Recent data evidencing further declines in inflation along with softening labor markets raised the odds that the Federal Reserve will lower the fed funds rate during its next meeting scheduled for September 17-18. There is debate whether the cut will be ¼ or ½ percentage point, with odds-makers betting on the former. After eleven straight hikes in the fed funds rate, the anticipated September cut is expected to be the first of several over the next year or two as the Fed attempts to bring the economy in for a soft landing without experiencing a deep recession or re-igniting inflation.
Market interest rates drifted substantially lower since peaking earlier this year as investors became more concerned about the risks of a recession with fears that the Fed may have waited too long to lower rates. The 10-year U.S. Treasury note yielded 4.71% in May and now sits at 3.71%. The 2-Year U.S. Treasury note currently yields 3.65% compared to 5.05% earlier this year. As much as some market participants may welcome the change in Fed monetary policy there are always unintended consequences.
As an example, the housing market, which has been stalling due to high mortgage rates, may see a further drop in demand as interest rates continue to fall. If someone is considering buying a home and they believe mortgage rates will be lower in the next six to twelve months, they may postpone buying until a more optimal time. Eventually, reduced demand for housing should soften prices, which along with more attractive borrowing costs may increase affordability, reversing the cycle.
In addition, for investors in fixed-income products such as government, corporate and municipal bonds, bank CDs, and fixed-rate annuities, lower interest rates will be unwelcome. After enduring years of below average yields on their “safe-money”, these investors were finally able to earn real rates of return (after taxes and inflation) over the past two years. Now, they may be resigned to another season of less than desirable returns. On the other hand, lower interest rates can make equities more attractive, so there is always a potential trade-off.
Investors who partner with holistic wealth management firms often possess intelligent financial plans that model a variety of economic and market scenarios. Their portfolios are constructed to help them achieve their goals with a reasonable probability of success at reduced cost and without unnecessary risk. They do not respond to the noise constantly being generated by the purveyors of sensationalized financial news, and they rest in the knowledge of having done their homework, thus enabling them to focus on their careers, families and other pursuits. The dedicated professionals at Wealthview are committed to that very ideal.
Carry on.
Sam Taylor, CIMA®, AIF®, CRPC®