How a 0.5% Interest Rate Cut Impacts Your Financial Health and Strategy

Ever wondered how a half-percent change in interest rates can ripple through the economy and impact your financial health? In this episode of Better Financial Health in 15 Minutes or Less, I, Stacey Hyde, break down the Federal Reserve's recent decision to lower their target interest rates by 50 basis points. We’ll explore the intricacies behind this move, from combating inflation to ensuring full employment. You’ll learn why these adjustments were made now, especially with the presidential election looming, and how they aim to strike a balance between economic stability and political neutrality.

Get ready to understand how these changes can affect your mortgage rates, investment strategies, and overall financial planning. If you're considering buying a home, discover how lower rates could increase your purchasing power. We'll also dive into smart investment moves, like shifting from money market accounts to longer-term bonds or bond index funds, to maximize your returns in the current rate environment. Whether you're a homeowner, an investor, or just someone looking to stay financially savvy, this episode offers crucial insights to help you navigate the evolving financial landscape with confidence. Tune in and transform your financial strategy today!

Envision Financial Planning. 5100 Poplar Avenue, Suite 2428, Memphis TN 38137. (901) 422-7526, This communication is strictly intended for individuals residing in the United States. Advisory Services offered through Envision Financial Planning, a Registered Investment Adviser.

Transcript

Speaker 1: 0:00

Hi, I'm Stacey Hyde and I'm back for another episode of Better Financial Health in 15 minutes or less, and today I'd like to talk about interest rates. Last week, the Fed lowered their target interest rates by what we refer to as 50 basis points. What that means is half a percent. So you'll hear talk of 50 basis points 25 basis points. All that really means is 25 is a quarter of a percentage point and 50 is just a half. So what does that mean to you?

Speaker 1: 0:35

Because there's been a lot of talk about when's the Fed going to cut rates. There's been talk a lot about it all through the year cut rates. They've been talking a lot about it all through the year, and the reason that the Fed had waited to lower rates is they really wanted to make sure that inflation was under control. Their target is an inflation rate between like between two and three percent, two and a half percent, and then they also have a dual mandate of full employment. Now they define full employment as 5% and the unemployment rate is trending around 4% right now. So, with inflation coming down, the most recent readings were in the high twos. They felt like that they could go ahead and lower rates. I think part of their reason for going ahead and lowering half a percentage point was the employment numbers were starting to not look quite as robust. I think there was some. It is a presidential election year and I think they wanted to kind of go ahead and get the rate decreases done before all the voting started so that they could not any further cuts wouldn't be seen as being political to help one party over the other. So but what does it mean really?

Speaker 1: 1:59

In many ways mortgage rates are set historically. They've been tied to what the 10-year treasury rate is. But the markets, because those mortgages are having to be sold to end investors, and end investors are like I'm not sure I want a mortgage that is, you know, paying 5%, when I can go invest in corporate debt, that's paying 6%. So you've seen mortgages be higher than that. But I do think that having the Fed lower rates will help pull down mortgage rates some. So if you've been sitting on the fence, maybe shopping, it may be a good time to speak with your mortgage lender about hey, what, how much house could we afford now? Because as rates go down, it's possible you could afford a little bit more expensive house for the same payment because less of your money is going to interest, which is is very good. The other thing to keep in mind is, if you are one of the millions of people that have had money in money market funds because you could earn four and a half to five and a half percent on your safe money, it may be time to think about potentially moving into longer term what we call fixed income longer term bonds for that money, because as the Fed lowers rates and as the market determines that yes, in fact, inflation does seem to be under control, you're going to see those rates start to fall.

Speaker 1: 3:41

We've seen this before. After we came out of the great financial crisis, rates fell very quickly out of that five percent level until they got to near zero. I don't think we're going back close to there again. I think that if you're one of the fortunate people who has a sub three percent or low three percent mortgage rate, great, you are one of the lucky few. But I don't think those people who don't have one of those and who are now looking to join the ranks of homeowners I think that's a bit unrealistic to think that rates are going to get that low again.

Speaker 1: 4:18

But I think it is important to think about potentially investing your money a little bit longer term to take advantage of these rates. I wouldn't go buy a 20-year treasury or anything like that, but I think five to six years. If you're wanting to keep it simple, you can purchase an index fund like a total bond index or an ETF that's tied to the global bonds. Because you want to be careful with bonds? Because you are taking credit risk and if you buy, say, a bond of one issuer, whether it's a bank, whether it's a car company or whatever if that company experiences trouble you risk not being able to get paid back, whereas if you invest in a fund, you have hundreds, if not thousands, of different companies, government debt, government agency debt that is likely going to pay you back and even if one doesn't, it's a such a small piece of the whole that it's not really going to have a negative impact on your investments. So, yes, the Fed lowered rates. The market had already priced it in.

Speaker 1: 5:31

We've talked before on the podcast about how the stock market is forward-looking. The bond market is too, and oftentimes even more cutthroat than the stock market, because it'll go raise rates or lower rates before the Fed, and that's a little bit what the Fed was doing with this was kind of catching up to what the market was already seeing out there. And they also have to balance imports versus exports, because if our interest rates are too high, that makes the dollar stronger. That means that we can buy a lot of non-US goods, but it makes it very difficult for US manufacturers to export their goods because it's just much more expensive. So by lowering the Fed Funds rate, that should help US manufacturers and exporters as well.

Speaker 1: 6:28

So, all in all, good news. Pay attention, don't let those rates creep down on you. Maybe you'll likely notice that if you go to renew a CD, it's unlikely that you'll get over a 5% rate now, whereas a couple months ago that was kind of the norm. But it's still good, still worthwhile, and I think it's going to help a lot of people be able to make some decisions and improve their financial lives and pay less in interest. Thanks for tuning in. This has been another episode of better financial health in 15 minutes or less.