Will Interest Rates Actually Come Down Soon?

 

We millennials spent the pinnacle years of our adulthood in an extremely low interest rate world. If the last year and a half have blurred your memory, let me bring you back…

From 2008 to 2022, the Fed Funds rate remained consistently below 2%, briefly climbing to above 2% in 2019. During this time, people were getting 30-year mortgages below 4%, and 15-year mortgages below 3%. It was even very common to find zero percent car loans. Even school, credit card, and business loans were significantly cheaper.

Nowadays, the Federal Funds rate is above 5%, and 30-year mortgages are floating around 7.5%. I frequently hear people longing for the low-interest-rate “glory days”. I have also noticed people buying houses they can’t quite afford, their rational being, “Well… I’ll just refinance when interest rates come down.”  

But let me remind you friends… This low-interest-rate environment we millennials entered the housing market in is NOT normal.  

Let’s widen our perspective a little bit by examining this chart dating back to 1960. What we call “high” around 5%, is actually pretty darn low historically! 

The main motivation behind The Fed lowering interest rates would be to save a drowning economy. However, when we look at the current economy, we’re seeing unemployment below 4%, the stock market near all-time highs, and inflation still above target.

Why would they decrease interest rates?

If they reduce rates too much, it might only send inflation even higher. Sure, outside forces or unforeseen circumstances could alter the current economic environment, but as of right now, May of 2024, the economy simply doesn’t need saving.

Source: Bloomberg

The Bloomberg chart above shows that not only are most members of The Fed (represented as yellow dots) thinking that the long-term target for interest rates won’t be achieved until 2027. In fact, they think the long-term target is 2.5% and not the 0.25% we all got used to. Furthermore, most members don’t believe interest rates will return to 3% until 2026. These “glory day” 0.25% interest rates might just become a distant memory, if not a thing of the past forever.

I’m not saying you shouldn’t buy a house or get a car. I am saying you need to buy what you can afford now. Don’t buy based upon the assumption that it will get cheaper again soon, because it might not. As I said in my blog, Why I Support Home Ownership Over Renting, I do think that owning a home is a great option for many Americans. Just make sure it is an expense you are prepared for and that you are living a financial life that is aligned with your personal values.

And please… don’t get an adjustable-rate mortgage.

Like ever.