Time again for the “soft landing” airplane drawing. As in, will there be a soft landing for the US economy or a hard landing? How soon might the US Fed lower rates and how fast might the markets keep going up or falter down?
A certain amount of gray hair (read: wisdom and experience) helps in understanding the current interest rate and US Federal Reserve environment. Why? Because economies do not move as fast as Amazon delivering a package same-day, or even same-month. And “gray hairs” know this.
The US Fed began raising interest rates two years ago in March 2022. The most recent increase was only in July 2023. There have been a historic 11 rate increases and a bit of pain along the way. BUT there has also been a great deal of stabilization of markets and the economy along the way. Part of the “stabilization process” unfortunately (or fortunately, depending on how you look at it) involved the fall of the FTX crypto fraud and the failure of three large US banks that were over their skis with risk. The “gray hairs” understand more about the length of time it takes for markets to stabilize because older and wiser investors can remember the history of the Fed’s interest rate changes going back to the 1960’s, 1970’s, 1980’s, 1990’s… all the way through to the early 2000’s, the 2007-2009 financial crisis, the 2020 pandemic – up until today. Hint from a friend with gray hair: interest rate changes are not a 3-month or a 6-month phenomenon.
Interest rate changes have been said to take around two years from the time of each interest rate change to filter into an economy and affect things like consumer spending, borrowing, lending, levels of household debt, wages, the ability to start a new business, rates of return on insurance and annuities, market returns, among other market actions. The last interest rate increase to the current level of 5.25% – 5.5% was only 7 months ago in July 2023. Today’s is the highest level of interest rates in over 20 years, which is another factor causing clarity of future interest rate policy to take longer.
There are still risks in the economy on both the upside and downside.
- On the upside: there is a ton of cash in healthy-yielding money markets, CDs, and US Treasury securities that could find its way into stocks.
- On the downside: inflation is still evident in food, transportation, and housing; real interest rates (rates after inflation) are still high keeping corporate borrowing costs high; there is the looming uncertainty of a 2024 US presidential election; Chinese real estate developer Evergrande, the most heavily indebted real estate developer in the world, has been ordered to liquidate by the Chinese government and further US and global risks.
The media and political forces seem to be pressing Jerome Powell and the Federal Reserve Board to go faster on lowering interest rates simply as a quick boost to the stock market. The gray hairs at the Fed including Mr. Powell want to wait for greater confidence that lowering rates will not reaccelerate dangerous inflation.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon for, tax, legal or accounting advice.