In an attempt to cool inflation, the Federal Reserve (Fed) raised interest rates There are currently signs that interest rates will be cut in 2024.
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Financial expert Jaspreet Singh, entrepreneur, certified attorney, and founder of the YouTube channel Minority Mindset, explains what this means and… How can we prepare for this possibility of interest rate cuts?
Who said layoffs were coming?
Singh explained that there are rumors among some major financial institutions that 2024 could be the year of significant interest rate cuts.
Singh said Swiss banks UBS and Morgan Stanley could cut interest rates by 2.2% to 2.75%, or as much as half of current rates, from the current 5%-plus rate.These cuts could happen in 2024. They seem to think that it will be implemented early in the year. Probably around March.
Financial institution Goldman Sachs, on the other hand, has suggested that these rate cuts will be more gradual, occurring towards the end of 2024 and extending into 2025-2026. Mr Singh said he believed there was a “lagging effect” of the slowdown and slowdown in the economy. The cooling of inflation will take time for the average person to manifest itself.
Why is a rate cut expected?
The reasons why banks are predicting these rate cuts all boil down to two main points:
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Inflation is cooling.
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Economists are predicting an economic slowdown.
UBS argues that these conditions will encourage the Fed to stimulate the economy. Lower interest rates make it easier to borrow money.
While banks may differ on the extent and timing of rate cuts, they seem to agree that inflation is cooling, the economy is slowing, and the Fed needs to boost the economy as a result. is.
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What does lower interest rates mean?
Singh said a rate cut means different things to different people. If you’re in the camp of people who want to buy things and want their investments to rise in value, you’d probably prefer lower interest rates. Because lowering interest rates means more money flows into the economy, increasing spending and increasing the value of investments.
People who want to buy things and have the cash to do so want higher interest rates. This is because when interest rates rise, the value of your investment generally falls. This is because rising interest rates mean people need higher returns to justify purchasing assets. Therefore, the more cash you have, the more bargaining power you have.
Suppressing inflation by increasing interest rates
The whole purpose of the steady rate hikes since 2022 was to keep inflation in check. And it’s working, Singh said. The latest inflation rate was 3.2% last year and remains stable. Singh called this “good news.”
But an even better indicator of inflation is known as “core inflation.” This rate actually decreased by 0.1%. This may not sound like a big deal, but it actually indicates a downward shift. Singh said the Fed’s target is 2% inflation, but the downward trend is heading in the right direction.
This would therefore give the Fed even more reason to cut rates to maintain this trend, especially if the economy appears to be truly slowing.
american credit rating
However, to better understand the economic outlook for next year, Singh said it is necessary to pay attention to the opinion of Moody’s, one of the major rating agencies. They are concerned that the U.S. lacks sound fiscal policy to reduce debt, and worry that the U.S. has more debt than it can repay.
The United States has already had its credit rating downgraded from AAA (risk-free investment status) to AA+ by credit bureau Fitch in August 2023, suggesting a decline in confidence. In the wake of the downgrade, the U.S. will have to work harder to entice investors to continue investing at higher interest rates.
Moody’s is concerned that the United States will not be able to repay this debt in full. And if there is national concern about the US debt, that means people are less likely to invest in the US and therefore the US has to pay more interest to lure people.
In fact, as the United States borrowed a record amount in the fourth quarter of 2023, the fastest growing portion of U.S. government spending was interest expense.
What does this mean to you?
Singh suggested that all this means that 2024 will be a year of vigilance and preparedness. It’s probably not a good year to finance a new truck or buy other large assets.
Instead, strive to build financial education and preparedness, because as Mr. Singh argued, opportunities arise for financially educated people at every stage of the economy.
But to take advantage of these opportunities, you need to set aside cash to protect yourself.
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