Lower interest rates will affect you

Due to rising unemployment and a slowing of inflation, the Federal Reserve Board has indicated that it intends to reduce the federal funds rate that it charges banks for overnight loans. While there has not been a stated amount of the reduction or a set date for a reduction, the first interest rate cut is expected around the middle part of September, and forecasts range from a quarter-point reduction to a one-point reduction. What does this potential reduction mean for the people of Gulf and Franklin counties who read this publication? There are several potential impacts.

Expect your bank to reduce the interest they are willing to pay on checking, savings, money market, and certificates of deposit. Yes, it’s been nice to have a $100,000 money market pay about $400 per month in interest, but those days appear to be behind us in the near term. Hopefully, the expenses that consumed that $400 like gas, groceries, and eating out, will be commensurately lower. The Fed is trying to generate a “soft-landing” for the economy and is hoping the reduction in rates will have offsetting effects in these two categories.

Expect to see renewed or continued development in our area as the cost of borrowing money should decrease for individuals, developers, and investors. This could cause an increase in property values as long as demand is greater than supply. Higher property values help if you plan to sell in the future and maybe not so much if you plan to stay. The corresponding increases in property taxes and insurance costs are not welcome but are a cost of playing the game.

Borrowing costs for autos, student loans, lines of credit, etc. should decrease. This will probably help balance the budgets for the younger generations who cannot afford to pay cash for major purchases. There is typically a lag between the date the Fed cuts rates and the dates lenders offer reductions.

Bond portfolios should typically see an increase in the value of the bonds when interest rates are decreased. There are two ways to make money with bonds, whether they are municipal bonds, corporate bonds, or government bonds. One can make money from the interest paid and from the increase in the value of the bond. In short, a bond that pays 5% is more desirable than a bond that pays 3%, and typically anything that is more desirable receives a higher price. That’s basically what we will have after the Fed rate cut – new bonds will have lower rates than recently issued bonds. The free markets operate to make the choice to buy those bonds equal. If the markets did not strive for equality, everyone would buy the 5% bond and never buy the 3%. 

Other factors affect the price of bonds. Credit quality, maturity date, and special features are some of those. There is no guarantee that a reduction in interest rates will increase the price of existing bonds, and bonds can lose value. 

The stock markets could see an increase from current levels if companies generate higher profits due to lower interest costs and greater sales. The stock markets are forward-looking, and they are currently near all-time highs. These current all-time highs have already factored in some level of interest rate cuts. I expect to see a good deal of volatility. LPL Financial and I are currently of the opinion that the markets are currently overpriced in the short term.

Gulf County resident Walter L. Woodrick is a certified financial planner practitioner, and the author of two books. His website is WoodrickFinancial.com, and his text number is 850.724.1369. Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. #621302-1.