What This Week’s Fed Rate Decision and Tax Season Means for Investors - WSJ's Take On the Week - WSJ Podcasts (2024)

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Dion Rabouin: What's good everybody? I'm Dion Rabouin for the Wall Street Journal and this is WSJ's Take On the week, the show where we break down the most important things to watch in business and financial news. We cut through the noise to get you ready for what matters. This week's Federal Reserve policy meeting will be the biggest event on the calendar for all asset classes. Expectations for interest rate cuts this year have been the major catalyst for higher stock prices. Lower rates make it easier and cheaper for companies to grow, which usually makes them more valuable to investors. We'll be talking to the former president of the St. Louis Federal Reserve about what he's expecting to hear from his former colleagues on Wednesday, and what might surprise him.This week is also the beginning of tax season. Americans can start filing their individual US tax returns beginning Monday, January 29th, and anyone who invests, whether that's in a savings account, the stock market or a home will need to get ready. The new year is the time lots of Wall Street money managers look forward to because they can use their losses from the previous year to lower their tax bill. But for many new investors, tax time can be painful because it's when they learn for the first time that Uncle Sam will be taking a chunk of their returns. We've got Wall Street Journal reporter Laura Saunders with us to talk about what investors need to know to get Is dotted and Ts crossed for tax time. And Laura will explain how some investors can pay a 0% tax rate on their capital gains.But first, let's get you ready for Fed Week. Most of the big banks on Wall Street predicted the Fed was going to cut interest rates in 2023, and they were wrong. The Fed raised rates to the highest level in 22 years in July and held them there through December. This year, Wall Street is again calling for the Fed to cut rates. Big banks like Morgan Stanley and Deutsche Bank see the US central bank lowering interest rates multiple times. But rather than relying on folks watching from outside, I wanted to talk to someone who's been in the room where it happens. So today I'm joined by former St. Louis Fed President James Bullard. Bullard is now the Dean of the Mitchell E. Daniels School of Business at Purdue University, but right before that, he served on the Fed's rate setting committee for 15 years. He was in the boardroom with Chair Jerome Powell and the Fed deciding monetary policy as recently as July. So I can't think of anyone better positioned to talk about this week's big meeting.Jim, thank you so much for being with us. Given everything we've got going on in the economy right now, I mean it feels like there's a lot happening that folks are worried about. What's your expectation for this year?

James Bullard: Well, my definition of a soft landing would be that the economy grows at 2% and inflation comes down to 2% or much closer to 2% as we go through 2024.

Dion Rabouin: Sorry, Jim, can I just ask you there, are you expecting inflation to get down to 2% this year or no?

James Bullard: I think we have a shot at it. If you continue to get the disinflation that we've had, you might be at 2% inflation. Even on a 12-month core inflation basis, you could get to 2% by the third quarter of this year. So this brings up another tricky issue for the committee is that they don't want to get into the second half of 2024, inflation's already at 2% and you still haven't moved the policy rate. That would be too late. What are you doing at 5 and 3 8ths on the policy rate if inflation's all the way back to 2%? So you kind of have to move in tandem before you get to the 2%.

Dion Rabouin: Can I ask you, Jim, based on what you've seen from the Fed, whether it's their communications, the minutes, different speeches, do you feel like there is an unwillingness to make those cuts?

James Bullard: No, I wouldn't say that. I would just say that they want to calibrate this carefully because if you wait too long and inflation, it really is at 2% on most of the measures that you care about. And I would say something between 2 and 2.5% because at that point you're pretty close to 2% and there's a lot of noise in the data, so you can't really get down to tenths of a percent on that kind of calculation. So if you get down to very low numbers and you still haven't moved the policy rate, then you might have to move very aggressively, the 50 basis points at a meeting or something.

Dion Rabouin: Do you have any worries about the way monetary policy is being administered right now?

James Bullard: No. I mean, we're talking at a time when this looks very successful. One question I have been asked a lot is whether I think the committee was too late in responding to inflation pressures in 2021. That's been a criticism that has been leveled and has some truth in it, but the pandemic was certainly a very special event, let's put it that way.

Dion Rabouin: So if you had it to do again, knowing what you know now, what would you do differently?

James Bullard: We didn't need to be feeding into the boom in housing that was actually caused by the pandemic. The whole idea in the spring of 2020 was that this would be a replay of 2007 to 2009 and residential housing would really take a big hit, but that didn't really happen. The pandemic actually went the other way. The demand for square footage went up. People wanted to move farther away, out of the big city, and because of that, the mortgage backed purchases were actually feeding into a housing bubble instead of solving a problem. So I think we could have stopped that in the third quarter of 2021. That would've helped us a little bit, I think could have allowed runoff or just stopped the purchases at that point. That would've been helpful. We could have raised rates somewhat sooner than we did and by more than we did. So that would've helped us and we wouldn't have had to get into the 75 basis point moves. Having said all that, I do think that the very aggressive policy of 2022 is going to be vindicated here.

Dion Rabouin: I want to ask you, as a former Fed president who's now in academia, you've got a unique perspective. What's something you're seeing in the world that most aren't?

James Bullard: I think there's still a lot of risk out there, and we get a little ignorant to stories about foreign policy, about wars that are far away from our borders. But there's still a lot of risk, probably higher geopolitical risks than there's been in many years, and it's tempting to push that to the side and forget about it, but I think that remains a major concern for the global economy.

Dion Rabouin: And then with that, what's something that you would want to stress at this week's meeting if you were still part of the FOMC?

James Bullard: Yeah, I think the committee has to have a strategy now about how they're going to approach 2024 and the looming possibility of cutting the policy rate. They want to cut that rate in a organized fashion. I think you'd want to get down to a four handle on the policy rate.

Dion Rabouin: It's up at above 5% now, so down to around 4%. So that'd be about four rate cuts, right?

James Bullard: A 4 handle I said, somewhere in the 4% range.

Dion Rabouin: Somewhere in the four. I gotcha.

James Bullard: Different members might disagree about where you have to get exactly, but it's actually a little bit better to start sooner, go kind of slow and then allow the data to trickle in and confirm that you're on the right path for policy. And then if it doesn't confirm, I think you could say, "Eh, that data's not really confirming our story. We're going to pause for a meeting." And I think that would be a good way to approach this. So what you don't want is to be out of position once you get to the second half of 2024. And if the landing is as soft as we're talking about here, there's a risk that the committee would be way too high of a policy rate at some point in the future, and then they would have to lower the policy rate rather dramatically, which I think would be inappropriate for the current situation.So a nice gradual decline that allows them to make data dependent decisions as they go through. I think that's what they have to set up for 2024, and then also acknowledge the many other risks that are out there and that maybe we'll get some big shock that we would have to react to.

Dion Rabouin: That was James Bullard, Dean of Purdue's Mitchell School of Business, and the former president and CEO of the Federal Reserve Bank of St. Louis. Up next, I'm joined by WSJ reporter, Laura Saunders, who's going to explain how investors can get a 0% tax rate on their investment income and how to avoid paying extra taxes on your capital gains. We'll be right back.Okay. So funny story. When I first started working at The Journal a couple years ago, I kept hearing people talk about the Tax Dog. The markets team worked on the fifth floor, and I would hear colleagues say, "This is the Tax Dog's world, and we were just living in it." That's an actual quote. It took a couple of months before I realized that the Tax Dog was Laura Saunders, WSJ's tax reporter. She's been with The Journal since 2009, and before that she spent nearly 20 years at Fortune Magazine. They call Laura the Tax Dog because she's known for getting to the bottom of just about any and everything tax related. Loopholes, deductions, withholdings and exclusions. And if she doesn't have an answer, she will do the reporting to find one for you. So with the IRS opening up tax filing season for Americans on Monday, there was no better time to bring on Laura Saunders. Laura, looking ahead to the beginning of tax season, what is the most important thing about taxes for investors to know that you think most don't know?

Laura Saunders: I think investors often don't understand how much taxes really, really matter. They're not a little thing. They're a great big thing, and people on Wall Street know this, but not everybody else knows it. And I can explain why. The basic measure when you're investing is what is your rate of return? Is it 5%, 2%, 10%? And that's what you're looking at. How have I done? Well, it depends on your rate of return. And taxes are a subtraction from rate of return. You have to pay tax, and so it can take your rate of return down, and it's often the largest single subtraction from rate of return. So it's very good to pay attention to your taxes.

Dion Rabouin: You and I have talked about that 0% tax rate on investment income that certain investors can get. Break that down for me.

Laura Saunders: Yes, that's really important. There is a 0% tax rate on capital gains and certain dividends. Instead of paying more, you pay zero, nothing. And it's for people at the bottom end of the income ladder, but not that bottom, not that low. For 2023, the 0 bracket ends at about $90,000 of taxable income, and it's even higher for 2024. Now, let's talk about that just a little bit. What is $90,000 of taxable income? That's for a couple, by the way. It's probably about half that for a single person. $90,000 of taxable incomes is after all your deductions, after your itemized deductions or your standard deduction. If you take that, it's about $30,000. So actually your income could be a whole lot higher, maybe 120,000 or more, and you could have that much of capital gains and dividend income, just have a 0 rate.There is one trick, which is that if you have a mix of incomes, let's say you have salary income or social security income, those things are taxed first at their regular rates, and then your investment income stacks on top of that. So let's say, make it really simple. Let's say you have $60,000 of wages and you have $40,000 of capital gains and investments. Well, that would take you up to 100,000. So only about $30,000 of those capital gains and dividends would be subject to the 0% tax rate. All your ordinary income goes below it and it stacks on top so that can knock people out. We wish it was the first income, but it's the last income you get.

Dion Rabouin: So in essence, it's like if I make $60,000 for my salary and then I get $40,000 of gains, I made that much and then sold $40,000 worth of the gains I made in the stock market. The first $30,000 of that is at a 0% tax rate.

Laura Saunders: And then it would click into about a 15% rate.

Dion Rabouin: For the remaining 10,000?

Laura Saunders: For the remainder. So you get as much as you get, but still, it's not like you always get it from the first dollar.

Dion Rabouin: You've also written about a surtax or additional tax that some Americans can pay on investments. How does that work and how can folks avoid that?

Laura Saunders: That's very important to know about. It makes people really unhappy. So in 2013, Congress added a 3.8% investment surtax for single people making over $200,000 of adjusted gross income, and for couples over 250. The 250 mark, let's say for a couple, that will be subject to the 3.8% tax. So you put in all your social security, all your IRA distributions, which are not subject to it, but they can push it up. And then you put your investment income on top of that, and let's say all your IRA distributions, all your social security, all this, all that, your wages would all go into a pot and maybe let's say that's $240,000 for a couple. Then let's just say you have $15,000 of interest, dividends, capital gains, things like that. Well then in that case, what did we say? 15,000. Then 5,000 of that, the amount over 250 would be subject to the 3.8% tax, and that catches people by surprise. This structuring is a good thing to keep in mind.

Dion Rabouin: That was WSJ tax reporter, Laura Saunders. Up next I'll explain why Apple's new virtual and augmented reality headset could play a major role in determining America's largest company and where the stock market goes next.One more thing before we get out of here. Let's talk about Apple. On Friday, Apple is expected to release its Vision Pro, the so-called mixed reality headset that carries a $3,500 price tag. The Vision Pro is coming to market at a very interesting time for Apple. Microsoft is nipping at its heels. Since November, 2021, the iPhone maker has been the largest company in the US by market value, but the title of America's largest company has gotten a lot more competitive lately, thanks to the AI powered rally that briefly helped Microsoft grab the top spot earlier this month. The two companies have taken turns at number one for much of January. Artificial intelligence was the big theme behind much of the stock market's momentum in 2023. Could virtual reality be what gets investors bullish in 2024? Apple is certainly hoping so. The company notably sat out of the AI race last year, and that may have cost shareholders.Sure, Apple's stock rose by almost 50%, but it was the worst performer of the Magnificent 7 stocks that carried the market. Tesla, Nvidia, Meta, Alphabet, Amazon and Microsoft all handily outperformed it. We reached out to Apple and the company did not respond to our request for comment. Because of Apple's size and its performance over the years, the company plays a major role in how well the overall US stock market performs. The Magnificent 7 companies make up more than 30% of the S&P 500, and Apple by itself accounts for around 7%. To give you an idea of how big that is, Apple's market cap is larger than 197 companies in the S&P 500 combined. So whether customers want to dish out $3,500 for Apple's new headset could play a big role in where the market goes next and which company is leading it. Apple is expected to report earnings this week along with Alphabet and Meta, but what may matter most to investors is the outlook for Apple's latest big idea. So this week I'll be looking for news about the Vision Pro.All right, that's everything you need to know to Take On the Week for Sunday, January 28th. This show is produced by Jess Jupiter, Jonathan Sanders is our booking producer, Michael LaValle and Jessica Fenton are our sound designers. Michael also wrote our theme music. Melony Roy is our supervising producer, Aisha Al-Muslim is our development producer, Scott Saloway and Chris Zinsli are the deputy editors, and Philana Patterson is the head of news audio for the Wall Street Journal. For even more, head to wsj.com. I'm Dion Rabouin. Stay smart.