Blog #11: Interest Rates are Falling Down
I want to preface this blog by saying that nothing is set in stone and that the Fed has not officially lowered interest rates yettttt… but it appears that interest rates are going to come down on Wednesday...
“Lower interest rates are good, right Tom?” welllllll, let’s get into that…
Lower interest rates can be good for certain reasons, like if you’re about to take out any sort of debt (mortgage, car, student loans, etc.) OR if you already have debt where the interest rate isn’t fixed (credit cards or adjustable rate mortgages or loans). And yes, most credit cards’ interest rates are variable, meaning they go up and down slightly as the Fed raises or lowers interest rates. Lower interest rates can also be good if you’re looking to refinance any existing debt, like a mortgage.
“Those all sound like good things, so what are the negatives?”
This is where things get… weird (at least in my opinion). Interest rates are usually lowered to help a weakening economy. Lower rates means it's cheaper for people and companies to borrow money, which in turn increases spending and investing. Lower rates usually help the economy. But here’s the weird: lower rates can increase inflation because of the increase in borrowing, spending, and investing. And that’s what I don’t get, why is the government lowering rates right now when we’ve been hit by high inflation for 3 straight years?
Now I know that we have seen ‘less’ inflation in recent months. And I’m sure there’s a lot of people that are going to be pumped to see rates go down (I sort of am, but that doesn’t matter here). But I’m not convinced we NEED a rate reduction right now. The S&P 500 has had two dips since the summer started, but it’s recovered both times. The most recent jobs report shows unemployment steady at 3.8%. Again, I just don’t see a NEED to drop rates.
“Tom, I don't care about your opinion. Tell how lower rates will impact me.”
Welp, if you’re looking to refinance a debt such as 20+% credit cards into a lower personal loan (say 11%) then it may be a good time to do so. It’s also possible that the availability of HELOCs will bounce back. My biggest suggestion to those reading this with credit card debt is to take advantage of these lower rates to pay off your debts quicker. Don’t use lower rates to increase your spending.
Summary Checklist:
Interest Rates are likely going down this week
There’s a chance they could be cut again a second time (possibly) this fall or even a third time (unlikely) by end of year
There are some small benefits, and financial institutions may be more willing to lend money out
One last thing about rate changes… the Fed usually ‘hints’ or ‘leaks’ that they’ll be raising, lowering, or keeping interest rates the same in advance of their announcement. This is on purpose, to sort of smooth out the publics’ response. They drop a hint that rates will be lowered, then two weeks later they make the announcement. I am NOT saying this next part is true, but it seems as though the Fed monitors the stock market’s reaction to their hint and then takes that reaction into consideration for HOW MUCH they lower rates. Right now, we do not know how much they’re going to lower rates (if at all). Best estimates by people way smarter than me are saying they’ll lower rates 0.25%. It could be more or less. That’s the beauty of this madness, we never truly know what they'll do until they make their formal announcement on Wednesday…
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