Will Interest Rates Drop? How it May Affect Your Plan
There’s increasing speculation that the Federal Reserve might start lowering interest rates later this year or next. While no one can pinpoint the exact timing, it’s helpful to consider how a lower rate environment could impact financial decisions related to housing, estate planning, taxes, investing, and retirement.
Housing is often the most noticeable area affected by falling rates. If mortgage rates decrease, mobility might increase, giving more families the flexibility to buy, sell, or relocate. However, it’s important to keep in mind the broader financial consequences of moving, such as property and casualty insurance costs and availability. Adjustable-rate mortgages taken out in 2021 or 2022 are set to reset soon, and although refinance rates may not be as low as they were back then, they would still seem more favorable than current levels. For some households, tapping into home equity through a HELOC could also be a sensible option if borrowing costs decline.
Estate planning also gains new relevance in a lower-rate environment. Strategies like Grantor Retained Annuity Trusts and intra-family loans become more effective when the IRS’s Section 7520 rate drops. It becomes easier to shift appreciation out of an estate when the so-called “hurdle rate” is lower, which can help preserve wealth for future generations.
On the tax side, falling interest rates can indicate slowing inflation. Since federal tax brackets and the standard deduction are indexed to inflation, slower growth may result in a smaller upward adjustment. This could leave more income exposed to higher rates. At the same time, lower borrowing costs often boost asset values, which can increase capital gains exposure, a beneficial challenge if managed carefully. Lower rates can also encourage increased charitable giving. Some planned giving strategies are more advantageous if rates are lower; for example, a Charitable Lead Trust might become more appealing than a Charitable Remainder Trust. It’s worth noting that starting next year, a provision in the OBBBA will reduce the deduction for households in the highest tax bracket from 37% to 35%, so timing is essential.
Investments tend to react strongly to changes in interest rates. Historically, large-cap stocks have performed well when rates decline. Companies benefit from cheaper borrowing, and investors often shift from bonds to stocks when yields fall. Nevertheless, diversification remains crucial. While yields on new bonds may reset to lower levels, the value of existing fixed income holdings typically increases. Managing reinvestment risk alongside opportunities makes portfolio management more critical than ever.
Retirement planning also needs attention in a declining rate environment. Lower yields can make conservative portfolios more vulnerable, underscoring the importance of incorporating growth assets that support long-term plans. The right mix of fixed income stability and equity growth helps mitigate longevity risk in a world where bonds alone may no longer suffice.
Declining rates impact nearly every facet of wealth planning. Please get in touch with your wealth manager with questions about how potential rate cuts could influence your strategy.
Weekly Commentary
Wealth Planning Commentary – September 2, 2025
Mallon FitzPatrick
Will Interest Rates Drop? How it May Affect Your Plan
There’s increasing speculation that the Federal Reserve might start lowering interest rates later this year or next. While no one can pinpoint the exact timing, it’s helpful to consider how a lower rate environment could impact financial decisions related to housing, estate planning, taxes, investing, and retirement.
Housing is often the most noticeable area affected by falling rates. If mortgage rates decrease, mobility might increase, giving more families the flexibility to buy, sell, or relocate. However, it’s important to keep in mind the broader financial consequences of moving, such as property and casualty insurance costs and availability. Adjustable-rate mortgages taken out in 2021 or 2022 are set to reset soon, and although refinance rates may not be as low as they were back then, they would still seem more favorable than current levels. For some households, tapping into home equity through a HELOC could also be a sensible option if borrowing costs decline.
Estate planning also gains new relevance in a lower-rate environment. Strategies like Grantor Retained Annuity Trusts and intra-family loans become more effective when the IRS’s Section 7520 rate drops. It becomes easier to shift appreciation out of an estate when the so-called “hurdle rate” is lower, which can help preserve wealth for future generations.
On the tax side, falling interest rates can indicate slowing inflation. Since federal tax brackets and the standard deduction are indexed to inflation, slower growth may result in a smaller upward adjustment. This could leave more income exposed to higher rates. At the same time, lower borrowing costs often boost asset values, which can increase capital gains exposure, a beneficial challenge if managed carefully. Lower rates can also encourage increased charitable giving. Some planned giving strategies are more advantageous if rates are lower; for example, a Charitable Lead Trust might become more appealing than a Charitable Remainder Trust. It’s worth noting that starting next year, a provision in the OBBBA will reduce the deduction for households in the highest tax bracket from 37% to 35%, so timing is essential.
Investments tend to react strongly to changes in interest rates. Historically, large-cap stocks have performed well when rates decline. Companies benefit from cheaper borrowing, and investors often shift from bonds to stocks when yields fall. Nevertheless, diversification remains crucial. While yields on new bonds may reset to lower levels, the value of existing fixed income holdings typically increases. Managing reinvestment risk alongside opportunities makes portfolio management more critical than ever.
Retirement planning also needs attention in a declining rate environment. Lower yields can make conservative portfolios more vulnerable, underscoring the importance of incorporating growth assets that support long-term plans. The right mix of fixed income stability and equity growth helps mitigate longevity risk in a world where bonds alone may no longer suffice.
Declining rates impact nearly every facet of wealth planning. Please get in touch with your wealth manager with questions about how potential rate cuts could influence your strategy.
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