Revisiting Interest Rates

What Impact Could Fed Rate Cuts Have on Your Investments? 

This summer marks more than one year since the Federal Reserve last raised interest rates; it also marks four years since the Fed’s last interest rate cut. Now, this year it looks increasingly likely we will see our first interest rate cut since all the way back before the pandemic. For that reason, we thought it might be a good time to revisit the most talked about topic in the financial world over the past five years and see what changing interest rates could mean for your investments moving forward. 

The Fed’s Current Stance 

Since last July, the Federal Reserve Board has held interest rates steady at 5.25-5.50%. While these elevated rates have been enough to slow inflation, it has not been enough to bring inflation back down to the Fed’s 2% inflation target.

However, with certain areas of the economy beginning to show strain (most notably Banking & Real Estate), the Fed is planning to release a bit of pressure on markets while also (hopefully) keeping inflation in check. 

What This Means for Your Investments 

Bonds & Fixed Income

To put it plainly, the past two years represented the worst bond market in modern investing history. If you bought a 10-Year US Treasury Note in 2021, your interest rate would have been just 1.5%. Today, a new 10-Year Note pays 4.25%. Meanwhile, if you were holding those old bonds, your investment lost money (why would I buy a 1% bond when I could buy a 4% bond for the same price?). But now, with potential rate cuts on the horizon, the value of existing bonds is likely to go up as interest rates go down – a win/win for current fixed income investors. 

Stocks

Similar to bonds, the stock market tends to react positively to falling interest rates. Lower interest rates reduce borrowing costs for companies and consumers alike, potentially boosting corporate profits and economic activity. Sectors like Consumer Goods & Industrials, which are sensitive to borrowing costs & spending, might see significant gains. However, it’s important to remain diversified, as market volatility can still pose risks. 

Real Estate

Real estate markets have felt the squeeze from higher interest rates, as more expensive mortgages can dampen homebuying activity. Lowering interest rates could revitalize the housing market, making mortgages more affordable and increasing demand. Real estate investors might see further enhanced opportunities for growth, especially in residential properties. 

Cash and Savings 

Higher interest rates have been a boon for savings accounts, offering better returns on cash reserves. While potential rate cuts might slightly reduce these returns, they will still remain relatively attractive compared to the pre-pandemic period. Keeping a portion of your portfolio in liquid assets can provide flexibility and security. 

When we look at your portfolio, we consider all of these potential changes and more. Our focus is, as ever, on maintaining a portfolio that balances diversification with opportunity – a portfolio specifically tailored to helping you achieve your unique financial goals. 

As always, we are here to help you navigate these changing interest rates, the evolving economy, and anything else the investment markets throw our way. If you have any questions or want to discuss your investment strategy in further detail, please don’t hesitate to reach out.

Investing involves risk. No investment strategy can guarantee positive results. Loss, including loss of principal, may occur. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets.

This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten