Today’s edition of TGIF 2 Minutes is worth a comparison to this past February’s archives – just 6 months ago – and was originally titled, “Interest Rates, The Fed & Gray Hair.” In today’s re-run, readers will learn that the US Federal Reserve lowering interest rates is not the only mechanism able to cause the stock market to go up. Sometimes markets go up due to other factors including momentum or continued consumer spending, as in the past 6 months.
Question asked in February 2024:
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 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 firm and the failure of three large US banks that were overdone with risk. Older and wiser investors understand more about the length of time it takes for markets to stabilize because of the history of Federal Reserve 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: interest rate changes are not a 3-month or a 6-month phenomenon.
Note: Interest rate changes have been said to take around two years from the time of each interest rate change to filter through an economy and affect things like–
- consumer spending
- borrowing
- bank & personal 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 12 months ago in July 2023. Today’s are the highest levels of interest rates in over 20 years (although these levels are still “normal” relative to pre-2007 financial crisis) 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, was ordered to liquidate by the Chinese government and further US and global risks (as of February 2024).
The media and political forces seem to be pressing Fed Chair 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.
Fast forward to earlier this week’s new market highs, despite no moves by the US Federal Reserve year-to-date. Anticipation is building.
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.