Fed Rate Cuts Signal a Major Policy Shift
Since the beginning of 2022, we have witnessed persistent inflation across nearly every U.S. business sector. In response, the Federal Reserve initiated an aggressively restrictive monetary policy, raising interest rates from near 0% to over 5% over the past two and a half years. However, recent economic data has shown promise, suggesting that inflation may be coming back under control. This has led some investors to call for interest rate cuts from the Fed. Last week marked a key shift in Fed policy, as they cut interest rates by 0.50%, which has significant implications for the economy and individual investors alike.
The September Fed Meeting: An Aggressive Rate Cut
The September Fed meeting represented a meaningful shift in monetary policy, as Jerome Powell and the FOMC determined that inflation has begun to trend down sustainably toward their long-run target of 2%. They opted for a 0.50% interest rate cut, exceeding expectations, as many analysts had anticipated just a 0.25% cut. The decision to implement a 0.50% cut instead of a smaller 0.25% has sparked debate among economic experts, with both positive and negative interpretations emerging. On the optimistic side, some argue that a more rapid and aggressive rate cut may indicate the Fed’s confidence that inflation is under control and that it is no longer necessary to impose additional strain on investors and businesses caused by higher interest rates. Keeping rates too high for too long can lead to a significant slowdown in spending and potentially a recession. Conversely, some experts express concern that a 0.50% cut might suggest the Fed is late in initiating rate reductions, arguing they should have acted in July and are now playing catch-up. Moving forward, Wall Street experts will be closely monitoring interest rate trends and future economic data to determine whether we are headed toward (or already in) a recessionary environment or if the Fed has successfully engineered the “soft landing” they have been targeting since the beginning of their post-COVID rate hikes.
What Do Rate Cuts Mean for Individual Consumers?
Just like rate hikes, decreases in interest rates impact individual consumers as much as businesses or the overall economy. So, what should investors expect moving forward as rates continue to decline? The good news for Americans is that rate cuts typically mean cheaper debt and borrowing. Major sources of household debt like mortgages, car loans, and credit cards should all start to see rates decline, offering some relief after the budget tightening of the past few years. However, the interest rates on savings instruments like CDs, savings accounts, and money market funds are likely to decrease as well. For this reason, it’s crucial to avoid keeping excessive “lazy cash” in bank accounts beyond what is needed for cash flow, emergency funds, or short-term goals. While the 5%-plus returns on fixed interest investments have been a silver lining of tighter financial conditions, we believe now is the time to redirect any funds held in CDs, money market accounts, or excess cash savings toward traditional bond funds as the interest rate environment shifts downward. As interest rates fall, bond prices typically rise, making this an opportune time to transition cash-heavy investments toward bond funds—especially given the dismal bond returns seen since rates began to rise in 2022.
Portfolio Adjustments at Relevé
As this information relates to your portfolio at Relevé, we have already made significant adjustments over the past 12 months in anticipation of the Fed’s shift. In November, we extended the duration of the bond portion of portfolios, which should enhance growth on the fixed income side as interest rates decline. Additionally, we recommend transitioning any remaining cash-centric investments (like CDs and money market accounts) toward traditional bond funds in the near future as rates continue to decrease. Finally, the declining interest rate environment presents a unique opportunity to add exposure to established growth and technology-focused assets as we enter a potentially favorable economic period for that sector. We’ve already planned the addition of a technology and AI-centered fund to our models in the coming weeks, and you can expect a separate communication regarding these changes soon.
Questions? We’re Here to Help
If you have questions about the current economic environment, our investment philosophy, or your portfolio, please feel free to reach out!
Jake Fromm | Lead Investment Analyst, CFS® | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.