How the Fed Funds Rate Impacts the Wealthfront Cash Account | Hacker News Reader

How the Fed Funds Rate Impacts the Wealthfront Cash Account

blog.wealthfront.com

48 pointsjbredeche55 comments

That's an awful lot of explaining for a pretty simple concept. Fed funds rate is a benchmark interest rate that Wealthfront, like many products, is tied to.

Rate goes down, and your interest payment goes down.

I suspect this has to do with fact that there has never been a rate decrease in the lifetime of the product:

> Wealthfront Inc. is an automated investment service firm based in Redwood City, California,[2][3][4][5] founded by Andy Rachleff and Dan Carroll in 2008

https://en.wikipedia.org/wiki/Wealthfront

The decrease came only as a surprise to those who weren't paying attention.

The rate is in all likelihood headed to zero and below, just like so many other industrialized economies have already done.

If that comes as a surprise then once again, you haven't been paying attention.

There are a lot of people who are logical, intelligent, earn money and understand neither numbers or finance. I have some sympathy for the financial companies trying to explain what is going on; the system is only simple to those that understand it.

Indeed, word on The Street leading up to the announcement was 0.25 rate cute was most likely followed by a small likelihood of 0.50 cut. No surprise.

I disagree, however, that rates are going to zero in the States. ZIRP/NIRP are going very badly in EU and JP and The Fed does not want to replicate that outcome. What's more likely is a long-term interest rate peg before cutting short-term rates that low.

PSA: You can track market sentiment with regards to rate cuts here: https://www.cmegroup.com/trading/interest-rates/countdown-to... (CME FedWatch Tool)

For the average person, the fed funds rate is a complicated thing that requires background about how money moves between financial institutions that most people simply don't have. The HN crowd is going to be fairly educated, but for the average person, explanations of these types of concepts are valuable.

That said, it's just fundamentally dishonest when they say this came as a surprise. Everyone in the financial industry expected it and the market has been pricing it in for quite a while. They clearly know this is going to be read by people who are of below average financial literacy and are blatantly trying to deceive them.

Frankly, I don't trust anything Wealthfront says about this product. Try invoking arbitration opt-out as per your right in 18-A of the Wealthfront ToS: turns out they don't actually support opt out, and will gladly cancel your account if you insist on having it. Makes you wonder what else in their contract they won't adhere to.

They say multiple times that this decrease was unexpected but it seemed to be pretty well telegraphed based on my read of the situation.

Is this article for customers that don’t know what interest rates are so they are not upset about a lower rate?

This article is advertising for their product, nothing more.

"The vast majority of our competitors will likely lower their rates even more than 0.25%" is silly FUD

Personal Capital & Betterment are lowering their rates on their high yield accounts by the same 0.25%

Sofi and a bunch of other high yield checking/savings accounts are doing the same

Why are people upvoting this? It's a thinly veiled ad for Wealthfront with minimal content. How is anyone surprised that savings account interest rates are tied to Fed rates?

How is there minimal content? It's a simple explanation of how how Fed rates impact interest rates. People have to learn about these things somewhere; I learned about it from this article.

Slightly off topic: does anyone know if Wealthfront manages HSAs? I really have liked their stuff and would like to "rollover" (not sure if that's the proper term) an old former employer HSA to them.

Doesn't appear that they do, based on Google, but I can offer a suggestion, Fidelity is the best place to keep your HSA. No fees and excellent investment options.

Thanks! Didn't know Fidelity did that. I'll see about rolling over to them for now.

It's new - They've done HSAs for employers for more than a decade but they just very recently opened them up to individuals.

I have an individual HSA with Fidelity, so I'm speaking from experience.

I have a high interest savings account with Marcus by Goldman Sachs. They used to pay out 2.25% but lowered to 2.15% recently. There are a few big red flags about Wealthfront for me...

1.) They claim to offer FDIC-insured up to $1 million, yet on the official FDIC website, and as far as I understand they only insure up to $250,000 per account. How is $1M possible?

2.) With the 10 year and 2 year US treasury yields plumitting well below 2% today, I don't understand how wealthfront can continue to offer 2.57% without taking a loss.

The way they and their competitor, betterment, work is that they distribute your funds to a real bank or up to 4 of them for that 1m FDIC insurance.

The real risk I see using them is the money transition period from your current bank to their partner banks while moving the funds. It's why I opted for a traditional bank with high yield savings but not as high as theirs.

I'd be interested to know how they explain FDIC insurance during the transitional period. I could be wrong and they have that covered, too.

It's not FDIC covered during the transitional period, and they don't say how long the transitional period is either.

What is the transitional period? Is it that when you make a deposit, you're actually transferring to Wealthfront, which distributes it to the real bank accounts they keep your money in?

Yes, that's my understanding. But there's no guarantee that Wealthfront transfers to the FDIC-insured bank accounts as soon as possible. For all we know, Wealthfront could hold on to it for weeks.

They don't have any advisory fee on the cash account. That is only for brokerage accounts.

1. Here’s a helpful FAQ from Wealthfront that might explain it: https://support.wealthfront.com/hc/en-us/articles/3600224058...

Tl;dr: they distribute your money to multiple FDIC-insured banks.

2. The federal funds rate and LIBOR both remain at 2.25%, give or take daily fluctuations. Furthermore, if you look a little further at Wealthfront, you might notice that they are offering margin loans at 4.75% - 6%, secured by a diversified investment portfolio at 3:1, so it’s entirely conceivable that they could be loaning the same money out again at a profit.

Wealthfront is not going to be loaning out money from their sweeps product to margin borrowing. Instead they will have a larger partner bank which offers then margin loans, they then mark up the interest rate and pass it on.

They do not have the accreditation to be issuing loans based on deposites. Thus why their banking product is a sweeps account.

I fully realize that. However, it's entirely possible that they are using the same banking partners to issue the margin loans and handle their deposit accounts. Even if they are not, the larger point is that there's a nice spread between what they are paying on the savings account and what they are making in margin interest -- and the margin account is extremely well-collateralized with liquid assets deposited in the borrower's Wealthfront account. The GP poster intimated that WF had to be losing money on their savings rate, and I'm just pointing out that it's entirely sustainable.

They can offer $1 million dollars in in insurance because it's an FDIC Sweep account - the funds may be stored at multiple banks behind the scenes. Fidelity, SoFi, and others offer FDIC sweeps as well.

The dopes that are saving in USD will pay a huge inflation tax. Same for the bond holders (aka bag holders) too.

Inflation is extremely low by historical standards:

http://www.smashcompany.com/business/nflation-in-the-usa-has...

Inflation measured across the whole US is not a useful metric when the gaps in economic potential are so wide. Most of the US is not experiencing economic growth, and is probably actually experiencing deflation due to decreasing economic potential and population. I don’t see the purpose of lumping in data from those places with the urban areas that most people want to live in and are able to find work and economic growth.

The inflation in rent and real estate is very real because more and more people want to (and need to) live in a smaller and smaller area, which also causes everything else to increase.

You can even see it in the stock market. Fewer and fewer companies are capturing most of the gains, and their equity values show it.

The implication here being that people in non-urban areas of the country shouldn't experience any reasonable amount of growth.

I didn’t imply that. I wrote that trying to measure inflation with one metric in what is essentially two different economies (or countries if you will) is useless.

People move around the US, so their debt or savings is not market specific. Amazon also charges the same amount for a PlayStation or whatever across the US. So, saying it’s useless seems misleading.

People aren't impacted by the cost of Playstations, they're impacted by costs of shelter (housing), education (future income potential), and healthcare.

All the data shows an increasing share of the economic growth concentrating into fewer hands. If you are young, and you want to lay the most secure foundations of your family's future, what are your best options? No one with options is advised to move to West Virginia or Oklahoma or upstate NY if they want to achieve security for their family.

Moving to a low cost area like West Virginia can be a great way for a specific person to improve their economic situation. A video game streamer for example get's paid in USD, but has minimal benefits from living in say Manhattan.

They can still invest in the same stock market, it's only a subset of things that get more or less expensive in various markets. Further, those delta's are fairly consistent over time at least compared with exponential growth from inflation.

But it won't be a great way for them to set their children up. Their schooling, their circle of friends, etc are very material for their future:

https://www.abcactionnews.com/news/national/map-income-race-...

That is why so many people are willing to forego the low cost of living areas and gamble on making it in high cost of living areas even though they may have a lower quality of life.

That map is answering a different question.

> Which neighborhoods in America offer children the best chance to rise out of poverty?

A couple that could live in either location but is saving 2+k per month is very much not in poverty. A couple that can afford to send their kid through med school because they have well over a million extra in assets is hardly poor.

> Most of the US is not experiencing economic growth, and is probably actually experiencing deflation due to decreasing economic potential and population.

Literally every single US state is experiencing growth [0].

> I don’t see the purpose of lumping in data from those places with the urban areas that most people want to live in and are able to find work and economic growth.

Most people aren't software engineers and for those that are, there are still plenty of job opportunities outside the bay area. Pretty much every fortune 500 company needs some software engineers and they are spread throughout the US.

> The inflation in rent and real estate is very real because more and more people want to (and need to) live in a smaller and smaller area, which also causes everything else to increase.

No, it't not [1]. You can sample this yourself by opening up zillow and putting a 250,000 dollar limit and you can find housing pretty much everywhere. Again, most people don't live in the bay area.

[0]: https://en.wikipedia.org/wiki/List_of_U.S._states_and_territ...

[1]: https://fred.stlouisfed.org/series/CUUR0000SEHA

Cities and surrounding areas in each state may be experiencing growth, but not the whole state. And even between cities, it's a very uneven balance. It's a different game in the tier 1 cities/suburbs versus elsewhere, and the issue isn't that there are richer areas and poorer areas, the issue is that the gap between them is getting larger.

https://www.redfin.com/blog/data-center/

Please define your "tier 1 cities/suburbs" and why they are "tier 1".

Where many rich people compete with many other rich people to live, evidenced by higher than average home prices and higher than average increases in home prices. In the redfin link, the difference between national median sale price and cities such as SF/NYC/LA/BOS/DEN/etc is huge, and growing!

There is clearly a migration of money and human resources from many areas into fewer regions of the nation. Cities like Indianpolis/Minneapolis/Nashville/etc are also growing, but I bet the areas around them are not, because people are migrating to the urban areas.

> Where many rich people compete with many other rich people to live, evidenced by higher than average home prices and higher than average increases in home prices.

That's just a proxy for good wages but you can find good wages in tons of other cities. I earn a 10% lower salary in chicago then I did in the bay area or seattle but I make up for that many times over by being able to afford a 5000 square foot house in chicago in one of the best public school districts compared to a 1000 square foot house in the bay area in a mediocre school district.

The difference: Chicago and most other cities geography allow them to sprawl and there is still plenty of undeveloped land keeping land prices low whereas the bay area basically has 2 5 mile wide strips of land for single family homes and there is none left to develop which is why your housing prices are exploding.

So while you consider tier 1 cities to be ones in which everyone lives in tiny homes spending all of their money on home mortgage interest rates because land is scarce, I consider tier 1 cities to be ones which pay well and also have affordable housing allowing me to invest money I would be spending on mortgage interest rates in your tier 1 cities.

What's the alternative?

Stash it under the mattress so you don't make any gains that can be taxed?

Save it in gold so you can be taxed as capital gains (unless you suffer a capital loss)?

Save in stocks & shares so you can be taxed on your capital gains and dividends? Good luck if you need to fix your boiler in the middle of a down turn.

Bitcoin? That has proven itself to be a rock stable currency and you still won't avoid losing your shirt / capital gains tax.

Technically you would've 'lost your shirt' in bitcoin if you had bought it during only 2 of the last 520+ months...

But those two months happen to be the months where everyone was buying. That's what made the price rise so dramatically.

> happen to be the months where everyone was buying.

So, in many ways the way any market distortion happens. If everybody else is buying, sell. If everybody else is selling, buy.

> If everybody else is buying, sell. If everybody else is selling, buy.

As always, the market can remain irrational longer than you can remain solvent.

I'm pretty sure bitcoin is younger than 43 years

It is in Internet Dog (Cat) Years. Or, if each block is like a ring on a tree (per 10 min instead of 1 year), it's a little older than its inception date.

Bitcoin has only existed for 552 weeks, beginning on 2009-01-03.

It depends when you crystalize the loss. If you need the cash and the market happens to be down this week, that's a problem. Don't forget this is replacing the savings and bonds that "dolts" use, this is supposed to be your short term easy to access money.

There are no safe alternatives (by central bank design). Keep a reasonable amount in cash, stagger the rest by risk (bonds, equities, real estate, etc).

We've already established that bonds and savings were for "dolts", both of which are short to medium term investments. By all means invest in equities and property for long term investments. If its money you'll need in the short term, these options don't seem quite so good.

Please don't post like this to HN. If you know more, share some of what you know so others can learn. Calling your inferiors "dopes" adds no information and breaks the site rule against name-calling.

https://news.ycombinator.com/newsguidelines.html

I didn't mean it as "you're a dope", therefore "you are inferior to me". I meant it as "you are a dope if you believe everything the government tells you, especially in regard to inflation figures". Subtle difference.

I'm not sure I get the difference, but the more important point is that your comment didn't add much information. If you know more about something, you're in a position to teach the rest of us about it, and that would make a much better HN post. If you don't have time or don't want to, that's cool, but in that case it might be better not to post anything.

Reply on news.ycombinator.com