Hello,

The Federal Reserve has been in the headlines a lot lately as analysts try to figure out when policymakers will cut interest rates.

Why does the Fed matter so much?

Let’s discuss.

The Fed’s decisions on interest rates are a big deal for markets and the economy because they affect how much it costs to borrow money.

Since businesses and consumers depend on credit to buy houses, fund business growth, pay workers, and more, interest rate policy decisions ripple across the economy.

Higher interest rates make it more expensive to borrow money and can act as a brake on economic growth.

On the flip side, higher interest rates can be a boon for investors by increasing the yield on savings accounts, bonds, and other debt instruments.

If you’ve found yourself putting off a new mortgage until rates come down or hunting down the best yield on a savings account, you’re experiencing the Fed’s actions in play.

How does the Fed change interest rates?

At a high level, the Fed sets the “target” for the Federal Funds Rate, which is the rate banks and large institutions charge each other.¹

Right now, that target is set at 5.25%—5.5%, and the actual "effective" rate is about 5.3%.

Unfortunately, you and I don’t have access to rates that low.

The rates we can get as consumers, investors, and businesses are set above that lowest rate.

Here's how that looks in practice.

The rates offered on the market to borrowers and investors are based on factors like risk profile, collateral, and loan length.

You can see in the chart that 30-year mortgage rates are much higher than the base rate, in part because of the length of the loan.

How does the Fed influence the stock market?

You might have noticed how much stock prices can swing when fresh headlines about the Fed's decisions emerge.

That’s because, all things being equal, lower interest rates are considered better for company performance because they incentivize borrowing and help fuel growth.

When interest rates rise, companies must pay higher rates to access credit, which can hurt their future prospects (and stock price).

Since the stock market tends to be forward-looking, the prospect of lower rates can flip the “greed” switch and trigger a rally as investors bet on future company performance.

That’s what we’ve been seeing in the past few weeks.

When will the Fed lower rates in 2024?

That is the $64,000 question. We don’t know exactly.

The Fed is choosing to move carefully and assess the data.

While we’ve made serious progress in taming inflation, there’s still a ways to go before reaching the Fed’s target of 2% inflation.²

While many investors and economists hope the Fed will start cutting rates this spring and keep to their plan for multiple rate cuts this year, others aren’t convinced.³

Some analysts don’t think the Fed will be in a position to cut rates until next year.⁴

What does all this mean for investors?

Markets are likely to stay volatile as long as interest rates remain uncertain, especially approaching Fed announcement dates.

On the other hand, signs of lower inflation or other data that would support a cut are likely to be greeted with further rallying.

Bottom line: We’re watching, discussing, and strategizing how to position clients this spring.

Questions? Concerns? Hit “Reply” and let us know. We’ll set up a time to talk.

Fiscally,

Your Eagle Wealth Team

Tax Scams

Tax season is upon us, and in this digital age, tax scams have become increasingly sophisticated making it challenging for individuals to discern between legitimate tax issues and fraudsters. 

One scam involves swindlers posing as a third party offering to help create an online account at the Internal Revenue Service (IRS) to pay taxes. The information they collect can be used to file a sham tax return, with the scammer pocketing the refund, or for other types of financial fraud or identity theft.5

Also, be wary of "free money" scams. Criminals may promise unclaimed refunds or stimulus funds, often requiring an upfront fee to "retrieve" your money. 

Remember that the IRS communicates mainly through the mail and will generally make contact by phone or in person only after a taxpayer has received multiple written notices. They will never ask for immediate payment, threaten to call the police, or ask you to pay a tax bill with a gift card, a prepaid debit card, or a wire transfer.6

To help protect yourself, consider setting up your IRS Online Account at IRS.gov, and avoid storing financial records and information in an email account. If you receive unsolicited communication claiming to be from the IRS, you might want to check with your tax professional before responding. If appropriate, the next step may be reporting it to local law enforcement, the FBI, the state attorney general, AARP, and the FTC.

*Remember, this email is to help make you aware that tax fraud can happen. Please consult your tax, legal, or accounting professional before responding to any new claim.7
 

The Week on Wall Street

Stocks extended their tech-led advance last week as signs of a resilient and still-enthusiastic consumer boosted momentum.
 

Nasdaq Sets New High

Stocks traded in a narrow band early in the week but ended the five-trading sessions with a powerful advance.

While the Dow dipped lower, artificial intelligence (AI) names powered the gains in the S&P 500 and the Nasdaq Composite. The Nasdaq bobbed around the 16,000 level for most of the week before posting consecutive record highs on Thursday and Friday, surpassing its 2021 record. It was the last of the three major stock benchmarks to reach a record high this year.8

Economic news also helped boost markets. The Personal Consumption Expenditures (PCE) Index, the Fed’s preferred inflation gauge, rose 0.3 percent in January versus December—and 2.4 percent on a 12-month basis. Both were in line with expectations. Stocks ticked up on Thursday following the release of the report.9

Consumers Remain Upbeat

With all the excitement over AI, it’s easy to overlook some key economic indicators that also speak to the underlying strength of the economy—specifically, consumer data.

In addition to the closely watched PCE report, an end-of-week consumer survey revealed that while sentiment softened in February, it remained near a 32-month high. Fresh data this week also showed an unexpected jump in personal income.

Finally, the PCE report also reflected an ongoing consumer shift from goods to services—a sign the economy continues to normalize after the pandemic. Since two-thirds of gross domestic product comes from consumer spending, these consumer-related metrics helped support the narrative that the economy appears to be gathering momentum.10,11

Any companies mentioned are for informational purposes only, and this should not be considered a solicitation for the purchase or sale of their securities. Any investment should be consistent with your objectives, time frame, and risk tolerance. Source: YCharts.com, March 2, 2024. Weekly performance is measured from Monday, February 26, to Friday, March 1. ROC 5 = the rate of change in the index for the previous 5 trading days. TR = total return for the index, which includes any dividends as well as any other cash distributions during the period. Treasury note yield is expressed in basis points.