Here We Go!

You’re 9-years-old. It’s Christmas Eve. You’re eagerly anticipating all the gifts under the tree. You’re wondering just how well Santa is going to treat you this year. Ohh, the excitement is intense!

Now, you’re 47, looking to do a major renovation on your house. Or 56 and trying to figure out what to do with your retirement savings. You’re wondering just how well the Federal Reserve is going to treat you.

Yes, the Wall Street version of Christmas is playing out right now.

Yes, the Wall Street version of Christmas is playing out right now.

Nothing is official until it’s official, but the Fed seems poised to cut rates this week. They’ve been telegraphing it for some time. And, the whole point of their forward guidance is to avoid surprising the market and creating unnecessary volatility.

The real question now is the size of the gift.

Will they cut the traditional ¼ point or will they start with a ½ point cut?

Will they cut the traditional ¼ point or will they start with a ½ point cut?

Beyond that, what’s the path of cuts look like for the rest of this year and into next?

At what rate do they think they’ll stop cutting?

If you’re an investor, you’re already seeing the reduction in rates work its way through the markets. Stocks are long-term investments that are influenced in part by what’s considered a safer alternative—Treasury Bonds.

If you’re an investor, you’re already seeing the reduction in rates work its way through the markets.

You’ve already seen the 10-year Treasury move from above 4.7% in the spring to under 3.7% this week. That move made stocks cheaper relative to Treasurys.

Stocks would welcome even more cuts if the Fed is simply trying to get back to a neutral stance on interest rates. If greater cuts are caused by higher unemployment and an impending recession, that likely would not be such welcomed news. So far, it seems the cuts are simply to remove restrictions on the economy.

If you’re a saver, rate cuts will eat into the yield you’re earning on the cash in your savings account or money market account. If you’ve been holding cash for the juicy yield, you may want to reconsider your strategy. Go back to your financial goals and see how much money you need to fund your short-term priorities. If you have excess cash, you may want to look for a better home for that money. The yield isn’t going to collapse overnight, but as the Fed cuts, the interest you’re receiving should continue to keep falling.

If you’re a saver, rate cuts will eat into the yield you’re earning on the cash in your savings account or money market account.

Finally, borrowers are the ones probably salivating the most. Cheaper money is on the horizon!! Yay!! First, temper your expectations a bit. Some rates have already come down, especially those pegged to long-term Treasurys like mortgages. Others like home equity lines of credit (HELOCs) generally move with the Fed. So, don’t expect your 8.5% HELOC to be 5% just because the Fed reduces rates next week. After all, the crazy low-interest rate environment we were in for about a decade is likely not going to be repeated anytime soon.

Interest rates affect so much of the big-ticket items we buy and how we invest. So, it’s natural to get amped for rates coming down. It does feel like Christmas a bit. Just be prepared for the adjustments to be gradual. Avoid making financial decisions based on a belief the Fed may cut rates back to zero.

If you need help navigating this new environment, reach out. Let’s have that conversation.

If you need help navigating this new environment, reach out.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.