If you missed last week's release from the federal reserve, the big news from Powell's announcement is that the fed plans to begin an incremental cut to interest rates starting in the third quarter and continuing into 2025. Here's what this means for investors:
đ» Bond Yields Coming Down
With the expectation of interest rate cuts coming for awhile, bond yields (the rate they return back to their investors) have been on the decline for the past several months. They'll likely drop even more sharply when the fed starts cutting rates. Because their yields will be lower, the prices of existing bonds will increase. This creates a lot of temptation to sell existing bonds before their maturity, since their yields may be lower for a period of time. So, what should you do? It's best not to disrupt their timeline. For example, if you have a 10-year bond and the 10-year timeframe isn't up, selling that bond means you are losing out on potential tax write-offs, and missing out on the longer-term upside you could get if you weathered this storm.
đ· Savings Rates Heading to Their Brat Era
We are likely nearing the end of this two-year hey day that saw savings rates maintain historic highs. We knew this time would come, and it doesn't mean we should go and invest our emergency funds into dividend stocks. Instead, now is a good time to check any money you have in savings (including high-yield savings). If the amount is more than you need for your emergency fund, consider moving the difference into a better-performing asset, such as a low-cost index fund with a higher return.
đ„ Mortgage Rates Making Us đ„°
It might feel like the moment we've all been waiting for when it comes to lending. Assuming the fed cuts rates somewhat consistently starting next month, mortgage rates should follow. This might make home-buying more affordable, but not necessarily. We should expect a more competitive buying market with buyers who have been waiting a long time for rates to drop to be more aggressive about finding a home in 2025. If there's a property you love, and the numbers make sense, you may not want to wait until rates go down. You may even be able to negotiate a free refinance with the same lender down the road. On the other hand, if you're looking to do a refinance, or to get a line of credit, it would be wise to wait until rate cuts kick in, so you can be sure you're getting a great rate (compared to the current ~6.5%).
âïž High-Interest Loans Not Likely to Plunge
If you're waiting to pay down high-interest debt in hopes of your rate decreasing, you should reconsider. Rate cuts will not significantly reduce the rate on your high-interest loan, so you aren't likely to see a reprieve here. Focus on paying down your high interest loan (especially before making new investments), so you're ready to take advantage of lower, fixed-rate debt in the future!
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