On July 31, 2024, the Federal Reserve (the Fed) chose to keep interest rates steady but hinted at potential cuts in the near future. This decision has important implications for investors, consumers, and the broader economy. Let's break down what this means and how it might affect your financial decisions.
The Fed decided to keep the federal funds rate—the interest rate at which banks lend to each other—steady at 5.25% to 5.50%. While they didn't cut rates this time, they strongly suggested that rate cuts might begin soon, possibly as early as September. The market responded positively and finished higher on the day.
Borrowing Costs: Higher rates mean loans, mortgages, and credit cards are more expensive, while lower rates make borrowing cheaper.
Savings: Higher rates can mean better returns on savings accounts and certificates of deposit (CDs).
Investments: Changes in rates can affect stock and bond markets. Markets have rallied since the Federal Reserve started to discuss lowering rates.
Overall, lower rates are considered a positive for the economy as long we see continued steady growth.
Inflation: Prices are rising more slowly, moving closer to the Fed's target of 2%. Hooray! Finally, we are seeing slowing inflation after inflation peaked at 9% in 2022.
Job Market: Job growth is slowing down, which might reduce pressure on wages and prices. Wage growth is already showing signs of slowing and workers are not quitting as much as in 2022.
Economic Growth: The economy is growing, but at a slower pace. Steady 2% growth is normal and completely okay for the long run.
Unless there is a big surprise in the economy or in geo-political events, we expect the Fed to reduce rates slowly over time. We don't expect a return to near 0% rates, but we think a slow glide down towards 3% is likely over the next 18 months.
Right now, the FedWatch tool shows a 0.25% reduction as the most probable change in September. The FedWatch website is a good bookmark to see what the market thinks about future rate moves.
Loans and Credit Cards: If the Fed cuts rates, loans and credit card interest rates might go down, making it cheaper to borrow money.
Savings Accounts: Interest rates on savings accounts might decrease. We are already seeing signs of dropping yields at some banks.
Money Market Yields: It's worth noting that money market yields, which have been attractive recently, may start to decline as the Fed begins to cut rates.
Bonds: When interest rates go down, bond prices usually go up. This could benefit those who already own bonds. After multiple down years in the bond market, we might see some relief.
Stocks: Lower rates can boost stock markets because companies can borrow more cheaply to invest in growth. That said, the market has already rallied from lows in the fall of 2023 as the Fed started to signal rate cuts were in the future. The interest rate reduction benefit might already be reflected in the higher stock pricing.
Mortgages: Lower rates could make it more affordable to buy a home or refinance your mortgage. Thirty-year mortgage rates are at 6.8% as of July 30th. If we see the rates come down over the next few quarters, the lower monthly payments will make home ownership more affordable or free up cash flow in a refinance.
Home Buying/Selling: Lower mortgage rates might stimulate more activity in the residential real estate market as buyers and sellers have access to cheaper mortgages.
I included an example for illustrative purposes if we see rates drop down to the 5% level. The difference in monthly payments is meaningful to homebuyers!
| Home Price | 7% Mortgage Payment on 30 Year Loan | 5% Mortgage Payment on 30 Year Loan | Monthly Savings with a Lower Rate |
| $500,000 | $3,327 | $2,684 | $642 |
| $1,000,000 | $6,653 | $5,368 | $1,284 |
Economic Slowdown: Growth is gradually slowing, with consumer spending expected to dip slightly. Consumers have exhausted pandemic excess and are turning to debt to increasingly fund spending.
Labor Market: Unemployment has risen to 4.1%, and there's concern that some workers hired during the pandemic may struggle to keep their jobs.
Geopolitical Tensions: Conflicts and trade disputes, particularly in the Middle East, could disrupt global supply chains and economic stability.
Fiscal Policy Changes: Upcoming elections could lead to shifts in government spending and taxation, impacting economic trajectories. In particular, a single party sweep would have the greatest impact on fiscal policy
Consumer Debt: Rising delinquency rates for auto loans and credit cards indicate financial stress among consumers.
Loans or Credit Cards: Look for opportunities to consolidate debt at lower rates if the Fed starts cutting.
Mortgages: Consider refinancing if rates drop to a level that justifies paying the refinancing costs.
Bonds: Evaluate your bond holdings and consider the impact of lower yields on the types of bonds you hold. If we are at a peak for rates, it may make sense to lock-in longer term returns in the bond market.
Stocks: Maintain a diversified portfolio and be cautious of overvalued sectors that have benefited from the current interest rate market.
Cash or Money Markets: Explore other options for cash yields if rates will decline.
Consider locking in rates by purchasing bonds out into the future. As of today, investors could possibly achieve rates at the below levels:
US Treasuries. 4.19% for 10 years
Corporate or company bonds. 4.91% for 10 years
Riskier or Higher Yielding Bonds. 6.63% for 7 years
The yields above are estimated net acquisition yields and are not inclusive of other fees such as investment management, trading, etc.
Stay Diversified: Spread investments across different asset classes to reduce risk. Consider adding other assets like private markets to improve portfolio resiliency.
Don't Try to Time the Market: Focus on long-term strategies rather than short-term fluctuations. Time IN the market is more important than timing the market.
Look at Data, Not Just News: Base decisions on economic indicators and company performance metrics, not daily news cycles.
Think Long Term: Long term investors have been rewarded for staying the market through volatility and allowing their investments to grow over the decades.