Wealth managers must be prepared to discuss the downside of lower rates

The pros of the lower interest rates widely expected to be ushered in over the coming months by the Federal Reserve are fairly obvious. Spurred economic activity due to lower borrowing costs immediately comes to mind.  

That said, there are cons to lower rates and advisors will likely have to explain those to their clients as well. And especially to those savers or retirees who have been enjoying those elevated bond yields in recent years.

Lower rates are not a panacea, according to Jesse Kurrasch, COO of The AmeriFlex Group, as they are equally likely to drive down consumer purchasing power at a greater rate than at which they lower interest burdens.

“These lower rates may also drive-up housing costs; while mortgage rates usually fall in step with the Federal Reserve’s rates, it is not guaranteed. Depending on the confluence of factors, it is possible that lower rates will not generate much benefit for the economy,” Kurrasch said.

And the economy could certainly use it. Allianz Life’s 2025 Annual Retirement Study reveals a striking disconnect: While monetary policy may be loosening, retirement confidence is tightening.

The study shows only 28% of Americans feel confident in their ability to financially support all their life goals, down 13 points since 2020. Meanwhile, the report said concerns about inflation, market volatility, and the future of Social Security are surging, especially among Gen X and the ‘sandwich generation.’ The Allianz study showed 59% of sandwich generation respondents have reduced or stopped retirement contributions due to dual caregiving responsibilities.

Put it all together and the Allianz study suggests that even as borrowing costs fall, Americans are navigating more uncertainty than ever, especially around retirement income, healthcare costs, and risk management.

Matthew Gotlin, chief investment officer at Choreo, points out that for individual savers, the near term implications are that savings accounts, money markets and many other short term borrowing rates, as well as floating interest rates, will likely fall and potentially deliver less income. Lower interest rates, and the desired economic growth which could accompany those rates, could also eventually also have inflationary effects, in his opinion.

All that said, Gotlin sees lower interest rates being stimulative for the broader economy because, all else being equal, it typically lowers the cost of borrowing for companies and consumers alike.

Finally, Rafia Hasan, Chief Investment Officer with Perigon Wealth Management, points out that the biggest impact to individual savers will be on the yields they are receiving in money market funds. But in her view, the market would need to see a much larger expectation of rate cuts “to get people who are camping out in money market funds to invest the money that is sitting on the sidelines.”

Furthermore, Hasan notes that consumer spending accounts for about two-thirds of GDP, and when she looks at the segment that has been holding up spending through recent inflationary periods and higher rates, it is the wealthier segment of consumers whose spending has been impervious to both higher rates and inflation.

“As rates fall, it is reasonable to think that the consumer response may be similarly inelastic. Overall, Federal Reserve policy has a greater signaling effect to the market, and much of the impact of the much-anticipated rate cut is likely already priced in,” Hasan said.