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The Fed’s move signals changes that could shift the investment landscape.
I don't know about you, but I'm pretty excited about what may happen over the next year.
The money supply will continue to increase across the globe.
Naturally, asset prices should also start to rise, including crypto.
The Federal Reserve recently cut U.S. short-term borrowing costs by a larger-than-usual half percentage point.
This move is expected to ease financial pressures for many Americans after more than two years of battling high inflation.
The Fed’s aggressive rate hikes from March 2022 to July 2023, which totaled 5.25 percentage points, have now been partially reversed.
The central bank has lowered its key rate to 4.75%-5.00%, signaling growing concerns about a cooling labor market.
Markets now expect rates to dip to 4.00%-4.25% by the end of the year, with more cuts forecasted into 2025.
However, rates aren’t expected to return to the sub-2% levels that fueled ultra-low mortgage rates in the past decade.
While paychecks are now rising faster than prices as inflation cools, the effects of inflation are still felt at the grocery store and elsewhere.
Even with lower rates, most Americans' financial relief will slowly materialize.
The Fed’s earlier rate hikes were meant to slow the economy and control inflation.
Yet, contrary to initial expectations, the economy has avoided a recession.
Inflation, measured by the Consumer Price Index, has fallen to 2.5% from a mid-2022 high of 9%.
At the same time, unemployment remains historically low at 4.2%, even with a slight rise.
Now, the Fed is using rate cuts to prevent a hard landing.
It hopes lower interest rates will ease borrowing costs for businesses and consumers, allowing the economy to grow.
However, achieving a soft landing—reducing inflation without severely disrupting the labor market—is rare.
As hiring and wage growth slow, the Fed's success will depend on precise adjustments.
As the Fed raised its benchmark rate, borrowing costs for credit cards, auto and home loans spiked.
Mortgage rates, for example, soared to nearly 8% in late 2022 but have since fallen to about 6.2%.
With more rate cuts expected, mortgages could become even cheaper.
Other borrowing costs, like personal loans and credit cards, should drop soon after the Fed acts. However, rates won’t fall dramatically.
While the Fed is cutting rates, it's unlikely to slash them to pre-2022 levels.
Only private loans will be impacted for student loans, as federal loans are unaffected by rate changes.
One key shift that may occur as the Fed lowers rates is moving capital from money markets into riskier assets like stocks and crypto.
Over the past year, many investors parked their cash in money market accounts, lured by higher returns due to rising rates.
Now, as the Fed cuts rates and the returns on these accounts diminish, investors may shift their cash back into assets, expecting better performance.
This could trigger a new cycle of rising asset prices and loosen market credit conditions.
More liquidity in the system could fuel growth and push asset values even higher.
For those holding large cash reserves in money markets, this transition might signal a re-entry into the stock or crypto markets, hoping for stronger returns as rates fall.
While borrowing costs drop, the return on savings accounts will likely decrease.
Banks, which had been touting high rates on savings and certificates of deposit, will likely lower those rates as the Fed cuts its policy rate.
For savers, this means lower returns on conservative investments.
Stock market investors' reaction will depend on how well the Fed’s moves are perceived.
In the long run, lower interest rates push stock prices higher as safer investment yields fall, encouraging more risk-taking.
In 2022, 58% of American households had money in the stock market.
Nearly all families owned stocks among the top 10% of earners, while only 34% of families in the bottom half held stocks.
As rates fall, those with market exposure could see gains, while savers in cash-heavy positions may need to rethink their strategy.
Although mortgage rates are dropping, housing affordability remains near crisis levels.
Data from the Atlanta Fed show that housing affordability is as tight as it was during the 2007-2009 financial crisis.
Lower interest rates alone won’t immediately solve this issue.
However, cheaper borrowing costs may incentivize builders to increase supply over time, easing some pressure on the housing market.
Homeowners with locked-in low rates might also be more inclined to sell, potentially bringing more inventory to the market.
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