America Has Grappled With Higher Interest Rates For Two Years. How Long Until They Go Away? - The Average Joe


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    America Has Grappled With Higher Interest Rates For Two Years. How Long Until They Go Away?

    Noah Weidner

    June 17, 2024

    Analysts were wrong about the recession — so it’s only fitting they were wrong about interest rates, too. In late 2023, analysts drummed up a rate cut bonanza, with as many as six cuts expected in 2024. However, halfway into the year, we’ve yet to see one. The latest Fed “Dot Plot” suggests we might have to wait a little bit longer before returning to business as usual.

    The New Plot: Recent moves by the central banks of Canada and the EU indicate the beginning of the end for high interest rates. Meanwhile, in the US, the Fed held rates at 5.25%-5.50% during last week’s Federal Open Market Committee (FOMC) meeting. However, if the latest inflation report is any indication, the Fed is now anticipating just one cut by year-end, with further reductions accelerating after the first.

    • Between now and 2026, increasingly dovish Fed members foresee rates at 4.125% for 2025, 3.125% for 2026, and a long-term rate of 2.750%.
    • Yet, the timing of these cuts could shift based on inflation, employment trends, and job reports, as evidenced by Fed members’ expectations dramatically diverging after 2024.

    Running with Scissors

    The Fed’s forecasted rate cuts are expected to provide relief to Americans who have been sidelined from buying homes or vehicles, potentially spurring spending and economic growth. This could further bolster the already low-volatility, record-breaking stock market to new heights. However, lower rates will be bad for cash-rich savers — and, as it turns out, there are a lot of them.

    • Currently, US money-market funds (MMFs) and corporate cash deposits have hit record highs of $6.12T and $4.11T, respectively.
    • When the Fed begins to cut, yields on bank accounts, MMFs, and other savings products will likely decline — prompting higher spending or investment.

    Exit this way: Federated Hermes’ analyst Deborah Cunningham says that the wall of cash in MMFs and corporate holdings will eventually exit into riskier products such as stocks. Investors could get ahead of the boom by buying index funds like the S&P 500, but risk-averse Americans who have cozied up to high rates might consider alternatives such as bond ladders or annuities before the cuts begin. While these options may not match the potential returns of the S&P 500, they offer greater safety and predictability, with potential returns ranging from 4-6% over several years.

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