Money moves to make before the Fed lowers interest rates (2024)

FAQs

Money moves to make before the Fed lowers interest rates? ›

Open a high-yield savings account

But if inflation continued to cool — or if unemployment rose unexpectedly — Powell said the Fed would likely be able to reduce its benchmark rate. Cuts would, over time, bring down the cost of mortgages, auto loans, and other consumer and business borrowing.

Buy short-term bonds instead of long-term bonds

In a period of rising interest rates, the price of existing bonds will decline. Bonds with a longer time to mature will feel a greater impact from an increase in interest rates than a bond with a shorter maturity. This is also true with bond mutual funds and bond ETFs.

Particular winners of lower federal funds rates are dividend-paying sectors, such as utilities and real estate investment trusts (REITs). Additionally, large companies with stable cash flows and strong balance sheets benefit from cheaper debt financing.

A rise in interest rates automatically boosts a bank's earnings. It increases the amount of money that the bank earns by lending out its cash on hand at short-term interest rates.

The financial sector generally experiences increased profitability during periods of high-interest rates. This is primarily because banks and financial institutions earn more from the spread between the interest they pay on deposits and the interest they charge on loans.

As interest rates plummet, earnings tend to rise, presenting a favorable environment for cyclical sectors. Notably, consumer discretionary, technology, real estate, and financial sectors have historically outperformed the market during rate declines and earnings upswings.

Ralph DiBugnara, founder and president of Home Qualified, doesn't anticipate a significant drop in mortgage rates or a Fed interest rate cut until there are consecutive months of lower inflation, reduced consumer spending and potentially higher unemployment.

Mortgage points, also known as discount points, are fees a homebuyer pays directly to the lender (usually a bank) in exchange for a reduced interest rate. This is also called “buying down the rate.” Essentially, you pay some interest up front in exchange for a lower interest rate over the life of your loan.

How to earn 10% interest per month? ›

Investing in rising interest rates can be done by investing in banks and brokerage firms, tech and healthcare stocks, and companies with large cash balances. You can capitalize on higher rates by purchasing real estate and selling off unneeded assets.

#2: Diversify Your Investments

First, make sure your portfolio is appropriately balanced between stocks and bonds based on your goals, risk tolerance, and investment horizon. While bonds can offer stability in a falling-rate environment, stocks may present growth opportunities as lower rates stimulate the economy.

Preferred stocks are not the same thing as bonds, but they are income securities and share characteristics that make them attractive when rates are falling. Specifically, they have an inverse relationship with the general direction of rates, meaning, like bonds, preferred stocks generally go up when rates fall.

If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.

Supply and Demand

Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them. An increase in the amount of money made available to borrowers increases the supply of credit.

The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.

A Fed rate increase can slow the economy by pushing up borrowing rates and raising the annual percentage rate on savings. If rates rise, it becomes more costly to borrow money. When the Fed boosts its lending rate, consumers and businesses can see increased costs for borrowing, which can discourage spending.

How exactly does the Fed move the target range? The Fed pays interest on bank reserves. That rate, which is determined by the Fed's Board of Governors, helps the central bank carry out its desired target range because it puts a floor on the interest rate banks will be willing to accept to lend to other banks.