The Fed cut rates by 0.50%... what's next?
We saw markets suggest there was about a 50/50 chance that the Federal Reserve would cut rates between 0.25%-0.50%. As it turns out, we got a 0.50% cut, so not too shocking.
But what does that mean for retirement and retirement accounts?
How much will this affect mortgages?
First, don't expect mortgages to come back to the favored 3% anytime soon. As a mortgage broker once explained to me, most mortgages are priced with rate expectations. If mortgage companies expect rates to come down, a lot of that would be baked into current loans. Further, when mortgage rates with under 3%, federal funds rates were nearly 0.00%. We're a long path away from that.
Now signals are showing that there will be another half a percent cut by the end of the year, maybe even another whole percentage cut by the end of next year. But that’s still put as far away from zero.
Check out the image above for a visual...
https://fred.stlouisfed.org/series/FEDFUNDS#
How will this affect savings accounts?
You might have enjoyed your money market or CDs paying you ~5.0% - 5.5% lately. I know I have. It's been great. But as I shared before, what goes up, (may) come back down.
It might be time to do something with that savings.
If I compare earning 1.3% vs. 2.5% vs. 7.6%, this is what you get:
That's a huge difference.
Turns out, from 2003-2023:
- 1-month government bonds average: 1.3%
- Inflation: US Consumer Price Index: 2.5%
- Balance portfolio: 7.6%
dimensional.com Metrix Book 2024 Historical Returns Date - United States. Balance portfolio as indicated by the Dimensional Core Market Index Allocation, 60% Equity, 40% Fixed Income.
I'm sure we all know that past performance is not indicative of future results.
Sitting on cash that, in the long run, earns only 1.30% could result in leaving a lot of money on the table. In our example, after 20 years of this, you're left with a +$287,000 difference. I can think of a lot of things to do with a quarter of a million dollars. That's a lot of your legacy that may not be realized.
Will the Fed cut rates more?
Maybe. As Fed Chair Jerome Powell has been saying, the Fed will be data-dependent. That might lead to more rate cuts this year andeven more next year. As mentioned above, the Fed is signaling a half-percent rate cut before the end of the year, but that doesn’t mean they’re going to do it. In the past, they have signaled rate cuts before, but what happened on that site was actually a rate hike. They will try to stay dependent.
So, what should you do next?
The bottom line is you have to have a plan. Some of that plan should address scenarios of lower rates. Some of that plan should address if the fixed income portion of your portfolio underperforms. But you have to have a plan.
As you can imagine, it's much easier to have these conversations now than waiting until after there is a market correction.