Hello,

Whenever you listen to financial experts, there's one topic that will almost always come up: interest rates. But what do interest rates have to do with your portfolio and wealth?

It turns out, a whole lot.

When you hear the term "interest rates" on the news, it's usually referring to the Federal Funds Rate, which is the rate that banks use when borrowing from one another. This interest rate is the benchmark set by the Federal Open Market Committee (FOMC), and factors in current economic conditions like inflation, employment, and GDP growth.

But why should you care about the Federal Funds Rate?

Because when the country's benchmark interest rate changes, it has a downstream effect on everything from your mortgage to your investment portfolio. In fact, just a one percentage point decline in interest rates can increase disposable income for individuals across the earning spectrum.¹

Take, for instance, a home mortgage. Say you're looking to purchase a $346,900 home. With a 7% mortgage rate and a 20% downpayment, your monthly payment would be $1,846. But if your rate decreases by just 1%, you would pay $1,664, a savings of $182 per month. If you factor this change over a 30-year mortgage, you'd save a total of $65,691* in interest.²
 

Your mortgage is just one example of how an interest rate change can directly affect your wealth. Let's zoom out to see what happens to the economy and the downstream effects of interest rate changes.

When interest rates rise

While economic growth is good, too much of it can lead to an overheated economy where prices are rising and inflation is a concern. In these scenarios, the FOMC is likely to increase interest rates to help maintain economic stability. 

However, an increase in the Fed Funds Rate is usually not good for stock prices since corporations have a harder time borrowing money and expanding during high interest rate periods.
 

Here's how you can look at the differences between rising and falling interest rates:
 

One last thing: Don't forget about lag time!

Hopefully, the correlation between interest rates, stocks, debt, and the economy is starting to click. But you should keep in mind that when interest rates change, there is usually a lag time between the policy change and its effect on the economy. According to research from the Federal Reserve Bank of St. Louis, it can take anywhere between 18 months to 2 years for interest rate changes to have an impact on the economy.³ 

So, the next time you hear about a potential interest rate change, remember that it will take some time before its effects are felt in the economy, and your portfolio.

As always if you have any questions, please give us a call. We’re here to help!

Warmly,

Your Eagle Wealth Team
 

 
EWM Teaching at COCC  
Do you have a friend or relative who could use some financial planning help?  Then we’ve got good news.  We’ve been volunteering at COCC since 2010, partnering with them on financial planning classes.  We’re big believers in the power of education and this is one of the ways we’re able to give back to our community. 

This fall, we’ll teach in-person classes at Central Oregon Community College.  They’re filling fast so have your friends check out our website for details. 
 

Personal Retirement Analysis Workshop: 

• 9/24/24 and 9/26/24 from 6:00 pm – 8:00 pm 

**These courses are not intended for current clients.  The planning we’ve done with you through personal meetings far exceeds what’s possible in a classroom of students.  Please remember though, if you’ve had any changes in your life that may affect your current plan, please call us so we can discuss and make any necessary updates. 
 

The Week on Wall Street

There were mixed results for stocks last week as upbeat economic data and a critical Q2 corporate report shaped the week.

The Dow Jones Industrial Average rose 0.94 percent, while the Standard & Poor’s 500 Index increased 0.24 percent. The Nasdaq Composite lagged, falling 0.92 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, gained 0.35 percent.^1,2

Key Economic Data

Markets began the week quiet as investors awaited Q2 earnings from Nvidia, the world’s most influential name in artificial intelligence.

The chipmaker–the second largest stock in the S&P 500 by market capitalization–dipped on the news, putting pressure on the Nasdaq and S&P 500. (The Nasdaq and S&P 500 are market-weighted averages, so larger companies have an outsized impact.)³

Nvidia is mentioned to show its influence on the overall stock market. It should not be considered a solicitation for the purchase or sale of the company.

On Thursday, an upward revision in Gross Domestic Product (GDP) data boosted markets, although stocks fell later in the day. Friday’s Personal Consumption and Expenditures (PCE) data seemed to confirm that inflation remained tame, welcome news for investors who are anticipating the Fed may adjust rates in September.⁴
 

Softer Landing in Focus?

Several pieces of data helped build a narrative that the economy may be coming in for a soft landing.

Second-quarter GDP growth was revised upward, from 2.8 percent to 3.0 percent. That’s an improvement from Q1 GDP, which rose 1.4 percent. Some market watchers were concerned about the Q2 revision after pending home sales in July hit its lowest monthly level in 23 years.⁵

Meanwhile, the Federal Reserve’s preferred measure of inflation, the PCE Index, came in 0.2 percent higher in July–in line with expectations. Core PCE inflation, which the Fed tracks closely, edged up 0.2 percent–also in line with forecasts.⁶