Welcome back, everyone.
Peter, good to see you finally, right? Today we get to talk through how to invest when interest rates are cut. So rates have been high since March of 2022, been on that steady escalator up for a while. But now they're coming down. So that's that means it is time to rethink how we are investing. But before we get there, Peter, why is the Fed now talking about and lowering these interest rates? Yeah, I thought you were saying it was good to see me finally. No, you were saying it's good to see these rates coming down finally, right?
Yeah. No, we are seeing these rate cuts because those interest rates have been elevated for a period of time. And in fact, it was quite the change from the last 15 to 20 years prior to 2022. That's when the Fed started raising rates, and they were the quickest set of rates. The quickest succession of rate increases in history. So the reason why is that the Federal Reserve, who controls the interest rate environment by controlling the core interest rate that banks can borrow and loan from each other, they are tasked with two critical tasks. They have a dual mandate to keep inflation under control and to promote full employment. And as we got through COVID and through 2021, obviously, inflation was the larger of the two concerns. We were seeing near double digit inflation. In fact, some categories was double digit inflation, but the core inflation number at points was up near nine percent. And so that is much higher than our target.
They like to target around two percent. And the weapon to combat against inflation is to raise interest rates, which they did often and in rapid succession and in big chunks. So now that interest rate has been high and remained high for an extended period of time. A year and a half, almost two years now that we've seen these interest rates climbing and then staying this high. Well, now the other side of that dual mandate comes into play because inflation has slowed.
Now, let me talk about that for a moment. That is not deflation. That is not prices coming down. That is the rate of increase in prices has slowed down. So they want inflation. They just want a healthy amount of inflation. Again, the target is around that two to two and a half percent range. But in the meantime, the full employment has come into question.
And in order to help stimulate full employment, kind of the opposite trend is true, where now they look at lowering interest rates in order to kind of stimulate the economy. The question is, did they wait too long? Right.
And that was what led to that market route in early August. A lot of people have been wondering that. But so far, so good.
Fingers crossed. But it brings us to the ever present question, Peter, which is, are we going to be able to avoid a recession? How, when will we know that we have successfully navigated that soft landing? Probably two or three years after the fact, as we look back. Hindsight being twenty twenty. And actually, most cases it's it's it's it's even clearer, especially if there's any kind of pain point. It will be scrutinized in great detail. But so far, so good.
Right. We've been talking about this coming recession since twenty twenty one through twenty twenty two through twenty twenty three through twenty twenty four. And it still really has not reared its ugly head, except now that we are seeing softening employment numbers. They've actually gone back to a few of the previous employment reports and said, and these numbers weren't quite right. They're a little worse than what what was advertised when the report first came out. They've revised them downwards, which is not a good sign.
And so is that the forebearer of a potential for a less than soft landing? Look, if the employment numbers stay where they at, I would say that they've done a relatively good job under these unprecedented and difficult circumstances with covid, with all of the stimulus money that was out there, with the world shutting down and then restarting. Yes, we're still talking about covid as as we talk about economic trends, but it is a factor that has played into this and had long term effects here. So if they saw some inflation as a result of trying to stimulate the economy and then did so successfully and then have been able to sort of bring the inflation back down while not seeing massive unemployment or or bigger talks about a real recession. I would say that they could kind of successfully pat themselves on the back about the soft landing, even though each dollar now purchases significantly less than it did prior to twenty nineteen. If we start to see these unemployment numbers continue to ramp up or move in the wrong direction, that's where we're going to really start hearing that dreaded R word recession. And again, we probably won't know until after the fact, two to three years after the fact. Right. Well, also, if they breathe it into the air and say we're in a recession, that exacerbates it.
So that makes sense, too. Now, before we get into specifics, I do want to talk through the main differences when it comes to investing in a high interest rate versus low interest rate environment. Well, investing in a high interest rate environment, maybe you don't need to take as much risk in order to get reasonable growth. But again, the reason interest rates were high was that inflation was even higher. So if you were in higher interest rates, fantastic. We're earning a little bit more on our cash, on our safe money. But is it keeping up with purchasing power?
Right. And the problem is that during high inflationary periods, often the market also has some difficulty and is a little bit more volatile in the wrong way, in a downward direction in the moment. But over time, the market has been our best tool to surpass and grow our purchasing power above and beyond the rate of inflation. It's just that they don't coincide exactly in time often. So a lot of people sort of rush to cash during periods of market volatility.
And that's exactly what happened. A lot of people went out shopping for interest rates or interest bearing kind of investments during the market volatility that we saw as interest rates were rising and 2022 being a particularly difficult year in the market. But now we have basically leveled out at these higher interest rates for quite some time. And so locking in some interest rate may be a good idea, a bit of two sides to that coin, so to speak.
And I guess pun intended there. But when you lock in an interest rate for a longer period of time, you get that higher rate even if rates begin to decrease, which we are seeing. Right. We could lock in this now available higher interest rate for the next two or three or five years and really appreciate it as in two or three years, rates are significantly lower. On the other side of that coin, you lock in the money for a longer period of time as well. So you've got to really evaluate, do you need this piece, this portion of your cash or your your your investable assets for a specific period of time? And over that period of time, do you want it to grow safely with a higher interest rate or do you want the potential growth of the market and are comfortable with the risk that comes along with it? To answer that question, I suggest you speak with a financial adviser. Let's get into some specific investment options and lower interest rate environments. And the first one, Peter, high yield investments. Yeah, I mean, as the name implies, right, it's it's a it's a higher yield environment, higher interest rates are available, higher payouts are available on loans and on savings and even money markets and checking and savings accounts.
Right. Or high yield savings accounts. I think that there is a place, a time that these are very appropriate for a portion of your money.
I do think that there are certainly kind of limits to how much you want to have just earning interest. But high yield investments, bonds, bond ETFs, bond funds may be a good place, especially as interest rates begin to fall or continue to fall. If you've got an existing bond bond fund bond ETF, the value, the underlying value of that holding can go up and mathematically should and will go up. Because if somebody is out shopping a year from now and rates are lower, they'd be willing to pay more for your holding that has a higher interest rate.
The yield to maturity equivalent means that the value of the bond that you hold, if it's paying more, is worth more. So bond funds, preferred stock, maybe an appropriate piece here, something that is paying a dividend and you're getting into a dividend piece or a priority position. Anything real estate related may be a good play because as interest rates fall, the real estate market should see some acceleration. You would see corporations refinancing or being able to sort of lock into lower rates, which means that they may have more interest in moving back into buildings or offices. And then personally, you know, for individuals, there should be a housing related boom in the market as well as people who've sort of been sitting on the sidelines as they were pondering whether or not to lock into seven, eight, nine percent interest rates suddenly can get, you know, four and a half or five percent interest rates again. And even those who did lock in choosing or looking at that and saying, hey, it's time to refinance, that would be a big boom to the housing related economy. So really anything that has to do with with real estate or housing stocks may be a good play. And whenever there's movement in the housing market, you know, people need to move. People need to furnish their house. They've got some additional budget room because they're not paying as much as in interest. So even the ancillary housing market kind of companies may be a benefit here from a lowering and falling interest rate environment. Interesting.
So much to think through and clearly no cookie cutter answer when it comes to each person's financial plan. So if somebody wants to talk about how they can be better invested during this, you know, these interest rate cuts. Peter, how can they get a hold of you? They can give me a call.
Nine one nine three zero zero five eight eight six nine one nine three zero zero five eight eight six. You can visit online. It looks like rich on planning dot com. It's my last name or Sean planning dot com.
You can email me Peter at Roshan planning dot com. I saw some stats on the number of people who financially could qualify to be home buyers just in the Wake County area, but we're still renting or in apartments. And that number was surprisingly high to me that there were so many that were sitting on the sidelines. Part of that is inventory, but part of that is the interest rate environment that we have been through. And so as we see the interest rate environment continue to change and become more favorable for home buyers, borrowers, I do think we're going to see a lot of stimulus within the economy. And hopefully that helps us to soften that landing a little bit. Right. Right.
And we will continue to revisit this topic, of course. Peter, thank you for your time today. I appreciate it. Absolutely. Thank you, Erin.
Hey, folks, Peter Roshan here with Roshan planning. So glad that you are enjoying the podcast Planning Matters Radio. You know, one of the tools that we've put out there that people really seem to appreciate and really are our finding of value is at nine one nine retired dot com. It is your retirement tax bill calculator. If you've got any kind of retirement account, your tax deferred 401K or IRA. This is the Web site.
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Whisper: medium.en / 2024-09-28 10:17:36 / 2024-09-28 10:23:09 / 6