Americans are one step closer to the Federal Reserve’s historic shake-up on May 15 — but millions of retirees aren’t ready for what’s coming

Kevin Warsh came one step closer to becoming the next chair of the Federal Reserve on Wednesday after the Republican-majority Senate Banking Committee rubber-stamped his nomination, which was put forward by President Trump.

The former Fed governor, presidential economic advisor and Morgan Stanley executive has signalled his desire for “regime change” should he take over as Fed chair (1) — namely, managing inflation and employment while shrinking the Fed’s balance sheet along with its “footprint in financial markets (2).”

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Many also expect that he could move to cut interest rates (the first Fed rate cut since December) if he takes over when current chair Jerome Powell’s term ends on May 15.

That latter expectation has raised concerns, however, given that Warsh appears to be a hawk who turned into a dove, once advocating for higher interest rates but now championing lower ones in a policy shift that more aligns with the wishes of the same president who attacked Powell multiple times for not lowering rates.

Though he insists that he’ll be “an independent actor if confirmed,” Warsh’s shift on interest rates and his refusal to acknowledge that Trump lost the 2020 election to Joe Biden earned him the moniker of Trump “sock puppet” from Democrat Senator Elizabeth Warren (3).

And while a Fed shake-up concerns all Americans, one cohort in particular could see their financial fortunes shift dramatically: retirees.

How Fed changes could impact retirees

While Federal Reserve interest rate cuts can help lower borrowing costs, stimulate business activity and placate a president desperate to boost his poll numbers, retirees counting on income from investments aren’t as bullish.

In January, 64% of retirees surveyed by Clever Real Estate said that the U.S. “faces a retirement crisis,” with 48% reporting that they can’t “financially sustain their current quality of life for the rest of their lives.” Almost a quarter of retirees said that they can’t sustain it for another year (4).

In a separate survey by retirement expert John Stevenson, 58% of retirees polled said “lower interest rates are detrimental to people who have saved responsibly” while 45% “fear inflation will outpace their income if rates fall and yields decline (5).”

An interest rate cut paired with the current 3.26% inflation (6) and the skyrocketing costs of energy and gasoline — as well as food, medical expenses and housing that remain up year-over-year (7) — would likely erode purchasing power for many retirees, worsen the affordability crisis and, broadly, prove concerns about stagflation correct.

Still, J. Sebastián Leguizamón, the director of Western Kentucky University’s Center of Applied Economics, told AARP that the effects of a rate cut on retirees is “mixed and very portfolio-specific” and that “it’s better to think in terms of trade-offs that depend on debt levels and how a retiree’s assets are allocated (8).”

For example, they note that while those with money in CDs, savings or money-market funds will more likely see declining yields with a rate cut, those paying down mortgages, lines of credit or loans — or with a stock-heavy portfolio — could get a boost.

The question of Warsh and his ability to maintain Fed independence also looms large for retirees, especially those with little savings. History shows that world leaders meddling in the independence of their nation’s central bank often results in soaring inflation and even currency collapse (9). In the U.S., for example, after Trump attacked Powell publicly last April, the value of the U.S. dollar, S&P 500, Dow Jones Industrial Average and Nasdaq all dropped (10).

Read More: Almost 50 with no retirement savings? Here’s why you shouldn’t panic

How retirees can help protect their pocketbooks and portfolios

For retirees worried about the uncertainty ahead, it’s a good idea to consider adjusting your personal budget to increase savings while also taking advantage of as many income streams as possible. A rate cut could also provide an opportunity to refinance or consolidate higher-interest debts (11).

Other recommendations include securing higher interest rates for some investments before any potential rate cut (12), and even considering a laddered portfolio of bonds that can weather future headwinds (13). High-yield bonds, in particular, can specifically protect against lowered interest rates and generate better returns, albeit with more risk attached (14).

The Kentucky-based Dupree Financial Group specifically suggests that retirees concentrate on “common sense investments in recognizable companies” and “dividend-focused strategies,” including “favoring income-producing assets over growth speculation (15).”

And, of course, keeping an emergency fund in cash or liquid assets is always advised as a pivotal line of defense in tough financial times.

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.

Forbes (1),(13); The New York Times (2); The Washington Post (3); Clever Real Estate (4); John Stevenson (5); U.S. Joint Economic Committee (6); U.S. Bureau of Labor Statistics (7); AARP (8); Capital Group (9); BBC (10); Equifax (11),(14); Gainbridge (12); Dupree Financial Group (15)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.