Fed cuts next year would likely boost stock prices and send bond yields lower. But a lot depends on why they’re cutting. If a recession hits, things will be tricky. But if the Fed cuts rates based on inflation normalizing and pulls off a soft landing, investors may be wise to load up on bonds now, said Elliot Pepper, financial planner and director of tax at Northbrook Financial in Baltimore.
What does this mean for my cash savings?
It’s been a great period for returns on cash, with rates on many high-yield savings accounts in the US at more than 4%. Meanwhile, Australia boasts a top savings rate of around 5.7%, and in New Zealand, the rate on a one-year term deposit has crossed 6%.
But rate cuts may end this golden era, as banks tend to move their yield offerings alongside benchmark interest rates. Still, competition between banks for deposits may prevent them from reducing rates too quickly.
When it comes to exchange rates, it depends on the currency. For the US dollar, it’s not so good — every group-of-10 currency rose versus the dollar on Wednesday, with the gains continuing in Asia on Thursday. Japan’s currency strengthened to levels not seen since August and advanced further early Thursday. The South Korean won and Malaysian ringgit gained more than 1% against the greenback in a sign of strength among emerging markets currencies.
What happens to mortgage and credit card rates?
Homebuyers may finally see some relief in 2024. Mortgage rates usually decline alongside Fed cuts, which would help ease the housing affordability crisis around the world.
Mortgage rates in the US just fell for a fourth straight week to the lowest since July, with the contract rate on a 30-year fixed mortgage now at 7.07%.
Costs for credit card users will also likely decrease, since card issuers typically use the Fed-influenced prime rate as a base to charge interest plus an additional spread. That would help consumers struggling with debt.
How do Fed decisions influence rates across the world?
Higher US rates make dollar-denominated assets more attractive, sucking money out of other markets and causing their currencies to fall. Some countries have had to defend their currencies against a strong greenback, adding to inflation pressures and making it harder to pay back debt that was issued in dollars. A Fed pivot may reverse that trend.
Some central banks and monetary authorities also move in lockstep with the Fed, including Hong Kong whose currency is pegged to the US dollar. But European Central Bank President Christine Lagarde said on Thursday that policymakers shouldn’t get complacent on the battle against inflation just yet, while her Bank of England counterpart, Andrew Bailey, observed that “ there is still some way to go” in the fight to tame consumer prices.
This article was provided by Bloomberg News.