The Federal Funds interest rate came down, what does that mean for you?

 

 

If you ask my opinion, American borrowers have been somewhat spoiled by the low interest rates that we had had for almost the last ten years.  This article will tell you that from 2015 until into 2022 we never had Prime lending rates higher than 5.5% — and most of the that time period they were lower than 5%.  That contrasts with the incremental rate increases put in place until last month all the way up to an 8.5% Prime borrowing rate from 2022 into 2024.

 

The past two years interest rates have been rising causing your payments for everything from automobiles to credit card balances to be higher. . . simply because of that rate.  If you had a loan for your home or on your business that was an “adjustable rate” loan then you have seen your payments rise as that interest rate has risen.  For some people that has caused immeasurable problems with cash-flow — be it a business’ cash-flow or their personal expense cash-flow.

 

We’ve reached a point where the Federal Reserve Board now believes it is in the country’s best interests to begin lowering the rate (called the Federal Funds Rate) that they borrow money to banks at.  Lowering that rate in turn results in commercial banks being able to lower their rates to consumers and businesses and yet keep the “spread” that they need between the rates they pay to savers and the rates they collect from borrowers.

 

That “spread” is essential to banks because they have to be in a position that what they collect from borrowers is more than they pay to savers.  And, that “spread”, as well as some other fee income banks collect, is how banks pay their own business expenses and, hopefully, generate profits.

 

Tom Anderson
Funeral Director Daily

If you are in business, rates coming down may give you some opportunity.  Let’s just say you have a $500,000 interest only monthly payment set up for your funeral home business operations.  At 8.5%, the latest Prime rate before the recent rate cut, you would pay interest totalling $42,500 per year for that financing help.  The Prime rate is at 8.0% now, but within the next 6 months there are those who think it will come down to about 7% or less. . . At 7% that adjustable rate interest only payment would be only $35,000 annually.  . so you are saving $7,500 annually by the rates moving down.. . .That’s good for your business!!

 

It appears that we are in a rate-cutting environment now, and could be for some time.  My suggestion would be to watch as those rates come down and if you find a rate that you are comfortable with, then lock in with a “fixed-rate” loan.  Doing so takes some of the risk out of your operations.

 

Quite frankly, it’s what some of the big companies do.  We reported on Service Corporation International (SCI) selling 8-year bonds at 5.75% bonds earlier this month.  In essence that gives SCI capital at a fixed cost of 5.75% paid off over the next 8 years.  Here’s the article on that decision.

 

The “Flip Side” of paying interest —  For banks to have money to lend, they have to have money in the first place.  And, they do that by offering savings rates to those that want to deposit money in the bank to save, or deposit for other purposes like checking accounts.  The “flip side” of interest rates coming down is that those savers, many times retired people, will see less income because of the rate drops.

 

I had a discussion with the pastor of my church this Spring about an upcoming fund drive appeal that the church was embarking on.  My point was, as it looked like the Federal Reserve Board would eventually lower rates, to see the retired people in our church first. . . . while their saving rates were still historically high. . . .

 

For instance, our last fund appeal was in 2018 and a one-year certificate of deposit was at 0.6% at our local bank.  That meant that if a retired couple had $100,000 invested in that Certificate of Deposit they would receive $600 annually in interest from the bank.  This past Spring (2024) I was able to take out Certificates of Deposit at a 5.3% rate. . . which would mean someone with that same $100,000 invested would receive $5,300 in interest instead of that $600  —  $4,700 more annually than in 2018.

 

The thought process that I had was that “momentum” is a big thing.  Now that we are in a Federal Reserve rate cutting environment, retirees will see their next Certificate of Deposit potentially paying less interest and may feel the need to “tighten up” their expenses and make less of a commitment to the church project.

 

On the other hand, I felt it was probably best to wait, on the church appeal, to see young families and those with credit financing needs — homes, cars, education — when rates started going down they might see momentum with lower payents and they may see room to breath again from the high cost of credit.  If they caught that “momentum” then maybe their gifts would be larger.

 

What does this mean for your funeral home?  Let’s look at Preneed. —   If I was operating a funeral home in this coming rate-cutting environment, I would probably put more of my resources than normal into Preneed development and sales.  As interest rates come down, it might be a little easier to convince older adults that preneed would be a good investment. . . especially considering that they may not be able to get the same “relative high” rate of interest from their bank when renewing a Certificate of Deposit. . . It’s just a thought I have.

 

One final thought, and selling point, about preneed at this time.  Preneed companies are like banks and have to be competitive to get client accounts.  As interest rates fall, as aniticipated over the next year or so, preneed insurance companies are likely to lower their “guaranteed growth rate” as well.  Another good selling point may be to tell potential preneed clients that they are catching a higher growth rate than might be expected in the future. . . That’s just another thought I have.

 

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