Are We Doing Better Than We Think?

people celebrating with champagne

The last few years have been tough for many American families. Tough might be an understatement for quite a few. There are some real scars from losing loved ones, global events, and the highest rate of inflation in decades. This isn’t a news site though – we’re dedicated to helping people live a wise money life. Let’s dive into the things that we can control (our money).

A Financial Refresher

For the majority of the last ten years, the US was struggling to reach the Federal Reserve’s (the Fed) inflation target of 2%. Economists believe that a little inflation actually helps create a healthy economy over the long run. It might help prevent some deflation, and a 2% rate of inflation gives the Fed some room to lower interest rates if there is an economic downturn. This helps protect jobs.

The US inflation rate in 2020 was 1.23% (below the Fed’s 2% target). After the US economy boomed back from 2020, businesses raised prices and job seekers raised their wage expectations. This lead to a massive jump in inflation. Inflation peaked in the summer of 2022 at 9.1%. The Federal Reserve’s Chair, Jerome Powell, started his historic fight against inflation in March 2022 by raising federal funds rates (which impacts our cost of borrowing money).

Over the next 18 months, the Fed raised rates from virtually zero to 5.25%-5.50%.

The Impact of Borrowing Money from the Fed’s Fight Against Inflation

As you can see, borrowing money in 2020 was incredibly inexpensive. Millions of homeowners refinanced their homes to under 4%. Many of them are 3% or lower. This may have given US homeowners, who have the advantage of a 30 year fixed mortgage, a major advantage in surviving the Fed’s aggressive rate hikes to fight inflation.

However, hopeful homeowners that were not able to buy during this timeframe missed out. Some homeowners that locked in a 2.8% 30 year mortgage felt stuck. This caused home inventory to lock up, where it felt like new builds were the only option. As the Fed raised their rates, mortgage lenders raised their rates as well. In October 2023, the 30 year mortgage rate peaked at 8.03%.

Home equity lines of credit (HELOCs), home equity loans, and personal loan rates also skyrocketed. Additionally, credit card interest rates went up as well.

If you were fortunate enough to lock in long term debt at a low interest rate (or own your home outright), the Fed’s rate hikes were simply not that bad. In fact, they were making life more affordable as wages continued to grow steadily and consumer prices on goods were stabilizing.

The Fed’s Fight Against Inflation – We’re Winning

Fed Chair Jerome Powell addressed the nation during his news conference stating that the Fed is likely done raising rates because of how inflation has continued to cool. While Powell cautioned against declaring victory too soon, the financial markets took notice of something else; the Fed officials signaled that they are now expecting 3 rate cuts in 2024.

Assuming there’s no major recession, this is a goldilocks situation (just right). Inflation has slowed to the Fed’s target, unemployment is at a historically low rate, foreclosures are below historic levels, and job seekers can still find better paying jobs.

Why are rate cuts important? Just as raising rates caused the cost of borrowing to go up, cutting rates makes the cost of borrowing go down. This means that hopeful homebuyers can secure mortgages at lower rates. Current homeowners might feel less locked into their current mortgage, and may be more likely to move. This frees up inventory. Upgrading your home or making essential upgrades will become less expensive. Credit card interest rates will drop. Student loan rates will go lower.

The financial markets are celebrating. If you haven’t checked your 401(k) in awhile, now might be the time to check it out.

News Says Doom, the Data Doesn’t

If you read or watch the news, you might have noticed a constant cycle of doom and gloom. The US consumer has consistently polled as having a gloomy outlook at the economy over the last two years. Despite their outlook, they kept spending. This behavior went against how people said they felt in polls – it was absolutely baffling to economists, who had predicted that the consumer wouldn’t be able to continue spending.

“I have been consistently surprised at the resilience of consumer spending,”

Christopher Waller, Fed official

The consumer has bounced back. Retail sales in November increased by 0.3% after declining in October. Economists were surprised. Consumers spent their money shopping online, going out for meals at bars and restaurants, and buying sporting goods and books.

Economists believe that this strength in consumer spending was partially helped by a decline is gasoline prices plummeting.

The US consumer is resilient.

What’s Next for the US Consumer?

There’s no way of knowing for sure how the economy will hold up. As of now, the tune has changed significantly since the Fed’s most recent news conference. We do know that wage earners are making more money now – in fact, wage growth is outpacing inflation. Consumers are enjoying meals at restaurants with family and friends. People are spending money on holiday gifts and making travel plans for 2024.

Despite the doom and gloom being pumped through the media, that is sure to increase during a heated political season, people in the United States are living life.

Living Your Wise Money Life

We believe that living your wise money life means making your own financial game plan. You can’t control a lot of things in the world, but you can control your money (we believe in you). The New Year is right around the corner, and now is the perfect time to start mapping out your wise money life.

Here’s where we start – this isn’t financial advice, just something we do here:

  • Write out your goals – what does your wise money life look like? Next year, 5 years from now, 10 years from now, etc. Write it down.
  • Know your budget – You can’t improve what you don’t track. There are lots of budgeting methods out in the world. Some people need to check their budgets monthly, some only need to do annual checkups. Which one are you? Find out, and know how much money is coming in, and how much is going out. From here, you can make a plan to pay off debt or start building wealth.
  • Build your emergency fund – Why do you need an emergency fund? Because cars breakdown, we lose jobs, and homes need new roofs. An emergency fund removes the stress of the unknown eventually happening.
  • Build your investments – If your employer offers retirement accounts and a company match, start contributing. If you are a gig worker, ask a tax or financial advisor about the advantages of using an IRA (traditional or Roth). Want more flexibility? Learn about opening a brokerage account. Feel lost about all of it? There are resources here on WML, around the internet, and certified financial advisors that can help you out. You can even use robo-advisors to manage balancing your investments each month for a small fee.

There’s a lot of noise out there about the world, the economy, politics, and more. Most of it is gloomy. That’s because gloom sells better. If you’re in control of your wise money life, then you have the power to tune out the noise and enjoy your best life.

We hope you have the happiest of holidays and a happy New Year.



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