Economic Perspectives: Consumers Start to Expect Lower Interest Rates

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Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Photo Credit: Ian Keefe, Unsplash

The University of Michigan publishes a monthly Survey of Consumers that assesses the confidence and expectations of U.S. consumers. It asks questions about current economic conditions, expectations for the future, and consumers' attitudes toward big purchases. There was a notable development in the December 2023 survey, as the percentage of consumers expecting lower interest rates over the next 12 months rose to nearly 30% from 12% the prior month. This expectation for lower interest rates is connected to easing inflation and the view that there is no need to keep interest rates at current levels, with inflation falling back to 2%. Consumers and investors expect rate cuts in the first half of 2024, and the Federal Reserve hints at the potential for rate cuts if inflation continues to ease this year.

This shift in expectations could impact consumer and business behavior. The interest-rate-sensitive segments of the economy that have slowed the most over the past year could start to thaw. For example, the housing market could pick up if homebuyers believe they can refinance to a lower mortgage rate in the coming years. The combination of lower inflation and interest rates could stimulate overall consumer spending and demand. With financing costs projected to decline, businesses may decide to start a new project, expand operations, or move forward with a project on hold. Lowering interest rates could stimulate demand and help stabilize the economy after the Fed’s aggressive rate hikes.

Investors can also take steps to prepare for lower interest rates, with the biggest opportunities concentrated in the bond and cash portion of portfolios. Cash and cash-like investments, such as high-yield savings accounts, money market funds, and certificates of deposit (CDs), were big beneficiaries of rising interest rates. Rates on cash jumped to their highest level in years, but those rates could now decline as the Fed starts cutting interest rates. Individuals with excess cash may consider locking in a short-term CD to take advantage of current levels before the Fed starts to cut. Bond portfolios can also be repositioned to lock in today’s yield for an extended period. With interest rates expected to fall from their recent peak, now is a good time for savers to review the fixed-income portion of their portfolios.

Percentage of Consumers Expecting Interest Rates to Move Down Over the Next 12 Months

US Consumer Interest Rate Expectations


 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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