How the Fed’s interest-rate cut will affect your sustainable investments and personal finances

September 24, 2024 at 11:26 AM EDT

How the Fed's interest-rate cut will affect your investments

After three years of aggressively hiking interest rates, the Federal Reserve is finally moving towards “normalizing” rates. Now that the Fed lowered rates by a half percentage point, the biggest cut in 16 years, it’s a good time to discuss how rate cuts affect your investments, especially sustainable investments.

The Fed is sending a message that it believes inflation is under control and the economy has recovered. Even though the Fed is late in cutting rates (compared to other countries), if it is correct inflation should continue to slowly ease.

This rate cut will have a huge impact on consumers and investors, affecting mortgage rates, bond prices, hiring practices, real estate prices and most importantly to many of us: the value of our investments.

Peter Ricchuiti, a senior professor of finance at Tulane University’s Freeman School, who also created the nationally acclaimed Burkenroad Reports student stock research program, explains: “Interest rates are enormously important to stock valuations. More than half of the valuation models I teach at Tulane University use interest rate levels to determine fair stock prices.”

Let’s begin by looking at how lower interest rates affect sustainable investments.

Climate change

Companies involved in combatting climate change are “generally younger and need to borrow a great deal of money to grow,” says Ricchuiti. “Lower interest rates reduce the cost of borrowing, and therefore helps these businesses increase earnings.”

Ricchuiti notes that the U.S. presidential election will have a far greater impact on climate change than interest rates. “Lower interest rates are a positive for sustainable initiatives and will help stem the tide of blowback from Republican lawmakers.” He adds that he believes this is arguably the best U.S. economy in six decades.

One place where lower interest rates won’t have a noticeable effect is the cost of homeowner’s insurance. Because of climate change, and the increase in climate-related disasters, the cost to insure homes, especially in vulnerable areas of the country, is likely to keep rising.

Green companies

According to Ricchuiti, “green companies are one of the most interest rate sensitive sectors of the market. The Fed decision to lower interest rates is a big boost to the industry.”

He explains that when the Fed started raising interest rates, “the shares of green companies such as Sunnova NOVA and NextEra Energy NEE began to underperform the general market. However, as inflation dropped about 65% over the past 30 months or so, the shares of many green companies have been outperforming the overall stock market.”

When the economy is strong, Ricchuiti notes, “companies are more willing to put some of their focus on doing what’s right. When the economy and corporate earnings suffer, these initiatives are pushed to the back burner.”

The good news for sustainable investors is that clean and green investments will continue to be a high-priority investment, especially as extreme weather events play havoc with the world. Regardless of how interest rates rise or fall, scientists, technicians and researchers will still be asked to solve many of the world’s environmental problems by developing new technologies.

How the Fed and interest rates affect other areas of the economy

Let’s take a look at other areas of the economy where lower interests may affect your finances:

Hiring: According to the Fed, weaknesses in the labor market provided motivation to urgently cut rates. Many economists believed the Fed was “late to the party,” and should have cut rates sooner. Nevertheless, the rate cut should boost the weakening labor market.
Mortgages: Hopefully, the days of high mortgage rates are over. Typically, the Fed will continue to cut rates at future meetings rather than “one and done.” That means patient home buyers and renters should expect to see lower mortgage rates in the months and years to come. Also, those who want to refinance will have an opportunity to refinance with reduced monthly payments.
The housing market: Lower interest rates should make it easier for people to rent or buy a home. Higher interest rates caused problems for renters and buyers. Although it won’t happen immediately, the rate cut should provide relief. It will also give home sellers an opportunity to sell their current homes as well as find new homes at lower interest rates.
Savings accounts: The one place where lower interest rates are unwelcome is savings accounts, where lower rates means lower returns. Often, those with large cash holdings parked in savings accounts move their money into the stock market as interest rates fall.
Bonds: Bond prices rise as interest rates fall, so lower rates are good news for bond investors.

Conclusion

As discussed in a previous article, no matter who enters the White House in January 2025, there is no need to make any sudden financial moves if your candidate loses. In other words, do not “panic sell.”

You can still invest in the stocks, mutual funds and ETFs that reflect your beliefs and values. The clean and green companies that have helped sustain the environment should not be affected immediately by lower interest rates, or even by a new president.