It’s January 2024, and nobody expects the Fed to cut interest rates at its January meeting. Interest rates will stay the same until the March meeting, when the only option is to stand pat, or to cut rates. An interest rate hike is off the table under all foreseeable scenarios.
What Should I Do About Interest Rates Now?
Under these conditions, it is important to understand two concepts. First, some interest rates move only when the Fed cuts or raises interest rates. Other interest rates move with the market.
The first kind of interest rates are generally most types of revolving debt such as credit cards, home equity lines of credit, and personal loans. These kinds of credit are almost always tied to the Prime rate. The Prime rate is set banks, and typically moves in lock step with the Federal Reserve Fed Funds Rate.
The second category of interest rates moves with the market. When people talk about interest rates and the market, they mean the bond market where all manner of debt trades hands just like stocks in the stock market. Just like stocks, these rates move every day, and just like stocks, more than a little bit of the movement comes via traders looking to predict the future a bit and profit from it. Mortgage interest rates for new mortgages fluctuate with these movements, which is why you can see different mortgage interest rates every week, or even every month. Most mortgages are based upon the 10-year Treasuries.
What is the Prime rate?
Okay, here is the short-short version. The Prime rate is the rate at which banks lend money to their best customers, with the best credit, under the best circumstances. If you have a HELCO with an interest rate equal to the Prime rate, congratulations, your bank finds you to be a good risk. What the Prime rate really is out in the real world is basically the Fed Funds Rate + 3%, or 300bps if you prefer.
What Will Interest Rates Do?
The Fed has spent the last 18 months curbing inflation by increasing the Fed funds rate over and over again either 0.5%, or 0.25% at a time. Today, the Federal Reserve’s target interest rate is 5.50%, and the Prime rate is 8.50%.
That’s it. The economy has started to wobble. There are tens of thousands of layoffs, many from tech companies, but certainly not all. Inflation is certainly within the Fed’s inflation target of 2%. Interest rates may already be too high. I can take six months or longer for interest rate changes to fully work their way through the economy, so the Fed has to try and be a little bit predictive. However, things are not clearly heading down. There might still be a resurgence of inflation.
With all of this in mind, the Fed will not raise interest rates barring some truly surprising event. That means the only way interest rates can go is down. That does not mean that they will go down soon, or fast. Most Fed officials have been trying to wave Wall Street off about a Spring interest rate cut. The Fed’s smart play right now is to stand pat. After that, it is just a matter of when the Fed will cut interest rates.
Should I Wait for Lower Interest Rates?
You might be waiting a long time. The Fed is in no hurry to cut interest rates and is hedging its bets toward not cutting. That means a rate cut might not come until Fall 2024, or even later. That can be a long time to wait for certain things. On the other hand, if you have the luxury of time, waiting until next year could yield much lower rates.
Should I Wait to Buy a CD?
No. No with no sauce. Interest rates are already wonky. Many banks are paying higher interest rates for shorter term CDs than longer term ones. They do this because they have plenty of time, and like above, they are willing to wait to lock their customers’ money in until later, at a lower interest rate.
Many banks are offering special interest rates on certain term CDs. If you need CDs, this is the time to buy those CDs with boosted interest rates. Some banks and credit unions are still offering 5% or more on shorter term CDs. Drop some cash into those and then watch interest rates. When the longer-term rates start paying more than the shorter-term rates, that is when to step into your longer-term CDs.
(As always, if CDs are an important part of your financial picture, a ladder is the best way to invest in CDs.)
Interest rates will stay the same or go down for the foreseeable future. However, it may be a while before they move at all, and when they do, the changes may be slow. Invest for flat or slightly down interest rate environment.