This week the fed chose not to cut rates. To no surprise, President Trump made his displeasure publicly known, even suggesting the fed should immediately cut rates by 100 basis points (1%).
So, what if the fed cut rates by 100 basis points (that’s 1%) from where we are today?
Interest rates are one of those things that quietly shape everything—from your business’s cost of capital to your personal investment decisions. When the Federal Reserve moves the fed funds rate, it sends ripple effects through the economy.
Let’s break down what could happen.
While the fed doesn’t set consumer borrowing rates, a full percentage point drop in interest rates will result in cheaper loans across the board—commercial real estate, equipment financing, credit lines, even personal mortgages and HELOCs.
For business owners, this could mean a real opportunity to expand operations, reinvest in growth, or refinance at lower costs. For consumers, cheaper borrowing often means more spending. And more spending means more business. Simple as that.
But….
The challenge with rate cuts—especially in a temperamental inflation environment—is that they can reignite pricing pressure.
More demand + cheap money = inflation risk.
With the recent year-over-year readings from the Personal Consumption Expenditures index (PCE)—the fed’s preferred gauge—at 2.1%, and the Consumer Price Index (CPI) at 2.4%, inflation is currently hanging near the Fed’s target of 2%.
However, there’s a very real concern that a sudden spur of low borrowing rates could throw fuel on what could become a fast-burning fire.
When borrowing is cheaper and people feel more optimistic, they spend more. Whether it’s a home renovation, new equipment, or finally taking that big vacation, confidence in the economy often turns into dollars in motion. And for business owners, that can be the green light you’ve been waiting for to move forward on something you’ve been putting off.
If you own investment property or a well-run business, a lower rate environment could push your asset value higher. But if you’re sitting on cash waiting for “the right time,” you might end up chasing higher prices. Where it would likely show up the fastest would be in the housing market, as lower rates would likely drive housing price increases in an already inflated and somewhat frozen housing market.
Stocks, real estate, and other investments tend to benefit when rates go down. That’s because future earnings become more valuable, and investors start reaching for yield in riskier places. So, if you believe rates will be lower a year from now, an investor may benefit from owning growth stocks even with the possibility of near-term volatility.
A lower Fed Funds Rate tends to weaken the U.S. dollar relative to other currencies. That’s good for exporters—U.S. goods look cheaper to international buyers—but it can also make imports more expensive, which again can add to inflation.
If your business imports materials or goods, that shift in currency value matters. The strength of the dollar is a mixed bag, especially in light of the President’s trade policy and application of tariffs. A stronger dollar means consumers in the U.S. buy more imported goods, but international consumers buy less U.S. exports. This creates the very trade imbalance the administration is attempting to reverse.
For income investors, falling interest rates aren’t great—new bonds pay less. But if you already own bonds, especially long-duration ones, you’ll likely see a bump in value.
If your portfolio includes fixed income, this is where proactive strategy comes into play. Bond returns over the past 5-years have certainly favored high-yield and short-term rates. We would expect this to change as the fed cuts rates, especially a sudden rate cut.
In the below chart, longer-dated bonds as represented by the iShares Core U.S. Bond ETF (AGG) has a 5-year return of (4.34%), while high-yield bonds as represented by the Pacer Pacific Floating Rate Bond ETF (FLRT) sports a 5-year return of 35.30%(!).
Disclaimer: For informational purposes and should not be considered as investment recommendations. Clients of Life Moves Wealth Management may maintain positions in the securities discussed.
If the Fed were to cut rates by 100 basis points, as the President suggests, it would kick off a wave of economic movement. Opportunity will open up—but so will the need for strategic decision-making. For business owners, especially those with liquidity events or capital investment planning on the horizon, a shift in rates can change the math quickly.
Rates don’t move in a vacuum, and neither should your strategy. If your financial plan is still built around assumptions from last year—or even last quarter—it’s time to revisit. Turn insights into action. Let’s build a plan for you that works in today’s economy.
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Author: Dale Shafer II, CFP®, CBEC®, APMA®
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