There are two kinds of people in this world.  The people who say, “Paul Revere never actually said ‘The redcoats are coming,’” and the people who only know the name and really not much else.  For the record, I’m just here to talk about the Federal Reserve, and I needed a silly pun.

Yes, we’re on the other side of the inflation conversation, and it’s time to talk about recessions and rate cuts.  You’ll see a lot of hype around the Federal Reserve cutting their interest rates on borrowed money.  What you need are facts, and I’m going to try to give them to you.

Will Interest Rates Get Cut?

Ok, straight to the point: no one can ever give you a 100% certainty on anything related to money and the markets.  We can tell you that there is a 99.9% chance that the Federal Reserve’s Federal Open Market Committee (FOMC) will cut rates in the near future.  

The next FOMC meeting will occur in September, led by Fed Chairman Jerome Powell. He hinted recently that cutting interest rates would be in the best….interests…of the economy.  He didn’t say that, but I’m a sucker for puns.

For those who don’t study the Federal Reserve chairman’s speeches, analysts absolutely scour those speeches for clues.  In the recent speech, all clues in this case point to at least a quarter-point interest rate cut, if not a half-point.

Will Interest Rates Ever Drop To 3% Again?

We need to go back to 2008 for this one, or really any financial crisis, including the Covid Crash in 2020.  Whenever something catastrophic occurs, the first thing that happens is that people go into defense mode.  No one spends money and no one travels.  Money stops moving.

The whole reason that the markets exist is to encourage the flow of money.  Money flows from your pocket to the grocery store and the government (ick), then into other people’s paychecks, and spreads all around.  Money needs to flow for people to get paid, and defense mode means no money flows and no one gets paid.  That probably includes you.  

With the 2000 Dotcom Crash and then the Great Financial Crisis, it was a crisis of credit. Banks lent out money to people, and those people didn’t pay it back.  When no one was willing to lend money, especially to businesses, the entire economy stopped all at once because businesses needed borrowed money to fund their day-to-day activities.

In order to encourage banks to keep lending out money,  the Federal Reserve dropped their interest rates to nearly 0%.  Banks could then borrow money from the Fed and lend it out, paying nearly nothing for the money and charging just a little above nearly nothing to their clients.  This served as a restart button to encourage lending again.

It worked really well, too.  After the Dotcom Crash, the Great Financial Crisis, and the Covid Crash, low interest rates kept the lights on.

Now, to finally answer the question, interest rates will probably not drop to zero again soon.  We’re currently at 5.25 – 5.5%, and dropping too far too fast when there isn’t anything really terribly wrong going on will absolutely spike inflation again like we were seeing in 2022 and 2023.

We may get back close to 3%, though, so don’t lose hope completely.  The current consensus is for somewhere around 2-2.5% in cuts to occur over the next year.  That means you can at least hope for something around 3 – 3.5% as a target.

What Happens When There Is a Cut In Interest Rates?

I’m glad you asked!

Cutting interest rates will loosen up the restrictions that we’ve been feeling lately.  First came the inflation where everything got just mind-blowingly expensive.  Then, we had the rising interest rates, which caused everything to get more expensive in a different way.

Inflation only mostly targets the poorer people in a community.  Raising interest rates evens the scales just a little bit and stop prices from rising so quickly.  Once the Fed starts cutting interest rates, that starts the process of allowing money to flow more easily.

People will take out mortgages and car loans. Businesses will spend more money.  Basically, anything for which someone might need to borrow money will start slowly getting cheaper.  Just a half percent interest rate cut on a $400,000 house over 30 years, for instance, results in about $150 per month on the monthly payments.

That $150 could be saved, or invested, or used to buy new headphones.  So, that ripple effect starts to take place basically the moment the Fed announces interest rate cuts.

Conclusion: What Should You Do?

If you’re able to be patient, do it.  Rates are expected to come down slowly over the next year.  You don’t want to make big decisions after the first rate cut because you’ll likely see things keep coming down and missing out on further savings.

If you have your money in a cash stockpile, you’ll likely want to start getting your money in the market if you’re not close to retirement.  Lower interest rates mean better earnings for businesses.  Stock prices of those companies that have been struggling for the last four years are likely going to start seeing a resurgence in growth.  I wouldn’t recommend stock picking, unless you’ve received some training, but find a nice ETF or mutual fund and start making your money work for you.