Financial markets have turned manic in recent days, excited by the idea that the Federal Reserve will cut interest rates repeatedly starting early next year.
Interest-rate futures point to a 74% probability that the Fed will push down its federal funds rate target at least 1.25 percentage points by the end of next year.
The target currently stands at 5.25% to 5.5%, and most experts expect the central bank to leave rates unchanged at its meeting next week.
As for next year, the Fed is highly unlikely to slash rates by anything close to 125 basis points, unless the economy plummets.
So far, the economy is holding up well, with personal consumption expenditures rising 0.2% in October. Consumer spending accounts for more than two-thirds of economic output.
And inflation already is descending toward the Fed’s target of 2%, with the PCE price index climbing 3% in the 12 months through October, down from 3.4% in September.
A soft landing may deter rate cuts
Ironically enough, many of those who are frantically snapping up stocks say much of their enthusiasm stems from their view that the Fed is engineering a soft landing for the economy. That would mean inflation subsides without the economy entering a downturn.
But if there’s no downturn, why should the Fed cut rates in a major way, if at all?
Goldman Sachs expects just one rate reduction next year – 0.25 percentage point in the fourth quarter. (To be sure, after that the bank expects a quarter-point move every quarter until the second quarter of 2026.)
What would the Fed holding back mean for you?
If the Fed does reduce rates just once next year, or not at all, what are the implications for you?
It means interest rates on your money-market accounts, certificates of deposits, and bonds you might buy will stay high. But it may be bad news for your stocks, which often suffer in times of lofty rates.
And continued high rates would obviously be bad news for your mortgage, credit-card, auto, student and personal loans.
So it might be a good idea now to limit your spending and keep your investments conservative.
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