Investment Advisor's Insight: Potential Effect of the Federal Reserve's Upcoming Interest Rate Adjustment on Your Financial Pockets
The Federal Reserve (Fed) has kept interest rates steady throughout 2025, following a significant cut by a full percentage point in 2024. However, signs are emerging that a change in mortgage rates may be on the horizon.
The Fed's primary goal is to keep the economy balanced, not too hot, not too cold. The key tool they use is the fed funds rate, which influences how much banks charge each other for overnight loans. This, in turn, affects a wide range of borrowing costs, from credit cards to mortgages, primarily targeting short-term interest rates.
In this high-rate environment, home sales have taken a hit. Many people finance their homes with 30-year mortgages, which are more closely tied to the 10-year Treasury rate, not the fed funds rate. Lower mortgage rates could make home buying cheaper, but the rising number of auto delinquencies shows that this relief is needed.
For those looking to refinance, lower mortgage rates would be beneficial, especially for those with mortgage rates above 7%. However, lower interest rates may hurt those looking to buy a home, as mortgage rates could drop but increase demand and further home price increases.
The type of debt that is most directly affected by lower rates is variable rate debt with rapid resets, such as home equity lines of credit (HELOCs) and credit cards on the consumer side, and floating-rate loans on the corporate side.
For those in high-tax states, municipal bonds are trading at a historical discount and offer an opportunity to get tax-free income at very compelling rates. On the other hand, lower rates will lower the net income of the population, particularly for those who are significant savers, many of whom are older and retired. Investors living comfortably by buying CDs and Treasuries will see a drop in their disposable income.
Particularly borrowers, the stock market—especially large-cap tech companies—and sectors sensitive to interest rates benefit from Federal Reserve mortgage rate cuts. This is expected in 2025 due to a weak economic outlook and political pressure on the Fed to ease monetary policy. The stock market has shown a positive response to the Fed's mortgage rate cuts, with large-cap tech companies seeing a boost in investment and asset prices.
Now is a great time to assess any outstanding debt and monitor when it makes sense to refinance. For those with cash positions in their bank accounts, it's advisable to review them and make sure anything above a six-month cushion is generating good interest in CDs or other high-yielding investments.
In upcoming meetings, mortgage rate cuts could be on the table, as indicated by Fed Chair Jerome Powell at the August Jackson Hole, Wyoming, conference. As the environment changes, you should actively manage your exposure to mortgage rates to better position yourself for what may come next.
Adjustable-rate mortgages also benefit from lower rates, but their use has plummeted since the financial crisis and are fairly uncommon today. The Fed's goal is to keep the economy balanced, and while lower rates can stimulate growth, it's important to consider the potential impact on various sectors and debt types.
In conclusion, while the Fed's mortgage rate decisions can have a significant impact on the economy, it's crucial for individuals to understand how these decisions affect their personal finances and make informed decisions accordingly.
