In an attempt to cool inflation, the Federal Reserve Bank (The Fed) raised interest rates a whopping 11 times since early 2022. Now, there appear to be signs that 2024 will herald some interest rate cuts as well.
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Financial expert Jaspreet Singh, an entrepreneur, licensed attorney and founder of “The Minority Mindset” YouTube channel discusses what this means and how to prepare for these possible interest cuts.
Who’s Saying Cuts Are Coming?
Singh explained that there are rumblings among some of the big financial institutions that 2024 will be a year of interest rate cuts, possibly even deep ones.
According to Singh, both Swiss bank UBS and Morgan Stanley seem to think these cuts, which could drop the current interest rate of just over 5% to 2.2% to 2.75%–as much as half the current rate, will come early in 2024, around March or so.
On the other hand, financial institution Goldman Sachs has suggested these rate cuts will be more gradual and come toward the end of 2024 and extend into 2025 and 2026. Singh said they believe that there will be a “lagged effect” of the slowing economy and cooling inflation that takes longer to manifest for the average person.
Why Are Rate Cuts Predicted?
All of the banks’ reasons for these rate cut predictions come down to two main things:
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Inflation is cooling.
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Economic experts are expecting an economic slowdown.
UBS posits that these conditions will propel the Fed to stimulate the economy; cutting interest rates makes borrowing money more accessible.
Though the banks may disagree on the degree and timing of the cuts, they do seem to agree that inflation is cooling, a slowdown is coming, and the Fed will need to boost the economy as a result.
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What Do Interest Rate Cuts Mean?
Interest rate cuts mean different things to different people, Singh said. If you are in the camp of people who want to buy things and wish to see investment values rise, you probably prefer interest rates to be cut, because it translates to more money entering the economy, thus more spending, which boosts investment values.
People who want to purchase things and have the cash to do so want higher interest rates, because investment values generally go down when interest rates go up. This is because increased interest rates mean that people need higher returns to justify buying an asset. Thus, you have more negotiating power if you have more cash.
Rising Interest Rates Cool Inflation
The whole purpose of the steady interest rate hikes since 2022 has been to cool inflation. And that has been working, Singh said. The latest inflation rate came in at 3.2% for the last year, which has been holding steady. Singh called this “good news.”
However, an even better indicator of inflation is known as “core inflation.” This rate actually came down by 0.1%. Though that might not sound like a lot, it marks a true shift downward. Although the Fed’s target is 2% inflation, Singh said this downward trend is moving in the right direction.
It will thus give the Fed further reason to cut the interest rates to keep this trend moving, especially if the economy appears to truly be slowing.
America’s Credit Rating
In order to understand the economic outlook of the coming year even further, however, Singh said we must pay attention to the opinion of Moody’s, one of the big credit rating agencies. They are concerned about the U.S.’s lack of solid fiscal policies to reduce debt, and worried that the U.S. has more debt than it can pay off.
The U.S. already received a credit downgrade from credit agency Fitch in August, 2023, from a rating of AAA, or risk-free investment status, to an AA+, which suggests a loosening of confidence. With a downgraded rating, the U.S. has to work harder to incentivize investors with higher interest rates to keep investing.
Moody’s is concerned that the U.S. can’t pay all of this debt back. And if there’s national concern about U.S. debt, that means people will be less likely to invest in the U.S. and thus, the U.S. will have to pay them a greater amount of interest to entice them.
In fact, the U.S. borrowed such a record amount in the fourth quarter of 2023, that the fastest growing U.S. government expense was interest expense.
What Does This Mean for You?
Singh suggested this all translates to 2024 being a year of caution and preparedness. It’s probably not a good year to finance a new truck or purchase any other big asset.
Instead, work to build your financial education and preparedness because, as Singh asserted, every phase in the economy creates opportunities for those who are financially educated.
But in order for you to capitalize on these opportunities you have to be prepared, meaning you have cash put aside to protect you.
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This article originally appeared on GOBankingRates.com: Jaspreet Singh: How To Prepare Your Finances for the 2024 Interest Rate Cuts
