How will the Fed’s decisions impact consumer finances, from credit cards to mortgages? With auto loan performance shaky, auto loan rates are expected to remain stable on the way down.
Savings Accounts
According to Bankrate data, the national average savings account yield was 0.61 percent in September. However, the numbers vary by bank because the federal funds rate functions as a guide for financial institutions rather than a rule.
For example, many online entities have offered account holders an annual percentage yield (APY) as high as 5 percent. By comparison, the major banks, such as TD Bank, Wells Fargo, and Bank of America, have maintained an APY of as little as 0.01 percent during this cycle.
Nevertheless, in more than a decade, savers have enjoyed the best returns on their savings accounts, certificates of deposits, and money market funds. Even billionaire Warren Buffett has piled up cash and owns more short-term debt securities than the Federal Reserve, accumulating tens of millions of dollars per month.
But experts say the Fed’s rate-cutting cycle will push the banks to modify their APY.
“Savings account rates may decrease as typically banks adjust their interest rates alongside the Fed,” Gates Little, the president and CEO of The Southern Bank, told The Epoch Times.
This could exacerbate the current trend of falling savings rates, which has been steadily declining since March 2021.
In July, the Bureau of Economic Analysis reported that the personal saving rate tumbled to 2.9 percent, the lowest since June 2022.
Stock Market
Estimates of the number of Americans owning stocks differ.
An April 2023 Gallup survey showed 61 percent of U.S. adults reported stock ownership. However, the Fed’s recent Survey of Consumer Finances highlights that 21 percent of Americans directly own stocks.
Whatever the case, the stock market’s performance can significantly impact the broader U.S. economy. And changing interest rates can affect Wall Street.
While the expected Fed policy pivot has had a noticeable impact on bonds, market watchers have different views on how the central bank’s rate cuts will influence the New York Stock Exchange.
Lower rates can be beneficial for stocks because they trim the cost of capital, says Michael Ashley Schulman, the chief investment officer at wealth management firm Running Point Capital Advisors.
“Interestingly, at least in the initial phases, it is often the smallest, junkiest, or weakest stocks—the ones that investors had left for dead—that rally the strongest when rates decline,” he recently told The Epoch Times.
Morningstar research has spotlighted mixed performances at the onset of rate-cutting cycles. Equities responded favorably when the Fed lowered rates in July 1995 and 2019. However, there was an adverse reaction when the institution cut interest rates in January 2001 and September 2007.
Jon DuPrau, managing partner at Quantum Portfolio Management, told The Epoch Times that a relevant comparison today is the 1995–1996 cycle “when the Fed cut rates preemptively to cool the economy without triggering a recession.”
“As the cycle progresses, DuPrau said, investors will need to monitor various economic indicators to determine whether the United States is more likely to face a soft landing or a recession.
Nevertheless, heading into the Fed’s potential September rate cut, the leading benchmark indexes have performed well this year despite a few hiccups along the way.
Year-to-date, the blue-chip Dow Jones Industrial Average has surged about 11 percent. The tech-heavy Nasdaq Composite Index and the S&P 500 have rallied 18 percent and 19 percent, respectively.
But while interest rates play a crucial role for stocks, they are not the only factor investors should consider, says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
“Interest rates may continue falling as inflation softens,” Haworth said in a recent research note. “A key factor is whether inflation declines because the economy stalls, or if it is a matter of prices softening within the context of a still-growing economy.”
In the end, Haworth notes, investors need to be prepared for potential near-term fluctuations in stock prices. Please rewrite this sentence.
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