Fall is in the air.
Maybe not in your part of the planet, but as I type this, rain showers have been falling outside my window.
Interest rates are beginning to drop too.
Though one’s location and bank can dictate this metric, mortgage rates are a good 100 basis points (that’s 1% in normal human language) off their peak nationally.
Current forecasts suggest the Federal Reserve will lower interest rates significantly, perhaps by 2% a year or so from now according to present target rate probabilities.1
What kind of things might occur if interest rates drop?
Savers might be bummed as they get less interest for their “safe” money in the bank. Wait… didn’t we just start earning interest at the bank again? But it may loosen up other parts of the economy.
Purchasing a house might become more attractive. Home Equity Lines Of Credit (HELOC) rates may not hurt debtors as badly.
Bond prices could jump up too. After all, if a bond is paying 5% right now and a year from now the same kinds of bonds are at 3%, those 5 percenters look much more attractive.
Blake Millard, sharing a chart from JP Morgan, reveals how a 1% move in rates may affect bond prices.2
It is important to approach predictions about financial markets cautiously, though. You know how I feel about forecasts. They can be wildly wrong. Just revisit my column in May about recent interest rate estimate failures.
The wisdom of Howard Marks echoes in my ears: “If forecasting is not valuable, then you can do a great service to your clients by telling them that.”3
While making investment decisions based on predictions is a dangerous game, understanding how interest rates influence the economy, your portfolio, and your financial plan is not.
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Sources:
- Target rates as of August 22nd at 2:33pm (these change constantly) via CME FedWatch
- “The Sandbox Daily” email on July 18, 2024.
- Accessed online: https://youtu.be/wkJXQ46ma8I