those that “wanted and were available for work and had looked for a job sometime in the prior 12 months but had not looked for work in the 4 weeks preceding the survey” as defined by the BLS. In turn, if we add these two measures to unemployment, we get a slightly more comprehensive measure of labor supply. Visualizing this relationship compared to job openings we get this picture: 

Here we see the inversion from 2021 through 2023 yet, the gap has largely returned to a ratio consistent with pre-pandemic levels. Still, this is definitely still a topic to keep tabs on so stick around for more updates!

Threaten to cancel every subscription you have ^TIMELY

From Nate Hoskin, Founder & Lead Advisor

The biggest enemy for subscription-based companies is CHURN. They hate cancelations more than anything so they will do anything to keep you subscribed.

That includes giving you a massive discount if you threaten to cancel.

This works with Max ($4.99 for 3 months), the New York Times (from $25 down to $4 a month!), Comcast, Spectrum, and Xfinity.

If you attempt to cancel online and don’t get an immediate discounted offer, you can call them and negotiate directly with a representative. The internet companies prefer to haggle over the phone, so when examining your provider you will most likely end up talking to someone.

I would love to hear what other subscriptions you’ve found that offer retention discounts!

Don’t make this mistake with your HSA  ^LUMINARY

When you think of the Health Savings Account, most people know you need to have a deductible of at least $1,500 to contribute (aka a High Deductible Health Plan or HDHP).

But people completely forget that you also need a low(ish) out-of-pocket maximum.

If it’s just you on the plan, your out-of-pocket maximum can’t be higher than $7,500. If you’re on a family plan, it can’t be higher than $15,000.

This means that you could be offered a plan with a high deductible, but if it also has a high out-of-pocket maximum, you won’t be eligible to contribute to an HSA.

If you contribute to an HSA and find out at tax time you aren’t eligible, you’ll have to pay a penalty equal to 6% of whatever you over-contributed. If you did the max of $3,850, that’s a $231 fine!

This is why it helps to have someone watching your finances alongside you. Without proper guidance, the minutia of personal finance can end up costing you money instead of saving it!

Higher for longer ^TIMELY

From Jon Scott, Lead Author 

There’s been an interesting battle between the Fed and Wall Street for the past year… and the Fed is winning. Prior to 2022, The Street did not fight the Fed… apparently, that message is not resonating. For roughly the past year Wall Street has bet that the Fed will not keep interest rates higher for longer, yet the Fed’s forecast (the dot plot) and interviews from Federal Reserve leaders indicate that rates will remain higher for longer—and so far that remains the case.

So what does higher for longer mean? Let’s take a look at the Fed Funds Rate since 2000.

The Federal Funds Rate is now at pre-2008 Great Financial Crisis levels. The idea of higher for longer is that rates will remain near current levels as opposed to the sub-1% rate we saw from 2008-2017/18.

In fact, the Fed gives clear guidance on where they expect the rate to be at in the next couple of years.

As the chart above demonstrates, Fed officials do not anticipate rates moving any lower than 4 percent in 2024 on the low end, while 2025’s lowest estimate is still above 2.5 percent—a far cry from the sub-1 percent levels we saw last decade. Clearly, the Fed is telling investors to expect higher for longer.

Bottomline, borrowing money will remain expensive. Do not expect to apply for a mortgage, refinance your home, or take out a car loan at the rates we saw prior to 2022.

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