The Federal Reserve has spoken: interest rates remain unchanged (for now). So, what does this mean for investors?
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“The Fed’s decision to keep rates unchanged means that borrowing costs will remain at their current levels,” says Howard Hook, CFP, CPA, with EKS Associates in Princeton, NJ. “This isn’t great news for homebuyers and automobile purchasers. While current interest rates are not at historic highs, they are significantly higher than during the past 10 years, prior to when the Fed began raising rates in 2022. It is interesting that the housing market has not softened as many people had expected.”
The delay in reducing interest rates, he adds, is good for savers as interest rates for money market funds, CDs, and bonds will remain at current levels, providing higher returns than in the recent past. Conservative investors, wary of investing too much in the stock market, are being paid at or slightly higher than the inflation rate, at least as measured by the reported Consumer Price Index at 3.3%.
“Ultimately, when the Federal Reserve begins to cut rates, it will do so under the belief that economic growth has stalled or slowed to the point where a recession is a concern,” he says. “The hope always is that the Fed will get out in front of a possible recession, but that usually is a task too difficult to manage well (at least in the past).”
So, what does he and his team of financial advisors at EKS Associates suggest to investors in light of the current interest rates? “One thing you may want to do is consider is investing any idle cash you have into a higher-yielding money market fund. Money market brokerage accounts usually pay higher rates than money market or savings accounts at banks. If the Fed is indeed looking to reduce rates five times over the next eighteen months (as currently projected), then the opportunity to earn 5% annually on those cash investments may not last much longer.”
Other than that, his guidance remains consistent: the best thing for investors to do is to maintain their allocation in stocks and bonds and earmark their cash needs for the next two to three years in cash or cash equivalents (such as brokerage money markets, CDs, or short-term bond funds).
When it comes to how interest rates impact investors, “Remember, the Fed’s policies are designed to maintain long-term economic health, and while they may not always align with short-term investment goals, they are essential for overall market stability.”
