MINNEAPOLIS — We've spent a lot of time over the last year talking about inflation and the Federal Reserve raising interest rates, and what that means for you if you're making a big purchase like a car or house, or how much it costs you to rack up charges on your credit card.
In this new year, economists say inflation is cooling and that could mean interest rates will start to go down.
That’s good news for anyone trying to borrow money, but folks like retirees and seniors who have been relying on higher interest on their less-risky investments are wondering: What's next?
For a quick example of how interest rates can affect a typical retirement portfolio, consider the 10-year Treasury rate over the last few years.
Back on March 9, 2020, the 10-year Treasury rate was at 0.54%.
At that rate, a $10,000 investment would earn about $54 a year.
Fast forward to Oct. 20, 2023, back when the rate was at 4.93%, the same $10,000 investment was paying $493 a year — seven times more money.
The only difference between these two scenarios was the interest rate.
"These higher interest rates have been a nice little cushion for a lot of seniors who weren't even expecting that."
University of Saint Thomas economics professor Tyler Schipper says the higher interest rates over the last few years have helped many retirees stay in lower-risk investments.
Back when interest rates were at historic lows, a lot of seniors and retirees had to chase higher returns to make enough money to stay retired.
A lot of investors went into the stock market and purchased more risky investments and put more of their lifesavings at risk.
Many of those individuals are now wondering about the future, ever since the Federal Reserve announced plans to start lowering interest rates in 2024.
"It's going to be everyone's favorite game of 2024: When will the Federal Reserve finally start to lower interest rates? Right now, markets seem to be believing that there will be more interest rate cuts than what the Federal Reserve is outwardly saying. The Federal Reserve says three times in 2024. Markets seem to be pricing in more than that, maybe even up to double that.”
Needless to say, by the end of 2024, interest rates on a lot of safer investments could be significantly lower than they are now, but the change won’t happen right away.
Professor Schipper says the first interest rate cut likely won't happen within the first three months of the year.
So, anyone who wants to lock in to these higher interest rates for the long term still has time to invest in long-term bonds, CDs and other investments before the rates go down.
On the flip side, Schipper says borrowers and consumers won't see relief right away, either.
"People are still going to walk into a grocery store and prices are still going to be high, and I know that stinks. Everyone wants prices to go back to where they were."
Professor Schipper says we may not see lower mortgage rates and credit card rates for a few months either.
He says credit card rates are more likely to go down after an interest rate cut, but mortgage rates are less connected to the federal interest rate and may not go down by as much, or as quickly.
Many economists are also looking at the possibility of a recession in 2024.
The opinions are wide-ranging, as some forecast a massive recession in the new year, whereas others are predicting a banner year for the U.S. economy and stock market.
"I'm team 'soft landing' now. For a long time, I said the soft landing is like this mythical unicorn, I'm convinced. I'm on team soft landing. I think my expectations for growth is slower growth in 2024, but well north of a recession,” Schipper explains.
“I think a soft landing is possible. I’m excited we somehow got it to work. It’s not easy to do. It’s very difficult and it looks like somehow the Federal Reserve might have pulled it off.”
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