Federal Reserve hints at rate cuts, gives financial boost to consumers
Houston - U.S. financial markets finished the week with the strongest results of the year, spurred by the Federal Reserve's suggestion that interest rates could be cut in the new year. Just over half of Americans own some kind of stock, either directly or through a fund. But the markets are also indicators of how the economy is performing by taking the pulse of corporate health. News that the Fed is taking a break from interest rate hikes is cautiously encouraging.
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Fed Chair Jerome Powell's announcement that the central bank would not raise rates this week was expected.
"Inflation has eased from its highs, and this has come without a significant increase in unemployment. That's very good news," he said.
An indication that as many as three cuts in 2024 could be coming was more surprising. The dove-ish declaration sent stocks soaring, leaving investors and 401K holders with a nice financial bump.
Houston financial advisor Rich Rosso was surprised by the announcement but not the idea behind it, "There is no way that short, intermediate, and long-term rates can stay at this level. It's not possible, so rates are going to head down."
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While Rosso is not ready to write off the possibility of a recession, boosted stock values and lower interest rates could benefit consumers. First, slower inflation that helped prompt the Fed's action is taking a smaller bite out of household budgets. Decent employment numbers are bringing steady paychecks, and lower interest rates could make it easier for consumers to borrow, especially providing an opportunity for some to refinance some of the $1 trillion worth of credit card debt that they hold.
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Financial experts, though, caution that the Fed's encouraging news may have been too much, too soon. "The market (was) looking for tighter financial conditions, and you go ahead and create one of the greatest stock and bond rallies I've seen in a very short period of time, then the Fed realizes maybe (they) were misinterpreted. For now, the news remains encouraging. If, however, the projected rate cuts don't come, markets could react negatively just as quickly.
For those who 'do' have a 401K or stocks, this is a good time to take a look at those accounts and rebalance, if necessary. Today's 'good times' could become tomorrow's troubles.