Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / The Fed Rate Cut That Never Came
Transcript
- Lucas: The Federal Reserve has held interest rates exactly where they are for seven straight months now. The effective fed funds rate is still 3.64 percent, and that is the same number it was back in October of 2025. Luna: Right. And a lot of people have been waiting for a cut. Every quarter, the dot plot shifts, and the market prices in a move that just never comes. Lucas: Exactly. So I want to ask a simple question today: if inflation is still running above the Fed's two percent target, why would they cut? And more importantly, what should you do with your money if this 'higher for longer' stance is the new normal for the rest of 2026? Luna: I think the answer to why they haven't cut is in the PCE data. The latest reading from March shows the headline PCE price index at 130.3, up from 129.48 the month before. That's still a 2.5 percent annualized increase when you run the math. Lucas: And core PCE, which strips out food and energy, came in at 129.3 versus 128.9. So both are creeping higher. The April CPI print was also a bit sticky — the all urban consumers index hit 332.4, up from 330.29 in March. That's about 2.7 percent year-over-year. Luna: So the Fed's favorite inflation gauge is still above target, and the backup gauge is even higher. No wonder they're in no rush. Lucas: Meanwhile, the bond market is telling a slightly different story. The 10-year breakeven inflation rate — that's the difference between nominal Treasuries and TIPS — has fallen to 2.39 percent. That's down from 2.44 a week ago, and it's the lowest level since early 2025. Luna: So bond traders are betting that inflation will ease over the next decade, but they still expect it to average nearly two and a half percent. That is not the same as the Fed's two percent target. Lucas: Right. And here's the tension: the breakeven is falling, which suggests inflation expectations are cooling, but actual inflation data is still running hot. That disconnect is why the Fed can't just cut rates preemptively. They need to see the hard data follow the expectations. Luna: So for someone listening who has been parking cash in a high-yield savings account earning four percent, thinking 'I'll wait for the rate cut and then lock in bonds' — that strategy may be costing them. Lucas: It absolutely is. Because if the Fed doesn't cut this year — and I think that's increasingly likely — those savings account rates are going to drift lower as banks adjust their own funding costs. The interest on reserve balances is still at 3.65 percent, so the floor is there, but some online banks have already started trimming. Luna: What's the alternative? I mean, if you need the money in the next year or two, you don't want to lock it up in long-term bonds and watch prices fall if yields spike. Lucas: You're right, you don't. But there are intermediate options. One is a Treasury ladder — buy six-month, one-year, and two-year Treasuries. You get a yield that's still around four and a half percent for the two-year, and you have maturities rolling over regularly. Luna: That's a good call. And I'd add I bonds. The current composite rate for I bonds issued through April 2026 is about 3.11 percent for the first six months, but the fixed rate component is still 1.3 percent. That fixed rate is yours for the life of the bond, regardless of what happens to inflation later. Lucas: Exactly. So if you buy ten thousand dollars in I bonds today, you lock in a real return above inflation of 1.3 percent for thirty years. That is a concrete hedge against the scenario we're describing — where inflation stays above two percent but the Fed doesn't hike, it doesn't cut, it just sits. Luna: And I bonds are also tax-deferred for federal, and exempt from state tax. That's a nice bonus for people in high-tax states. Lucas: Let's talk about the equity side for a minute. The S&P 500 is at 7,446 as of this morning, up half a percent over the last five days. The Dow is over 50,000. Stocks have generally shrugged off the 'no cut' narrative because corporate earnings have been resilient. Luna: But if inflation stays sticky, and the Fed stays on hold, at some point the real cost of capital starts to bite. Companies with high debt loads will feel it. Small caps especially — the Russell 2000 is at 2,843, up almost two percent in five days, but that could flip fast. Lucas: Exactly. The Russell has a lot of unprofitable or highly leveraged companies. If rates don't come down, their interest expense eats into margins. So for investors, that suggests being selective. Favor companies with strong balance sheets and pricing power — the kind that can pass through higher costs. Luna: That's the playbook for this environment. I think the big mistake people make is assuming that because inflation is falling from its peak, the Fed will quickly normalize rates. That's not what we're seeing. Lucas: No, and the data from the last six months confirms it. The fed funds rate hasn't budged. The balance sheet runoff continues. The Fed is effectively saying: 'We are comfortable here. We don't need to do more, but we also don't need to undo what we've done.' Luna: So the message for listeners is: stop waiting for the cavalry. The rate cut may not arrive this year. Adjust your portfolio for a world where 3.6 percent is the new neutral. Lucas: I think that's exactly right. And the adjustment doesn't have to be dramatic. A small shift — maybe five to ten percent of your fixed income allocation into I bonds or TIPS, and a ladder for the rest — can make a meaningful difference in real purchasing power over the next twelve months. Luna: And if you're holding cash, don't let it sit in a checking account earning nothing. Even a money market fund paying three and a half percent is better than zero. But check the yield trend — some are starting to drift lower. Lucas: One last thing: the 10-year breakeven falling to 2.39 is actually a signal that the bond market is starting to believe the Fed's narrative. If that keeps dropping toward two percent, then the case for rate cuts builds. But we're not there yet. Luna: And until we are, the smart money is on being prepared, not on predicting the pivot. Lucas: That's a good place to leave it. Next time, we'll look at how this 'higher for longer' environment is reshaping the housing market in unexpected ways. Spoiler: it's not just about mortgage rates. Luna: Looking forward to it. Until then, keep your purchasing power top of mind.