Fed Rate Cuts: Where Do Interest Rates Go From Here?

Ole' Jerome at the Fed gave his annual talk to all the big wigs in Jackson Hole last week.

The big quote going around from his talk is "the time has come for policy to adjust."

Aka.. we cuttin' rates in September, y'all! 🤠

But wait, there's more!

You don't have to wait to get the benefit of the actual cut as mortgage rates have been moving lower in anticipation of the actual event. 😁

Take a look at how the market has moved ahead of the Fed:

When you see that rates have already fallen ~17% and the Fed hasn't event taken action yet, it should moderate your expectations on how much more rates will decline. 💡

This brings me to a major point worth making when it comes to managing expectations:

Finding Opportunity

We all love to try and predict the future. 🔮

It's very seductive to say something will happen and have it come true.

But the truth is nobody can predict the future.

Instead, the best we can do is make educated guesses and take historical trends and project them into the future. 🤷‍♂️

It's worth doing, but certainly isn't perfect.

A good exercise is to think of various paths we might take in the future so we can be prepared for the different outcomes. 🧐

Here's a few scenarios I could see as reasonable possibilities for the next year or so:

• 📊 Rates go down, but less than people think. Mortgage rates have already dropped ~17% in anticipation of the coming Fed cuts, so it likely will take even more Fed action than expected to push rates further down. Also, our economy could be stronger than expected and rates may systematically stay higher than we all expect. After all, we're still below the long-term average for rates indicating rates aren't too high.
  
  
• 📉📈 Rates go down in the short-term and inflation picks back up. Using the Core PCE, we're still 30% above the inflation target set by the Fed. We may get the benefit of lower rates in the next year, but they could reverse higher as inflation becomes the main issue again.
  
  
• 💣📉 Rates go down significantly, but it is due to a financial shock in the system and there's limited opportunity for average buyers to take advantage of it. Given how quickly the Fed sorted out the bank failures early in 2023, I'm not as worried about this. However, there's lots of companies with unrealized losses on their books and our government is spending like a drunken sailor. As I discussed with my coaching members, a variety of data points indicate we're close to something in the system breaking.
  
  
• 📉🤩 Rates drop further, the economy holds up well, and there's a housing boom. This is the goldilocks, "soft-landing" scenario everyone wants and is envisioning. But, i'm not sure it's most likely as rates don't usually come down from where they are today if the economy is doing well.
  
  

Now, just in writing this, I can already see I am biased towards scenarios where rates go down (as is everyone). Let's consider a final possibility:

• 📈🥵 Rates level off and go up from here. It's a scenario no one is considering which means we need to give a little thought to it. Regardless of the reason for rates to rise, what if they do? This is the contrarian approach and usually a valuable one given everyone expects rates to keep going down.
  
  

In general, we can play what-if all day, but my point to you is to prepare for a few different outcomes.

➡️ Take 30 minutes and think about what you would do in your business if rates fell significantly.

Which clients would you call first? Do you need to hire a team member to help with the increased work? What are you going to prioritize? What expenses would you cut? 🤔

Now do this with rates staying the same and rates increasing.

You'll be waaaaay more prepared than the average agent who's not thinking about this at all.

What happens in the future matters less when you've thought about the different outcomes and have plans for the most likely ones.

As Howard Marks says, "we can't predict, but we can prepare!" 🚀

Dr. Alex Stewart
Founder

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