#38 | 2024 Interest Rate Outlook

Jon “Jag” Gay: Welcome back to Protecting and Preserving Wealth. I’m Jon Jag Gay. I’m joined by Bruce and Jason Hosler of Hosler Wealth Management. Gentlemen, always great to be with you.

Bruce Hosler: Jon, it’s great to be with you this morning. Thanks for joining us.

Jason Hosler: Good morning, Jon. It’s good to be here.

Jon: Bruce, I understand you want to talk about 2024, which you would expect at the beginning of the year, but specifically drill down on interest rates today.

Bruce: That’s exactly right, Jon. And 2023 was a very interesting year in the markets and in the interest rates, and we think that 2024 is going to be interesting as well. Dominating the story last year were the historic rate increases, and then finally the Fed pause, some people are calling it the Fed pivot, and we think the Fed is going to continue to dominate the headlines and drive the markets in 2024.

Jason: You have to remember that much of what has happened the last few years in the markets is all downstream of the COVID pandemic and the government response. We saw unprecedented government intervention into the economy, inflation at higher rates, the fastest raise in interest rates since the creation of the Federal Reserve to combat that inflation, and finally, we appear to be at that pivot point for the Fed.

Jon: Every time I hear that word pivot, I think of that scene with the couch and Friends, but on a more serious note, do you expect interest rates to come down in 2024?

Bruce: Oh, wow, what a question, Jon.

Jon: I’m putting you right on the hot seat here, Bruce!

Bruce: The Fed has been signaling that they expect to lower interest rates in 2024. They’ve suggested that there may be as many as three to five adjustments, but the bond market seems to think that they’re underselling the matter, and what we mean by that is the 10-year Treasury has already moved down from its high on October 18th of around 4.99%, let’s just say 5%, and today, here we are at 3.85%, roughly, on the 10-year Treasury in the third week of December in 2023.

Jon: Yes, good idea to timestamp this, we’re recording this on December 21st. What does that mean for us laypeople here in the audience?

Bruce: It means that the market expects the Fed will have to cut interest rates more than they have stated that they’re going to. That is, the market’s expecting the Fed to have to cut interest rates, and the Fed has said they’re only going to cut them so much, but the market’s expecting it to be much more than that. They’re pricing in what they’re considering to be a soft landing, and if that’s successful reining in inflation, let’s say that they are successful, without causing the economy to move into recession, that’s what the Fed’s trying to achieve.

Jon: All right, so Jason, let me put you on the hot seat. Do you have any expectations of a recession in 2024?

Jason: Also one of those big questions. We think a recession is possible, it would only take one or two things going wrong to see that play out. You could see inflation tick back up, you could see some of the geopolitical hotspots around the world flare up, that could derail the Fed’s soft landing track. Remember, it could also be a smaller recession, and if the market expectation of more rate cuts plays out, the Fed could begin acting aggressively to stabilize markets. There’s many smart analysts whose research we follow that have disagreements on when the Fed is going to cut, how much they’re going to cut by, will there be a recession in 2024? I don’t think we’ve ever seen analysts so widespread across the board as we do right now.

Bruce: Oh, they’re extremely diversified in their views, and these are smart people that we have a lot of respect for, and they fall on both sides of what’s going to happen.

Jon: Again, important to emphasize that these are predictions, not a guarantee of any future results. So let’s keep throwing the firebombs into more hot seats here, Bruce. What do you think as far as the election and how that might affect interest rates, the presidential election year we’re in now?

Bruce: Certainly, the Fed has claimed that they always want to not try to take a political side, one side or the other, and they want to remain neutral on what they’re doing, but any politician, all politicians, want the economy to be in good shape during an election year, certainly. The Fed has tremendous political pressure to try and make sure that they’re easing just enough to make sure that the economy is not crashing. Could that affect interest rates? Yes, most definitely. It could affect how they react or preact to what they see coming down the pipeline.

Jon: Let me challenge you on what you just said there, Bruce. You said that every politician wants to have a good economy in an election year. I would say regardless of party, the party that’s trying to take over probably wouldn’t mind seeing a bad economy and blame the party previously in power, and the party in power wants to say, “Hey, everything’s great,” right?

Bruce: Right, but just remember, if you’re constituent and the incumbent is in office and the economy is lousy, even if they’re the party that’s out of favor or not in control, you may still hold that incumbent responsible and say, you know what, I want somebody else because what you’ve been doing isn’t working for me. Incumbents, even if they’re not in the party that’s in power, they have exposure to a bad economy. Generally, politicians as a whole want the economy and stimulus to be good.

Jon: That’s a fair point. Jason, back over to you. What do you see happening with inflation? I realize that’s a really broad question and probably hard to answer here in January, but what are your thoughts on inflation as we head into the new year?

Jason: You’re shooting some big shots here, and they say when you’re getting flack, you’re over the target. Inflation, I think, is still top of people’s mind because even though it’s come back down to 3.1 at the last read. On the CPI, prices are significantly higher for most Americans than they were a couple of years ago. People are still feeling that pain of paying more for everyday items. I think the trend is most likely going to continue down. Again, like I said earlier, it wouldn’t take much disruption of the path that we’re on to see inflation tick higher in a couple of places and to have that influence what the Fed is trying to do.

Bruce: Let’s just clarify, the rate of inflation is the rate that it increases from where it is today. It’s just, is it slowing down at the rate of inflation? That’s really what we’re talking about. There’s inflation, but it’s just slower than it was last year. We have all of last year’s inflation that people are thinking about. I had the opportunity this week to go visit my grandchildren at Jason’s house, and my granddaughter wanted french fries. I went to the drive-in at McDonald’s to get french fries, and a large french fry at McDonald’s caught me off guard, $5.41 for a large French fry! We’re not talking a hamburger, we’re not talking a drink. We’re talking just french fries, $5.41! That’s what inflation feels like to everyday Americans. Something that probably just a couple of years ago was maybe a couple of dollars, now it’s $5.41.

Jon: Bruce, let me be equal opportunity here, because I had to go make a return in the mall last week for my wife, here during the holiday season as we record this. And I stopped at Burger King in the food court and I got a combo meal. The combo meal, I forget the exact number, I want to say it was like $16! And I’m like, are you kidding me right now? This is nuts!

Jason: Right. That is what inflation feels like. When the reports come in, inflation is lower. What the reporters don’t realize is that things are already high and people are already feeling that pain. The rate of acceleration has just slowed a little bit, but it doesn’t mean it’s come to a complete stop, and it doesn’t mean that we’ve already not felt that 9% inflation that we had last year.

Bruce: We’re definitely not seeing price decreases.

Jon: If I can make an analogy here, it’s as if you were driving your car, your speedometer and how fast you’re going is one thing, but when we’re talking about the change in inflation. We’re talking about how hard you’re hitting the gas pedal and how fast that number is going up, not what the actual price of things is, right?

Bruce: Right. Exactly.

Jason: Exactly.

Jon: It’s like you guys are cut from the same cloth or related in some way.

Bruce: Yes.

Jon: Bruce, let’s get back out to the overall theme of the podcast, being interest rates. What about the oil markets? I know that’s something that people have a lot of questions about.

Bruce: We’ve seen the oil markets soften considerably this year, and oil was up in the $80’s, $90s, and now down today. And I think I looked earlier today and they were around $72 a barrel for oil in the US, $73.65 per barrel. We have the whole thing going on right now in the Middle East, most specifically the Houthis shooting at super tankers in the Red Sea, and now all that traffic has to go around the Southern Horn of Africa to get out to Western Europe.

We could see that affect the oil markets, and that could affect how interest rates act because the Fed is going to have to react to if we have inflation. Let’s say oil goes up, and it’s a worldwide market, so let’s just cover this. If the price of oil goes up, that affects the price in the US, the price of gas, and then we’re a distribution economy, so everything is getting moved and there’s a cost of transporting everything in our distribution economy, and then the Fed may have to react because inflation is higher, and so they raise interest rates. That is something we’re watching. We don’t see that as a big deal right now, but I don’t know, Jason, do you have any other thoughts on oil and inflation and how that affects the interest rates of the Fed?

Jason: While right now we’re not seeing an immediate impact from this, this is definitely a possibility to see further impacts. If the war in the Middle East expands right now with Israel, why the Houthis are shooting is because of Israel. They’ve made that very clear in their communications. You could see Iran get involved. You could see Russia get involved there. You could see the US drawn in more. All of those possibilities could definitely add to instability in the area, which makes the shipping oil much more dangerous.

Jon: Yes, it’s really unpredictable to see where it’s going. As you look at what happened in 2023, it’s certainly an ever-changing situation. I’m going to put you on the spot here, Jason. And you don’t have to give me an exact number or just give me your thoughts on it, but back to interest rates. Rate cuts in 2024, do you anticipate the Fed cutting rates? How often? How many? What are your initial thoughts as we head into the new year?

Jason: I think they will cut rates in 2024. I would be surprised if they do any less than three. I think I would tend to agree more with the market that they’re going to end up doing more than they are publicly forecasting right now. If there’s any crisis that comes up, if we look back at how the Fed responds historically to these crises, they cut much quicker than expected, or at least than they are forecasting. That’s because they’re generally behind the eight ball to try and react to what’s already happened, rather than proactively trying to be ahead of where the market is moving to.

Bruce: Yes, they’re trying to get out in front of it as quick as they can, but they’re always late to the game.

Jon: Right, and then you’ve got what they say, and then you’ve got what they do, and both things can certainly affect the market.

Bruce: Right.

Jon: Again, back out to interest rates here, you talk about the interest rates coming down, Jason. Bruce, what about the short-term interest rates on cash? If those rates come down, will investors move out of cash in a major way with the rates coming down? Money market accounts have $5 billion, $6 trillion dollars parked in them right now because interest rates are the best they’ve been in decades.

Bruce: Exactly, Jon. There is a lot of money parked in the money market accounts, and as those interest rates start to come down and people are looking for yield, they can’t get that in their money market or cash holdings so they’re going to start looking outside of that, perhaps longer-duration holdings. If we just consider today, what does longer-term investments look like? Well, the 10-year Treasury is at 3.86% today. That’s less than what they’re getting or have been getting on their money market. They’re going to be looking desperately to try and get yield, and it’s clearly going to force people to move up the risk spectrum in order to find either higher yield or bigger opportunity to have a return on their money.

I think it’s going to happen quicker than people think. Those rates will start to come down, and then people, when they find out they’re earning zero, when those rates come in really low, in the low just basis points, there’s going to be a movement for some of that money to enter the market, and that changes the dynamic of what we’ve had this last year with people just being able to sit in cash, not taking in any risk and making 5% on their money market accounts.

Jon: Bruce, Jason, I know you and your team at Hosler Wealth Management are zoomed out looking at the entire picture as we’ve discussed over the last 15 or so minutes, and I know you do the same for your clients when it comes to managing their investments, their money, planning for their retirement and their future. How do our listeners best reach you and your team if they have questions about their financial future or potentially want to work with you?

Bruce: They can reach us at the website, https://hoslerwm.com, and request an appointment there. They can reach us on the phone in Prescott, (928)  778-7666, or in Scottsdale, (480) 994-7342. Jon, this has been a great conversation today. Thank you. Folks, we look forward to hearing from you. If you have questions on this, we do have answers. We are on the watch for what the opportunities are for you going forward.

Jason: Thank you, Jon. It’s been good to be here today.

Jon: Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a registered investment advisor. Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments, and any comments should be given directly to the office at the contact information specified. Any tax advice contained in this communication, including any attachments, is not intended or written to be used and cannot be used for the purpose of 1) avoiding federal or state tax penalties, or 2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

The accuracy, completeness, and timeliness of the information contained in this podcast cannot be guaranteed. Accordingly, Hosler Wealth Management LLC does not warranty, guarantee, or make any representations or assume any liability with regard to financial results based on the use of the information in this podcast.