Time To Lock In Rates?

Seventeen years ago (2007) the Oz economy was so revved up it was branded a ‘two-speed’ economy thanks to the mining boom.

Meanwhile, the US economy had the throttle wound right back thanks a red hot real estate boom.

In fact, it was so hot they hiked rates seventeen times between 2004-06 to help cool things down.

And then in September 2007, the Federal Reserve cut rates by 50 basis points.

Most notably, Fed Chairman, Dr Alan Greenspan, was at pains to point out, “…we are not heading into a recession”.

Consequently the stock market surged for the next month, until…

Signs appeared of rising unemployment, the first indication of a recession.

And now the same pattern has emerged in 2024.

Last month, the Federal Reserve cut rates by 50 basis points.

And again, Fed chairman J. Powell was almost blue in the face convincing everyone, “… we are not heading into a recession…this will be a soft landing”.

So what are the chances rates will go down further in the US and eventually here?

Well, lets have a look at the similarities between 2007 and 2024, of which there are plenty.

But lets focus on two.

Firstly, by September 2007, mortgage stress was snowballing because rates went up too fast and too far between 2004-06.

The same pattern has emerged in 2024 thanks to two years of aggressive, unexpected, hiking.

Secondly, in September 2007, the Index of Leading Indicators had peaked.

Meaning, economic growth had topped out suggesting a slowdown was imminent despite every assurance from the Federal Reserve a recession wouldn’t happen.

Six months later the US entered one of the worst recessions on record and unemployment reached 10%!

The exact same picture has emerged in 2024, the Index of Leading Indicators had peaked.

So what does this mean for borrowers and depositors?

By almost every measure, it appears we’ve reached the top of the rate cycle which means if borrowers fix their loans now, they may be fixing at the top of the cycle.

In my opinion, borrowers should go variable for at least the next couple of years.

Consequently, depositors should consider the opposite.

Term deposit rates will most likely drop from here so any opportunity to lock in a decent rate for the next 6-12 months might be a good idea.

And if you’re wondering how low rates could go, it’s too hard to tell at this stage.

If rates are cut too fast, it could spark inflation.

However, if we get a worse than expected slowdown then we could see the same rate cuts as 2007.

Have a great weekend!

Adam

Back paddock – your pet is a reflection of you.