Following a record sequence of rate rises by the Fed to rein in soaring inflation, interest rates are higher now than they have been in more than 20 years.
But according to Federal Reserve Chair Jerome Powell’s indication on Wednesday, the rate-hike campaign is most likely ended. Additionally, according to Fed projections, the benchmark federal funds rate will be lowered by three-quarters of a percentage point in the next year, from a 22-year high of 5.5% to 5.5% to a range of 4.5% to 4.75%.
In what way should regular American investors react?
A licensed financial planner in Baltimore named Jordan Gilberti said, “Your finances are all tied in some way to interest rates, and the anticipation of lower interest rates could lead to a vastly different financial landscape than we are seeing today.”
Interest rate cuts should mean lower rates on home, car purchases
Borrowing rates for new vehicle and home purchases could drop if the benchmark interest rate declines in the next year, enabling purchasers to extend their budget. Reduced variable interest rates on credit cards and home equity loans will also help borrowers by reducing their debt load.
The news is more complicated when it comes to investments. Money market accounts and “high-yield” savings accounts should see a decrease in interest rates, which would reduce the appeal of such assets. Shorter-term fixed-rate assets, such as bonds and certificates of deposit, should see a decline in rate, making them less appealing.
The announcement of the Fed’s rate drop has already caused stock prices to jump. This week, the Dow Jones Industrial Average hit all-time highs.
If the Fed does start lowering interest rates in the next months, stocks might soar higher. They may also drop, particularly if investors start to worry that the rate reductions signal a flagging economy.
Managing partner of Hightower Wealth Advisors in St. Louis Omar Qureshi said, “Let’s speak the truth that the Fed didn’t say.” “When the Fed senses a slowdown in the economy, it lowers interest rates.”
Here are some expert suggestions on how to maximize your savings in the event that interest rates decline.
It may be time for that refi
Anyone with debt has an opportunity when interest rates decline. Gilberti advises customers to enumerate all of their debts and their interest rates. “Ask yourself, ‘At what rate would it make sense to refinance these loans?'” he said.
There is even more reason for anybody considering refinancing a house mortgage or auto loan to hold off, according to Brett Holzhauer, a personal financial specialist at M1, the finance app.
He said in an email that “the Fed announced this week that it intends to lower interest rates on three different occasions in 2024.” In light of this, you may want to wait until interest rates drop before refinancing any existing debt, such as a mortgage or student loan debt.
In 2024, everyone with a fixed-rate mortgage that is 7% or more should see if they can refinance, according to Natalie Taylor, a Santa Barbara, California, certified financial adviser.
She said in an email that refinancing is usually only beneficial if it can cut your rate by at least 0.5% to 1%, if not more. Keep in mind, however, that it’s not free.
Reconsider money market and ‘high-yield’ savings accounts — but don’t stop saving
Maybe no one would suggest to a customer to give up on saving money. But keep in mind that if the Fed begins reducing, the well-known high-yield savings and money market accounts of today may earn reduced interest rates.
The time when money market and savings accounts offered 5% returns is “probably short-lived,” according to Crescent Grove Advisors co-chief investment officer Andrew Krei.
In order to benefit from such rates, Accrue Savings CEO and founder Michael Hershfield advised “start saving now” and building up your account while the rates are still favorable.
“Make sure your emergency fund is established, maintained, and increased,” Hershfield said in an email. Having a financial cushion might help you weather unforeseen costs without having to sell assets in difficult times. “Market conditions and the job market may change.”
Consider locking in higher rates with bonds or CDs
Krei suggests “investment-grade bonds further out on the yield curve” as longer-term options to savings and money market accounts. These bonds should have a maturity of four to ten years in order to “lock in higher rates beyond the next few months.”
There are still a lot of Treasury bonds that yield 4% to 5% annually. However, the recent decrease in bond prices indicates that the financial community has already priced in the impact of interest rate reductions.
Qureshi said, “Take the two-year bond, for instance.” In October of last year, the two-year rate reached as high as 5 ¼%. It is now down to 4.4% when I check it today. That’s already included in the cost of those later actions.
Even now, interest rates on certificates of deposit are still 5% or more, and they may be guaranteed for a certain number of months or years.
“You can think about using CDs to extend the period that you’ll receive a higher interest rate on cash if you want to lock in a higher interest rate,” Taylor said.
Stocks? Yes, but don’t buy high
It may not be the ideal moment to purchase stocks right now since the market is still trading at or close to record highs.
However, the stock price may influence that choice.
According to Qureshi, the S&P 500 has increased by more than 20% year to far, indicating that the financial market has already responded to the Fed’s projected rate reduction.
Nonetheless, the bulk of that success is fueled by a collection of tech giants known as the “Mag Seven”: Apple, Amazon, Microsoft, Nvidia, Facebook, Meta Platforms, and Tesla.
According to Qureshi, “I would argue that these big-seven stocks are way over their skis” and that a great, steady, dividend-paying company that is more conventional would be a better option. This year, they have been left behind.
According to Quereshi, dividend-paying equities gain appeal when interest rates drop because of their yields.
“Alternatively, you might purchase a dividend-focused exchange-traded fund (ETF), which is a collection of stocks that typically follow a certain index.
Investors should think about buying small-cap stocks and shares of businesses with a lower market capitalization, advises Krei of Crescent Grove Advisors.
In an email, he said, “Small caps, in particular, remain near historically cheap levels across several measures.” “Interest rates have been a contributing factor in this underperformance, but there are economic factors as well. Smaller businesses are more susceptible to a slowing economic environment.”
Due to their greater reliance on loans for growth and expenditure financing, smaller businesses are more susceptible to increased interest rates than bigger ones. Declining rates in 2024 “would enable the small caps to make up ground lost to the broader market during the previous two years.”
Source : usatoday
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