Your Financial Future
The next Federal Reserve meetings will take place Sept. 17 and 19. One of their most important decisions will be what to do about interest rates. Wall Street is hoping that they will begin to drop interest rates that were increased to deal with 40-year high inflation, which remains higher than the targeted rate of 2%.
Since their last meeting, we have had tremendous volatility in the stock market. Two weeks ago, the market experienced a huge drop in value that it has since recovered. During the two years since the Fed started raising interest rates, the stock market has gone up during a time it should have gone down. Much of this growth was driven by the Magnificent Seven stocks. It is important to remember that it is not one of the Fed’s responsibilities to help the stock market.
Let’s discuss some of things that will happen in the economy when they do start to lower interest rates. Fixed income investments such as bonds, savings accounts and certificates of deposit will go down. We are already seeing CD rates much lower than they were last year, and the only ones paying any interest are short term ones usually maturing in less than one year. If earning a better rate of interest safely is important, you might want to lock in some options now.
Bond values are greatly influenced by interest rates. As the Fed lowers general interest rates, the value of high-quality, longer-term bonds will increase above face value. This is because they will keep paying the higher interest rate at which they were issued while newly issued bonds of the same quality will be paying less. Money market interest rates will fall much quicker than bonds. That is because they only own short-term investments that will quickly reflect the new lower interest rates.
If you believe the Fed will lower interest rates anytime soon, take advantage now to keep higher interest rates as long as possible.
Some things will become more attractive as the Fed lowers rates. Mortgages are an area that will see a positive change. While rates have come down a little already, they are still significantly higher than two years ago. While lower mortgage rates are great news for home buyers, this could create some new inflation pressure which was the cause of raising rates in the first place.
Many current homeowners with a mortgage have been reluctant to sell and either buy a larger or smaller home because they are not able to move their current lower rate loan to the new property. The top reason keeping the price of houses high is a lack of inventory. Until that is solved, home prices will remain out of reach of many potential buyers.
Credit card interest rates should start to fall when the Fed does finally start to lower rates. These will still be one of the highest cost ways to borrow and should not be used for anything except short-term borrowing. The best strategy is to pay your balance in full every month and avoid interest costs all together.
Lowering interest rates can lead to a weaker U.S. dollar. This means that the cost of any imported goods could increase. This can be inflationary in itself. The Fed must walk a balancing act and not tip too far either way. It is important that only monetary policy is followed with political pressure.
I do expect the Fed to start lowering rates at some point, but they will not be in a hurry. I also expect rates to not go back to zero as we have seen since 2008, but hover between 2% and 3%. This could eliminate some possible financial bubbles such as certain overvalued stocks.