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- We're in our cutting era
We're in our cutting era
The fed is starting to cut rates. What does that mean for us?
The fed is now in its cutting era. Earlier this month, Jerome Powell announced a reduction of interest rates by 50 basis points, or half a percent.
Usually, when the Federal Reserve starts cutting rates, they do so 25 basis points at a time. The approach here is to reduce the risk of recession.
We’ve gotten some really big questions around interest rates. And we’ve boiled it down to 2 topics: mortage rates, and recession risk.
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Interest Rate Cuts: A new era of the economy.
The burning question we get a lot: Why does the Federal Reserve increase/decrease interest rates?
Simple Answer: Interest rates are increased/lowered to bring stability to the money supply.
If there’s too much money out there, inflation risk is high, and that means your dollar won’t go as far because prices will be higher. In this case, the federal reserve will sometimes look to increase interest rates to make it more expensive to borrow in order to lower inflation, which would help draw prices down.
If there’s too little money out there, economic activity can slow, which can result in recession. The federal reserve will look to lower rates, so it becomes cheaper to borrow, which would then fuel economic activity in hiring people to do jobs. Those people will then have money they didn’t otherwise, and go spend it on things, which would in turn, speed up the economy.
Another big question: Why are we cutting interest rates now?
Simple answer: The job market and inflation are slowing, so the conditions are right to start lowering rates instead of keeping them at these levels.
What’s going to happen to mortgage rates and house prices?
They’re going down. Go see. Go ask for a pre-approval and you’ll get a better rate than you got in 2023.
So while it’s easier to get a mortgage that may not make you financially gouge your eyes out, house prices are a little….difficult to predict.
Depends on a lot of factors: Where you’re buying, what kind of neighborhood, is the region a hotbed of economic activity, etc.
There’s a growing belief that we could see house prices spike because there are so many prospective buyers on the sideline waiting for rates to come down. This means more competition for homes, therefore driving the price up.
Or, we may see weaker labor market numbers in the coming months, and prices may not be going up because the buying pool isn’t flooded with buyers.
We have to add that this is all speculation.
We invested a lot of money into a high yield savings, what happens when rates go down?
You may lose out on the high rate that got you in there in the first place. Lower rates are meant to spur economic activity, which is in turn meant to get your money out of the account and into a new house or…DVD player or something (keep in mind, CC interest rates also go down in the event of a rate cut).
None of this is investment advice, btw.
Have a great week!
Ahmed and Peter
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