Interest Rate Cuts? I Wouldn't Bet On It.

In my last few newsletters and frequently on twitter, I have spent a lot of time discussing interest rates hikes and the impact they have on the economy. Most people understand what Interest rate hikes are and know that they are happening. However, many people don’t realize how extremely important they are in understanding the direction of the economy and the direction of your investments.

Quick Recap of Fed Interest Rate Hikes.

For those who need a refresher, the federal reserve controls the money supply (USD) and interest rates. Since 2020, our government has spent an unprecedented amount of money, leading to the highest inflation since the 1970s. The two ways to combat inflation (or eat up the extra money) is to raise interest rates or increase production. Since the Biden administration isn’t interested in cutting taxes and incentivizing business growth, they decided to raise interest rates.

When the Fed raises interest rates, money becomes more expensive. When money is more expensive, businesses and consumers tend to cut back spending. This is what usually causes recessions.

The Fed has been raising interest rates since April of 2022. It usually takes a year for the economy to feel the effects of interest rate hikes, which means we are about due. The recent bank collapses are most likely the start of an economic downturn cycle.

Will the Fed Cut Rates?

After the last rate hike (last week), there has been a lot of speculation about the Fed cutting rates since things are getting dicey (bank collapses). A potential rate cut brings hope to investors because it’s a sign of better times ahead and when timed correctly, there is a lot of money to be made.

However, I don’t believe we are there yet. It would look silly for the Fed to raise rates up until this point just to start cutting them a month or two later. What’s more than likely to happen is the Fed might hike one or two more times, then pause for a while. The only thing that could change this is the following:

1. bad unemployment numbers

2. a major financial institution collapse

3. a stock market collapse

If one of these events happened, then it might be appropriate for the Fed to cut rates. But if the Fed keeps rates up long enough, one of these might be inevitable.

Outlook

Unfortunately, back in 2008 the government realized that if it stimulated economic downturns (printed a bunch of money) then it could get out of those downturns much quicker (the covid crash is a perfect example of this). It appears this administration is going to do the same thing it did in 2008 and 2020, print more money. Spending more money to solve a problem that was caused by spending money the first place can only lead to one outcome - an economic downturn. You can read about it in this newsletter. (America's Only Two Financial Paths Moving Forward (beehiiv.com)).

Follow us on Twitter @Freedomville_ and @Hill_Households for more day-to-day coverage.

Email us questions or reactions @[email protected]