What If?

Bill Parrott |

What if the Federal Reserve does not lower interest rates this year? What if they leave them alone? Since 1990, the Federal Reserve has tinkered with interest rates 76% of the time or 26 years out of  34 in which they took action. Sometimes, they would step on the gas and lower rates; other times, they applied the brakes and raised rates. The Fed left rates alone from December 2008 to December 2015, when the S&P 500 soared 123%.

Long-term interest rates have averaged 4.18% since 1990, when the Federal Reserve started using the Federal Funds rate to control economic activity. The rate today is 4.09%. Despite all the adjustments, long-term rates are trading near the average rate for the past 34 years. US GDP climbed 364% during this period, averaging 4.72%, while the S&P 500 is up 1,270%, averaging 8.10% annually.

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I'm not sure it matters if the Federal Reserve raises a quarter of a point here or lowers a quarter there because global market forces are so powerful. However, stock and bond markets wait anxiously for Fed announcements to see if they will change the direction of interest rates. The Fed only controls the Fed Funds Rate; the remaining rates from one month to thirty years are left to market participants to determine current levels. I like the 1-month US T-Bill as an indicator of short-term interest rates, and since last July, it has remained unchanged, pegged at 5.49%. The current Fed Funds rate range is 5.25% to 5.50%. Maybe the market knows something?

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The Federal Reserve is important, but we don't need to worry about them raising or lowering rates at each meeting because market forces tell us all we need to know about the direction of rates. I prefer to put my faith in millions (billions?) of market participants instead of twelve voting members of the Federal Reserve.

Investors and financial experts try to guess what the Federal Reserve will do with interest rates, and they only have two choices – raise or lower rates- and they often get it wrong. A recent Wall Street Journal article states, "Wall Street has been caught offside in both directions while betting on the path of interest rates over the past few years."[1]

What if the Federal Reserve does not lower rates this year? I don't think it matters. Gambling on Federal Reserve actions is exhilarating for some, but you'll do better to focus on your financial plan and long-term goals.

Never let an inventor run a company. You can never get him to stop tinkering and bring something to market.~ E.F. Schumacher

February 10, 2024

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.

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