Fears of a recession have subsided thanks to strong employment and growth and decreasing inflation. The possibility of a recession has diminished. Federal Reserve officials appear to have ceased talking about it. The minutes of the central bank’s last three meetings have not mentioned the term “recession.”
Economic conditions, including employment levels, inflation rates, and overall economic growth, influence the Federal Reserve’s decisions regarding interest rates. The central bank aims to use interest rate policies to support a stable and sustainable economic environment. The Federal Reserve aims to strike a balance between promoting economic growth and controlling inflation. Lower interest rates can stimulate economic activity by encouraging borrowing and spending, but they may also lead to higher inflation. Higher interest rates, on the other hand, can help control inflation but may slow down economic growth.
Businesses and households that borrow too much are more likely to experience financial difficulties if their revenues decrease or the value of their assets decreases. Such shocks may force heavily indebted families and firms to drastically reduce their spending, which will have an impact on the level of economic activity overall. Furthermore, financial institutions and investors suffer losses when individuals and companies are unable to repay their loans.
The FOMC meeting on December 12–13, 2023 reports financial conditions eased, driven by a decline in interest rates, an increase in equity prices, and a depreciation in the dollar. The rise in equity prices was supported by the decline in Treasury yields and by earnings growth that exceeded consensus expectations. Implied volatility for equities diminished notably. The easing in financial conditions reversed some of the tightening that occurred over the summer and much of the fall.
Federal Reserve policymakers have projected three rate cuts for the upcoming year, aiming to reduce the fed funds rate from the current range of 5.25%-5.5% to 4.5%-4.75%. However, financial markets appear to be more dovish, pricing in anticipation of six quarter-point Fed rate cuts, and perhaps even a seventh. If these projections materialize, the cumulative effect will amount to a 150-basis point reduction, bringing the fed funds rate down to 3.75%-4%.
The market’s expectation of a more aggressive approach to rate cuts has been a driving force behind the substantial rally in the stock market towards the end of 2023. This optimism in the financial markets has contributed to a significant drop in the 10-year Treasury yield, plummeting from 5% in late October to well below 4% at present.
The Federal Reserve interest rate as of January 3rd, 2024, is 5.3 percent.
The Treasury bill 1 year (secondary market) rate is 4.5 percent.
Bank prime loan interest rate is at 8.50 percent.
At a news conference conducted after the meeting, Fed Chair Jerome Powell outlined the main points of discussion, stating that the central bank was probably done raising interest rates and that it anticipated to start lowering borrowing costs by the end of 2024.
What should you do with your money in an interest-rate-cut environment? We asked expert wealth advisor, Taylor Kovar, CFP.
When the Fed cuts rates, borrowing costs typically decrease. It’s a reasonable time to refinance mortgages, student loans, or other high-interest debts to lower rates, potentially saving thousands over the life of the loan. Check the closing costs associated with refinancing to ensure it’s cost-effective.
Lower rates often lead to higher stock prices, especially for growth stocks and sectors like real estate or technology. Review and adjust your portfolio to take advantage of sectors likely to benefit. Ensure any adjustments align with your long-term investment strategy and risk tolerance.
With lower interest rates, the return on savings accounts and CDs typically decreases. However, it’s still a good time to bolster your emergency fund, as economic uncertainty often accompanies rate cuts. Look for high-yield savings accounts that offer better-than-average rates despite cuts.
Bond prices generally rise when interest rates fall. Consider adding high-quality bonds or bond funds to your portfolio to capitalize on price appreciation and receive regular income. Be mindful of the duration and credit quality of the bonds, as they influence their sensitivity to interest rate changes.
Lower rates can make financing more affordable for real estate investments. Consider whether this is a good time to buy property for personal use or as an investment. Real estate markets can vary greatly by location and sector, so do thorough research and consider your long-term objectives.
Taylor Kovar, CFP, is the founder and CEO of Kovar Wealth Management and the CEO of The Money Couple. Though he “retired” at 35, Taylor speaks and writes extensively on money and marriage, financial independence, business, travel, and leadership. Taylor Kovar has also contributed to Yahoo Finance, Forbes Fortune, and Go Banking Rates, to name a few.
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