On September 19, the Federal Reserve cut its benchmark rate by 0.5 percentage points. The headlines are abundant and sorting through the diverging theories on the Fed’s decision can be overwhelming. We are here to provide clarity on the subject by addressing the facts of the matter while exploring how these decisions could impact our current and future clients financially.
Fact #1: This is the Fed’s first rate cut since March 2020
In the Spring of 2020, the COVID-19 pandemic and lockdown led to a surge in unemployment with a correlated dive in consumer spending. The Federal Reserve cut rates and pumped money back into the US economy to combat the fear of a prolonged recession. This led to a subsequent four-year fight, using a series of rate hikes against surging inflation rates. This fight against inflation has ended, for now.
Fact #2: Lower Fed Funds Rate = Lower Interest Rate = Different Opportunities
The Federal Funds Rate is a benchmark for most interest rates in the capital markets. Therefore, this rate cut should lead to a lower cost of borrowing, which would unlock trade activity for many consumers who have been stuck on the sidelines. For example, if you are a home buyer, mortgages could now be cheaper. If you pull out a HELOC (Home Equity Line of Credit), your interest payment could be more affordable. If you are a developer, relief on construction loans could start to make deals pencil again. And if you are a seller, your pool of buyers may have just gotten larger, providing some positive price implications. Lower interest rates bring different opportunities to the table, and it’s important to reflect on where you are positioned within the field of play.
Fact #3: The Yield Curve remains inverted
While it’s easy to get excited about potential opportunities returning to our economy, many variables remain to consider, such as the “Yield Curve”, which shows the percent returns of US Treasury Bills over a period of time. A treasury note is a loan to the US Government, providing an essentially risk-free rate of return. In theory, a long-term treasury bond should have a higher yield than a short-term bond to account for the associated risks. However, today we are seeing what is called an “inverted yield curve”. This just means that a short-term treasury note gives a higher percent return than a long-term treasury note. Why is this concerning? If treasury yields are high, that means that consumers feel confident about the market. Therefore, the U.S. must compete with bullish markets by offering high, risk-free returns as an alternative investment. However, if yields are low, that often indicates an increase in demand for risk-free returns, allowing the US to lower its offerings. Therefore, this inverted yield curve could indicate market pessimism since it reflects a decreasing yield slide across time. If the yield curve remains inverted, this could provide some uncertainties for lenders who may consider more conservative restrictions in today’s market.
The Federal Reserve announcing the first rate cut in four years is exciting news and is certain to shake up some dramatic headlines. Lower interest rates could open the door for more consumer opportunities and some seller upsides as well. However, it is critical to consider factors beyond interest rates that could affect both the economic future and your personal financial future.
Looking for the best way to get insight on how this could impact you or your real estate endeavors? We encourage you to consult with your local Keller Williams agent. Haven’t worked with a Keller Williams agent before? Let’s connect you.
