November 7, 2024

The Federal Reserve announced their 0.25% rate cut, signaling an effort to stimulate economic activity by making borrowing cheaper and encouraging investment and spending. A 0.25% cut, while modest, can directly impact the economy, and your finances. Here’s how:

Cheaper Borrowing Costs

·         Credit Cards and Loans: A rate cut slightly lowers interest on variable-rate credit cards, personal loans, and home equity lines of credit. You could save a bit on monthly interest payments, freeing up cash for other needs.

·         Mortgages: Although mortgage rates aren’t tied directly to the Fed’s rate, they often respond to rate cuts, making it a good time to consider refinancing.

Lower Savings Yields

• Savings Accounts and CDs: When rates drop, so do yields on savings accounts and CDs. This can mean slightly reduced returns on savings, making it more challenging to grow funds through these accounts. Some may look to other investments for better returns.

Potential Stock Market Boost

• Investments: Rate cuts often encourage more stock market activity as cheaper capital supports business growth. This can raise stock prices, benefiting investors, but it’s wise to consider market volatility as well.

Economic Confidence

• Rate cuts are a signal that the Fed aims to support economic activity, encouraging consumer spending and business investment. This can help support job stability and economic confidence, which indirectly benefits your financial well-being.

Projected Impacts with Additional Rate Cuts (50-75 Basis Points)

If the Federal Reserve moves to cut rates further—by 0.5% to 0.75%—we could see more pronounced impacts:

·         Further Reduced Borrowing Costs: Larger cuts could make financing for homes, cars, and personal loans even more affordable, potentially driving more significant consumer spending. However, this could also lead to increased consumer debt if people take on more than they can comfortably repay.

·         Savings and Fixed-Income Impact: Larger cuts could lead to even lower yields on savings accounts, CDs, and certain bonds, pushing more conservative savers toward higher-risk investments to maintain returns. This shift could increase volatility, especially for those unfamiliar with riskier markets.

·         Stock Market Implications: More substantial cuts generally fuel stock market enthusiasm as companies benefit from cheaper capital, supporting growth and increasing shareholder value. This could bring opportunities for capital gains but may also contribute to volatility if the market becomes over-inflated or if economic fundamentals don’t align with market growth.

Election Impact on the Fed's Policy Direction

The outcome of the election may indirectly affect the Federal Reserve’s approach to interest rates moving forward.  While the Fed operates independently, it considers shifts in the administration’s economic policies and outlooks. Historically, Trump has favored lower interest rates to stimulate economic growth. If his administration implements tax cuts, deregulation, or increased spending, the Fed might face additional inflationary pressures, potentially causing them to be cautious with rate cuts or even keep rates steady to control inflation. Trump’s stance on trade or regulatory policies might impact economic growth, potentially leading the Fed to adjust its rate strategy in response to shifts in employment, inflation, and overall economic confidence.

What it Means for You, the Investor

Ultimately, today’s Fed rate cut of 0.25% is a small but meaningful shift that can slightly lower borrowing costs, decrease savings returns, and potentially lift the stock market, influencing both short-term spending and long-term investment strategies.

Melissa Talarico

CRPC®, Financial Advisor

E-Mail: mtalarico@brightonsecurities.com

Direct: 585.340.2234