YOUR MONEY Rate Cut Conundrum
With interest rates declining, where should you sock your money? ::
BY GREG BROWN T
here was a time not so long ago when many of us probably figured we’d never see high rates on our
savings accounts again. After the 2008 financial crisis
prompted the Federal Reserve to slash its benchmark rate to 0%, savers have been adrift in a frustrating era where banks essentially paid nothing for the privilege of holding our cash. However, when inflation roared
to life after the coronavirus crisis, the Fed found itself in uncharted territory — trying to figure out if the inflation was “transitory” or a more permanent byproduct of government spending and borrowing run amok. Led by Fed Chair Jerome Powell,
the governing committee went on an aggressive interest rate-boosting binge to try and quash inflation by cooling the economy, pushing up rates from 0% to 5.50% in a span of just 17 months, from March 2022 to July 2023. After more than a decade of being
out of fashion, earnest nickel-and- dime savers were being rewarded for
their prudence. Now, though, we’ve reached
another inflection point. The Fed, shifting its focus to cracks forming in the job market as inflation cools, has reversed course, dropping rates by a more-than-expected 50 basis points since September, to 5%.
NEXT MOVES Powell is navigating an especially tricky moment in time. There’s plenty of uncertainty that comes with any new presidential administration in Washington, D.C., but the bigger picture is even more daunting: Wars in Ukraine and the Middle
East, and the threat of a conflict with China over Taiwan; Supply chain wrinkles such as the
suspended dockworker strike; And a job market dealing with
the existential threat of artificial intelligence and robotic automation. Nevertheless, there is also plenty
to celebrate. Inflation is down sharply from mid-
2022, when it peaked at 9.1%. The Fed has long targeted 2% as its “ideal” rate, with the most recent figures showing the consumer price index at 2.5% and trending (slowly) downward. With that, the Fed is turning toward
the problem of full employment — the second part of its so-called “dual
mandate” in which it attempts to balance steady economic growth with price stability. The U.S. jobs machine seemed unstoppable six months ago. Plenty of workers felt secure enough in their careers to seek better pay elsewhere. Wage growth spiked higher in 2022 in response to the one-two punch of high inflation and low labor supply on the heels of the pandemic. Since then, that growth has been
trailing back toward the long-term average. Meanwhile, analysts estimate interest rates will fall to between 3.25% and 3.75% by the middle of 2025. The question, then, is what can
investors do when rates inevitably flatten out? A falling benchmark rate means the
cost of borrowing goes down. That’s good news for homebuyers, credit card holders, and people who want to finance new cars and home appliances. It’s not good news for retirees
who rely on bond income in their portfolios. The days of 7% CDs, 6% on savings accounts, and 5% U.S. Treasurys might be in the rearview mirror. “Lower rates mean lower coupons,
lower yields, and less income stream to investors,” says Stephen Roth, a certified financial planner based in Newark, New Jersey. “It really is a thing of the past.” Owning bonds used to work well as a strategy once you accumulated a
Dividends Still Matter O
ne investment vehicle that would do well
in a lower interest rate environment is dividend stocks, says Jonathan Ford Jr., an investment adviser in Morrow, Ohio.
The payout ratio, which is
the annual dividend payout divided by the earnings per share, tells you the percent of earnings you are getting paid as a shareholder, Ford explains.
“If this gets too high, 72 NEWSMAX MAXLIFE | JANUARY 2025
it could be considered a red flag,” he says. “Around 70% is typically used as an acceptable upper level for cautious investors.” When selecting dividend
stocks, you can choose a pooled investment vehicle, such as a mutual fund or ETF,
or individual stocks if you wish to do the extra work on the research front to pick out the best individual names. Consider subscribing to a newsletter, like Newsmax’s Dividend Machine or The High Income Factor, for dividend- focused stock picks.
©ISTOCK
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