At long last, after four years, the Federal Reserve has finally cut the Fed Funds rate by 50 basis points, bringing the target range down to 4.75% – 5%.
Expectations suggest we’ll see another 50 basis points cut in 2024, with a total reduction of 100 basis points by the end of 2025. Fed Chair Powell remains optimistic, describing the economy as “very solid” and seeing no elevated risk of a downturn.
By 2025, the Fed Funds target rate could drop to 3.25% – 3.5%. With such clear visibility for rate cuts, the outlook for consumers and investors looks positive. As long as the Fed isn’t behind the curve, as it was in September 2007 when it cut, we could see continued economic growth and rising wealth for most of us.
What’s not to love about that?
The Fed Cutting Rates When Stocks Are at All-Time Highs
How lucky are we that the Fed is cutting rates while the S&P 500 is at an all-time high? Few of us would have believed stocks would perform so well after the aggressive rate hikes of 2022.
Now, with rates coming down through 2025, it’s like having your okonomiyaki and eating it too. Lower borrowing costs will enable companies to invest more, while lower interest expenses boost profitability. As businesses grow profits, they might also hire more employees.
Corporate earnings now have a tailwind, which is good for share prices. Although the S&P 500 is expensive based on historical valuations, if earnings can surprise on the upside, the S&P 500 can continue to perform.
It almost sounds too good to be true—which is why it’s worth keeping a watchful eye. Corrections will happen again.
According to J.P. Morgan, “over the past 40 years, the Fed has cut rates 12 times when the S&P 500 was within 1% of its all-time high. In all 12 cases, the market was higher a year later, with an average return of 15%.”
The Fed Cutting Rates When Real Estate Is at All-Time Highs
Mortgage rates jumping from sub-3% to over 7% should have knocked the national median home price down by 10% – 20%. However, due to the “lock-in” effect, where most existing homeowners had already refinanced, inventory stayed low. As a result, home prices stayed steady during the hikes. Plus, roughly 40% of homeowners don’t have a mortgage, so higher rates didn’t affect them.
Now, with mortgage rates declining, recent buyers from 2022 and 2023 are considering refinancing. Meanwhile, longer-term homeowners might pursue cash-out refinances to tap into their home equity. What a gift—to make a significant gain on your home’s value and then use that equity to enhance your lifestyle.
Of course, more supply will hit the market as some locked-in homeowners decide to upgrade or downsize as life changes. But with lower rates, demand will likely outpace supply, placing upward pressure on home prices once again.
America already faces a structural shortage of over a million homes. With builders constructing fewer homes during the high-rate environment, real estate owners stand to benefit even more as the Fed cuts rates further.
An Economic Collapse Isn’t the Biggest Fear
Your initial fear about the Fed cutting interest rates might be that they see the economy is in worse shape than the public realizes. The Governors of the Federal Reserve can’t openly say they see significant weakness, or they risk sparking panic and accelerating or deepening a recession.
Look back to Fed Chair Ben Bernanke’s overly optimistic stance before the global financial crisis. If you listened to politicians or government officials at the time, you would have had no idea that your financial world was about to be engulfed by chaos.
However, the worst fear after a Fed rate cut isn’t upcoming economic devastation. Household and corporate balance sheets are strong, and access to credit has been more restricted since 2008.
If we do experience a recession, your investments might lose 10% to 25% in value, nothing as severe as the 2007–2009 financial crisis. Moreover, there’s comfort in knowing the Fed has already started cutting rates. If the economy does visibly weaken, these rate cuts will eventually help. Though it usually takes at least six months for the effects to kick in.
Every month without a market crash brings us closer to being “saved” by the Fed’s actions in the future thanks to their cuts today.
The Real Fear: Making Too Much Money
Instead of fearing job loss or significant declines in your investments now that the Fed has started cutting rates, you should fear making too much money!
Absurd, you say! How can making too much money be a bad thing? More money sounds great! Being richer will relieve financial stress, allow you to better take care of your family, and help you retire earlier or at least more comfortably.
Maybe. Maybe not, if you can’t control your desire for making more money than you need.
The problem with making more money is that it often awakens a money addiction you didn’t realize you had. Once you get a taste of earning more from your investments or your job, you may start sacrificing the most important things in life for even more.
Greed is one of the seven deadly sins, and we’ve all experienced it! You can see it in real time as wealthy people continue to work at jobs they don’t like due to the desire for more money.
Overworking When Times Are Good
For most people, when times are good, they work more. Everyone gets fired up to put in longer hours at the office because the Return on Effort increases. There are only certain windows of opportunity to make maximum money, so naturally, you push harder when times are good.
More opportunities arise when asset prices are rising, partly because people naively believe they will continue to rise at the same trajectory. With more opportunities come more work and more stressful decisions to make.
If you’re still early in your career or far from financial independence, it makes sense to take full advantage of these good times. They don’t last forever.
Unfortunately, intense competition can take a huge toll on your physical and mental health.
The Pursuit For More Money Can Hurt Your Health
Due to your desire for more money, you may start developing chronic back pain, neck stiffness, or elbow pain. You might even start grinding your molars at night due to the stress you’re enduring. Over time, you may forget what it feels like to be healthy, as you begin to accept chronic pain as part of your daily life. But it shouldn’t be.
I experienced all these types of chronic pain while working in finance. At one point, I even paid $750 for a dentist to drill indentations in my back molars so I could close my jaw more comfortably and find some relief!
As you take on more work, your mental health may suffer too, as you constantly strive to keep up with or surpass your peers who seem to always be making more. Every month or quarter, there’s a new quota to fill. The stress of always having to be a top performer may start to grind you down.
And it’s not just about making more money—you also want to gain more status in society. Updating your LinkedIn profile with that next job title feels like the ultimate reward. Because if you’re not the Vice President of so and so company, what are you, really?
Your Spouse And Children Won’t See You Anymore
Imagine commuting 45 minutes to work, only to sit in front of a laptop for 10 hours a day. You might even have to jump into video meetings from the office, and then commute 45 minutes back. Madness!
But you have to do it because the Fed is cutting rates, and it’s go time! Your company’s share price is rising or your startup is full of promise, and your managers are rolling out new initiatives for you to meet. If you hit your targets, you’ll get that 10% raise and the title you’ve been chasing for so long.
With the drive to make more money, being a stay-at-home parent during your kids’ early years is out of the question. Non-stop meetings mean you’ll never be able to pick them up by 4 p.m. to take them to soccer practice.
Instead of spending most weekends with your kids, you’re jetting off to yet another client meeting. You must close that deal, otherwise, you won’t get that sweet year-end bonus.
You love your kids more than anything. But when times are good, your love will be tested every hour you’re working to make more money instead of spending time with them.
And when they reach the age where all they want to do is hang out with their friends, you might regret all the time you spent chasing wealth.
The Pursuit Of Money Might Make You Lonely
Forget about never seeing your spouse and children again—your pursuit of money in a rate-cut environment might make you forsake love altogether.
Who has time for dating when there’s so much money to be made in a low-interest-rate world? And having kids? That’s out of the question—not only are they expensive, but they’ll also drain your energy.
Cultivating friendships can wait until you make that extra $100,000, $1 million, or whatever number you’re chasing—because only then, you think, will it feel like enough. But the truth is, it’s never enough until you decide it is.
As Patrick Meagher and Bob Marley once said, “Some people are so poor, all they have is money.” Be careful not to focus too much on the quest for wealth.
Find a Better Balance with Money
Sacrificing love, friendship, health, and time is rational when you have no money. The good news is that if you do make these sacrifices, you’ll eventually earn enough to make lifestyle adjustments. The problem is, even after reaching an income or net worth goal, it can be too hard to quit chasing more.
Living in New York City and San Francisco, two of the cities with some of the most driven people, I see the hustle for more every day. There are people worth tens or even hundreds of millions who work in misery because they see their peers doing even better.
For your own well-being, strive for more balance. Diversify your time to include activities for your health, friends, and family, please.
After 20 years of saving and working, remind yourself there’s no need to push as hard during good times. You’ve reached the minimum investment threshold where work becomes more optional. This gives you the freedom to focus on more meaningful pursuits.
If you live in an intense, fast-paced city, you might need to relocate to a more relaxed area to break free from the desire for money and status. As you age, I promise you’ll start questioning whether sacrificing so much for wealth was really worth it.
Fighting The Desire for Money and Status
Maybe warning people about the desire for money and status is easier for me since I burned out and have been living the FIRE lifestyle since 2012. However, it’s precisely because I took steps to quit the money chase that I’m healthier and happier than I was before.
Unfortunately, the contentment I felt for what I had did not last the entire time I’ve been gone. Since 2012, I’ve struggled repeatedly with the desire for money and status due to tax cuts, bull markets, and rejections.
Here are some examples:
I consulted for fintech startups from 2013 to 2015 because I wanted to make some supplemental retirement income and stay relevant in my mid-30s. I wasn’t sure I had enough to permanently retire in San Francisco.
During COVID, a particularly challenging time as we had a newborn and had to pull our son from preschool, I decided to write Buy This Not That. I wasn’t too keen on writing the book given my added childcare responsibilities. However, my son was rejected from six preschools, likely due to the lack of status of his parents. This rejection drove me to become a bestselling author.
In 2023, I bought a new forever home, despite having a perfectly fine one we purchased in mid-2020. I wanted to take advantage of price weakness and buy the nicest home I could afford while my kids lived with us. However, I also remember thinking it would be nice to have a nicer house than my peers. After not keeping up with the Jones for so long, once again I succumbed to comparison.
Today, I’m facing the consequences of my desire for more status—I depleted my passive income for this new house. Now, I’ve got to figure out how to make more money again. The cycle seems endless until we make a conscious effort to stop it.
Take advantage of the Fed rate cuts by making more money. But beware that when the time comes to stop, you might find it harder than you think.
Finally, there’s also the possibility of working hard, only to lose money in a declining interest rate environment. To soften that disappointment, it’s essential to cultivate interests beyond money and status. Wishing you the best as we navigate this new economic reality.
Reader Questions
What is your biggest concern now that the Federal Reserve is cutting interest rates? Do you think it’s absurd or irrational to fear making too much money during a Fed rate-cut cycle? Are you ever worried that you’re sacrificing too much time and health for money you don’t need? How did you manage to overcome the desire for more money and status?
Here’s my podcast episode on what a Fed rate cut means for real estate, stocks, and your retirement.
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