When interest rates rise, borrowing, both for consumers and small businesses, becomes a challenge because of the future cost of repaying that loan.
According to the Federal Funds Effective Rate chart, the current Fed interest rate, which is approximately 5.25% - 5.50%, is at its highest since late 2000 and early 2001.
Investors, small business owners, and prospective homebuyers have been anxiously awaiting Fed interest rate cuts since the COVID-19 pandemic. Due to where the economy is currently headed and clear signs that growth is slowing, a rate cut is inevitable and could come as soon as September.
What A Rate Cut Means for Your Portfolio
A rate cut, whether 25 or 50 basis points, should be seen as a short-term negative and a long-term positive for your investment portfolio.
- Short-term negative
The Fed cuts interest rates when there are clear signs the economy needs help. In other words, something is broken that must be fixed, and when something is broken, consumer spending and corporate earnings decline.
A soft labor market combined with our dependence on consumer spending signals a short-term hurdle that we need help from the Fed to overcome.
- Long-term positive
Rate cuts from the Fed will help the economy, and your portfolio, long-tern. As expressed above, lower interest rates give individuals, families, and small businesses more access to affordable loans. Buying a home, starting a business, and expanding a business all become easier as rates come down, which means we can expect earnings growth.
What questions do you have about the economy? Ask me at ryan.oconnell@bloomingtreewm.com.