Federal reserve lowers its rates, how does this impact the markets?

The federal reserve made an emergency cut of half a percent on March 3rd, or Tuesday of this week. We haven’t seen a emergency cut since a few weeks during the 2009 crash. Not only is this scary and ominous, considering the last cut, but it changes a few things in various markets.

TL;DR:

Stock market, short term lower rates are good, long term/medium term, lower rates are bad.

Housing market, good for buyers

Savings market, lower rates all around

cryptocurrency, depends on your perspective,

How might this impact the markets?

Stock market

In the stock market, lower interest rates are generally a positive for the stock market. Lower rates make it cheaper for businesses to borrow and invest in their operations, and so companies can expand their profits at a lower cost. In addition, lower rates make stocks look like a more lucrative option for investors, so stock prices tend to rise when rates are cut, if the economy looks strong otherwise.

The stock market tends to price in the potential for a rate cut sometimes weeks or months before it actually takes place. In this case, the S&P 500 soared 4.6 percent the day after the Fed made it clear that it was willing to lower rates and the day before it actually did so.

Winners: Stock investors did well as it became clearer that the Fed was on board to lower interest rates. The market pushed up many stocks in anticipation. Bond investors have also done well, as lower rates — or the expectation of them — raised the price of bonds.

Losers: Paradoxically, while stock investors may benefit in the short term as rates decline, the increased prices may set up investors for losses in the medium term. If the economy weakens further and the Fed cuts rates again, investors may begin to anticipate that a recession is looming and quickly sell off stocks.

And since we are a few days out from the rate cut we can look back and see with some clarity. For the most part the markets seemed to like it. For this week the stock market is up and $SPY is up 4.46% as of writing this. But further, as expected, treasuries are also up this week at 2.6%. But there are a few other markets that we should cover too.

Housing market

In the housing market, the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons.

In 2018, the Fed raised rates on the belief that a stronger economy could handle higher rates, and mortgage rates climbed as well during much of that period. As investors began to anticipate a slower economy, they pushed the yield on the 10-year Treasury lower in 2019 and 2020, and that hit mortgage rates well before the Fed even acted.

Winners: Lower rates are great if you’re looking to get a mortgage or you’re able to refinance an existing mortgage. Those with adjustable-rate mortgages can also benefit from lower rates.

Losers: Losers include those who are unable to take advantage of lower rates, perhaps because they’re underwater on their house or maybe they’ve locked in a fixed-rate mortgage and today’s rates aren’t quite low enough that it makes sense to refinance.

But the good news, at least if you’re someone looking to buy a house, is that the 10-year treasury yield has hit an all time low – falling below 0.9%

Savings market

In the savings market, falling interest rates mean that banks will offer lower interest rates on their savings and money market accounts – although with SoFi you can still get 1.10% and $75 bucks when you sign up with the link. CDs typically also see a decline in rates, though these products tend to reflect much of the lower yield before the Fed actually implements the cut.

Winners: CD owners who locked in rates recently will retain those rates for the term of the CD. However, if rates continue to fall, these savers will have a hard time getting the same higher rates that they have now when they have to roll over their CD.

Losers: Savings accounts will feel the brunt of lower rates, as banks are likely to fairly quickly ratchet rates lower following the Fed’s move. Any other variable-rate products, such as money market accounts, will also move lower.

Returns for online banks have already begun to shift lower. SoFi, Robinhood, Wealthfront, M1Finance, etc have all lowered their rates as of today with more companies to come, if they haven’t already.

Cryptocurrency markets

In the cryptocurrency markets, falling interest rates mean that investors have cheaper access to credit, both for personal loans and business loans. With cheaper access to credit that could fund another bull run of wealth flowing into cryptocurrency as other assets tumble over fears of the corona virus grow. Of course, this depends on if you think cryptocurrency is a hedge against global risk or not.

Winners: It depends on the viewpoint. But assuming it’s a “risk safe-haven”, then we should see further growth as the corona virus grows in strength and as the stock market losses grow.

Losers: As interest rates fall and global risks rise, it could push investors into safer assets, and as the majority of hedge funds and investors, think Bitcoin is still too risky – this would push prices down.

But, in my opinion, the lowering interest rates interest rates and the rising global risks put Bitcoin in a neutral or probably even negative spot. If there is a recession next with high inflation rates due to lowered rates, Bitcoin is an excellent place to park your money. But baring those two confounding factors, it’s a neutral or negative spot. Investors are panicked by the recent scare so they probably won’t be investing in highly volatile crypto and internet coins.

Although, I’m not sure anyone knows:

Summary:

With many markets expecting some economic weakness due to the corona virus and unemployment sitting near historic lows, you’ll want to consider how much longer the economy’s expansion can continue. When the economy enters a recessionary period again, rates should fall. So if you’re going to make your moves into crypto, stocks, savings, or housing, I’d do it quickly.

Disclaimer and Author’s Bio:

Kendon started TheCryptoDivision in 2017 in order to help people understand cryptocurrency/finance and learn about the unique  opportunities in the cryptocurrency world and in the financial world. Kendon is an economics graduate from BYUI. He worked for an investment bank in the foreign exchange department.

If you haven’t invested in cryptocurrency yet, Kendon recommends using Coinbase as a good jump start. Invest $100 dollars into Bitcoin and you’ll get another $10 dollars’ worth of Bitcoin for free using the coinbase link.

Kendon recommends trying to fight the fed’s devaluation of your dollars by using SoFi’s free banking and getting around 1.10% on your checking accounts. You’ll also get a free 75 dollars.

For investing I use a automated investment platform, M1Finance, and for trading I use Robinhood.

The author gets support/income for this website by donations, using affiliate marketing, google ads, and a shop on his website. But he has never taken any financial compensation for any research or post. This is not meant as financial advice.

If you want to get into contact with me, DM on Twitter, follow on facebook or follow on the crypto-social media platform steemit or email TheCryptoDivision@protonmail.com

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