For almost two years now, the story of the economy and markets has been all about runaway inflation and central banks’ historic attempts to reverse it. But we may be turning over a new page in the storybook — and it could have a happy ending for your 401(k).
At the moment, interest rates are historically high, making home loans, credit card rates and other lending super expensive. This has brought inflation (although, notably, not prices) lower. But high rates have devastated America’s housing market, which is on pace for its worst year since 1993. It has also slowed job growth somewhat and kept stocks in a holding pattern for a miserable 23 months.
But in its economic projections Wednesday, the US Federal Reserve predicted rates would be significantly lower by this time next year than they are right now, implying three rate cuts next year. A reverse-course for rates has all kinds of implications for consumers, businesses and investors — many of them welcome.
Lower rates could make borrowing cheaper. Mortgage rates, which have been hovering around a two-decade high of near 8%, could mercifully come down. And business lending could become cheaper, freeing up corporate profit that makes stocks more attractive. That’s why the Dow shot up to a record high Wednesday and the broader S&P 500 was approaching a record set at the beginning of 2022.
It also would remove some of the economic risks associated with hiking rates. By raising lending rates, central banks like the Fed, the Bank of England and the European Central Bank have (purposefully) been trying to slow down their respective economies to get out ahead of inflation. But central banks historically have been quite bad at landing that plane safely — so bad, in fact, that the “hard landing” metaphor has become a jargon term used for when restrictive lending standards crash the economy into a recession.
Although Fed Chair Jerome Powell in a press conference Wednesday cautioned we are far from clear of a hard-landing scenario, a turn to lower rates could help soften the blow higher rates have taken on the US economy — an economy that has many Americans feeling disgruntled. But lowering rates next year would also signal that the Fed believes it has won its hard-nosed battle against inflation, one it was so determined to win that it hiked rates at the fastest pace in modern history.
Goldman Sachs analysts in a note to clients Wednesday said they expect the rate cutting to begin in March and continue throughout the spring. They also boosted their US economic growth forecast as a result of the Fed’s upbeat mood Wednesday at the conclusion of its two-day policy meeting.
All of that is good news for your wallet and your portfolio.
“Lower interest rates across the spectrum [will help] sustain the business expansion and will directly create conditions whereby beleaguered consumers will see direct relief,” said Joe Brusuelas, chief economist at RSM.
Of course, nothing is ever exclusively good news. US savings rates, which are near their highest levels this century, will come down if the Fed starts cutting rates. And the Fed tends to cut rates when it starts to worry about an oncoming economic slowdown. The last time the Fed cut rates was when the economy was slowing in late 2019 — and again in the wake of the pandemic, when a global lockdown created the deepest (albeit briefest) recession in American history. Before that, the Fed last cut rates during the global financial crisis.
So, while consumers will probably have reason to cheer, it’s important to note that there are risks to lower rates, too.
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