What Lower Interest Rates Could Mean for Markets and Your Wallet

The Federal Reserve uses monetary policy to achieve its dual goal of maximizing employment and maintaining price stability. But in today's economy, those objectives are pulling the Fed in two different directions. Corporate layoffs have increased, while inflation has remained well above Fed’s targeted level of 2%. Fed Chairman Jerome Powell described last month’s cut as taking out insurance against potential weakening in the job market.  

We believe that based off of the effect, rates will continue to be cut.  Of course, the market almost always anticipates what the Fed will do in the future. So, it's highly likely that these rate cuts are at least partially priced into the stock and bond markets. 

Lower interest rates often mean lower borrowing costs, benefiting both consumers and corporations. Lower interest rates often lead to a weaker US dollar, which can help US companies sell their products internationally. Lower interest rates can also have drawbacks, especially for savers who will earn less interest.  

Let's take a deeper look at how the Fed's actions may affect your pocketbook.  

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Impact of Rates on Housing  

The Federal Reserve does not set mortgage rates, bankers do, using the 10-year Treasury bond as a benchmark. But in general, when inflation is under control, if the Fed lowers its short-term rate, all interest rates will follow. That has been the case this time around, with the 30-year mortgage interest rate falling from a high of almost 8% in 2023, down to 6.3% recently.  

Today’s rates are still almost twice the 3% interest rate home buyers enjoyed in 2000 and 2001. But the lower interest rates fall, the more likely it is that a home buyer can afford to purchase their dream home. It also means that home buyers who took out 8% mortgages can refinance their mortgages and save money every month on interest expense. Consumers should also benefit from lower interest rates on home equity lines of credit, credit cards, and auto loans. 

Impact of Rates on the Stock Market 

Stock investors tend to prefer low interest rates because it means companies can borrow funds at a lower cost. The less a company pays in interest expense, the more it can report in earnings. Companies can use the cash that would have otherwise been used to pay interest to invest in and expand their businesses. These are all positive developments that can send a company’s stock higher. 

Impact of Rates on the Dollar 

Lower interest rates also tend to result in a weaker U.S. dollar because foreign investors are less likely to buy U.S. debt if it has a lower interest rate. S&P 500 companies generate about a third of their revenue internationally. As the dollar declines, the products they sell abroad in foreign currencies can be more competitively priced, and a foreign customer's local currency can purchase more US goods than before. In addition, when foreign revenues are converted back into dollars, they appear larger.  

The Downside of Lower Rates 

Lower interest rates are not good news for savers. As interest rates decrease, banks tend to pay out less interest on products like savings accounts and certificates of deposit. The same is true for money market accounts. The yield on money market accounts was about 5.3% from August 2023 through September 2024. Since then, the yield has fallen to 4.3%. If the Fed continues to lower rates, money market yields will likely fall as well.  

Investors should consider the various ways interest rates could affect their portfolios.  Our team at WHZ is here to help. Call us at (860) 928-2341 or schedule a complimentary discovery session now with our team.  Together, we can create a strategy designed to give you Absolute Confidence. Unwavering Partnership. For Life.  

Authored by Senior Partner and Chief Investment Officer, Laurence Hale AAMS, CRPS®.  Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your financial advisor.