Will Cutting Interest Rates Now Hurt You in the Long Run?
THE BIG THING I WANT YOU TO KNOW:
There is a lot of pressure on the Federal Reserve to cut interest rates. The problem is, our economy is still healthy! If we cut them now, we won’t have much to cut when things inevitably go bad. We are in a time of plenty, so take advantage of this time to be storing up!
There’s been a lot of excitement in the market this week! Why?
All the excitement is centered around the idea that the Federal Reserve may be cutting interest rates.
Before we move on with this “interest-ing” topic
Here is a basic crash course on the Federal Reserve:
The Federal Reserve’s job is to help regulate the market and keep the economy stable, and one of their primary tools for doing that is interest rates. So when you hear that the Fed is cutting interest rates, what’s actually going on is the economy is slowing down and they want to stimulate more money going into the economy. That’s when they lower the short-term interest rate, which causes banks to lower interest rates on loans making money easier to get.
If we lower interest rates and people have more discretionary income, the idea is that they would take that income and go spend it in the economy and it would boost the economy — more people have more money and are spending it, therefore more money is circulating in the economy. But, when the economy is growing, they can raise interest rates to keep inflation in check. There are two sides to the coin!
what happened ten years ago during the last economic crisis…
In the financial crisis ten years ago, we saw interest rates drop to nearly 0 and then move into a direction we call quantitative easing. It was a massive effort by the Fed where they poured trillions (with a T!) of dollars into buying our own bonds to stimulate the economy, something that’s never been done in the history of our economy.
They kept interest rates low for a while as we were getting back on our feet, but then started to raise them because the economy was doing great. Over the last few years, we’ve seen a consistent, small increase in interest rates, but we’re still not at historical levels. By all signs, the economy is still very healthy!
If we’re healthy, why are they thinking about cutting rates? great question, reader.
*It’s worth noting that you can take any set of data and extrapolate what you want from it.
Because we’ve seen trade tensions with China growing over the last two years, current possible tariffs against Mexico, along with people claiming there’s an economic slow down, there’s a strong push on the Fed to do a rate cut, and the market LOVES this idea.
Why? A rate cut means, again, easier access to money, cheaper money, more money in circulation, and economic expansion!
But here’s the problem:
If we start cutting rates while the economy is in good shape, when the economy is inevitably not in good shape, what happens? We won’t have anything to cut!
a very old, but very relevant story from chris to help prove a point
One of my favorite stories in the Bible is of Joseph. God gives him a vision of fattened cows and skinny cows walking into the water and the understanding is that there’s going to be a certain number of years of plenty in Egypt, but then there will be years of famine following. God gives Joseph this idea to help Egypt store up food in the good years so that there are reserves set aside for the bad years.
Sure, this story is from thousands of years ago, but it’s also very relevant in terms of how we think about our own financial lives! We’ve been living in the longest bull market in history — if there’s ever been a time to store up, it’s now! If we are looking at broad strokes, the country is in a time of plenty.
Here’s the MASSIVE caution flag in my mind: What concerns me about cutting interest rates is that there is pressure on the Fed for something that would be great in the short-term, until a few years from now when we do hit natural economic crisis and we’ve already cut interest rates and there’s not much left to cut.
Are we taking this short-term boost that will feel great to everybody temporarily in lieu of long-term actual health?
let’s look in the mirror and filter this interest rate news down into our own world
Where do YOU and I fit into this?
As a country, we are in a time of plenty right now. Are you setting aside right now for the eventual decline, or are you just taking all the excess and going out and having a great time?
I don’t mean you shouldn’t have fun and take vacations, but part of planning is setting aside. Many of us have forgotten what it feels like when everything drops.
Now is the time to set aside, so you’re ready when things eventually do drop. How do we do that realistically?
Have boundaries in the way you build your financial plan. You’ve likely heard me talk about emergency funds, but an opportunity fund is my favorite kind of fund. It’s money set aside purely to enjoy and travel or give or take the kids to Disney.
If you don’t have a fund like this, chances are you feel guilty when you spend money on fun!
But one of the beautiful things about financial planning is that, once you’ve set aside an emergency fund and set up income scenarios, you have the freedom to put money in this opportunity fund and spend it guilt-free…because that’s what it’s there for!
Good financial Planning Can Be Counter-Intuitive
Isn’t it counter-intuitive that we find freedom in the discipline of having a plan? Having a plan that looks at every aspect of your financial world gives you the freedom to put extra money aside to spend on whatever you want without having to say “I should’ve put this money in savings,” or “I should have put this money towards ___”.
Through that discipline comes so much peace.
If you’re longing for that freedom, to enjoy what you’ve been given, come talk to us about it. We’ve walked so many different kinds of people through this process and would love to figure out how we can take your specific situation and build a financial plan that allows you to grow, but most importantly, gives you peace and freedom.
Do you feel guilty when you spend money for fun?