Impacts of the Fed's Aggressive Rate Cut: What Investors Should Know

In a significant move last week, the Federal Reserve (Fed) cut the Fed Funds rate by 0.50% instead of the more traditional 0.25% adjustment, marking a clear policy shift towards supporting the labor market vs fighting inflation. This signals the beginning of a rate-cutting cycle, which could boost risk-based assets. Now is a good time to reassess large cash holdings, as interest rates on cash are likely to decline significantly.

Key Takeaways:

• Odds of a soft economic landing are increasing, which supports risk-based assets. The Fed decided to frontload rate cuts in order to help the labor market from weakening much further. The Fed’s recognition of the recent cooling in the labor market and progress on inflation help maximize the odds of achieving the rare soft economic landing. We discussed the Fed and a potential soft landing on our recent quarterly webinar series.
• This is the start of an easing cycle, more cuts are expected. While the exact path is uncertain and the Fed will remain data dependent, further easing is likely. The Fed now sees Fed Funds at 3.4% by year-end 2025 vs 4.1% at the June meeting. Longer-term, the Fed expects rates to settle in at 2.9%.
• Fed’s reaction function changing back to the “Fed Put” narrative. The Fed's readiness to act provides a safety net for markets (i.e. Fed Put), mitigating potential downside risks. Importantly, even after the 0.50% cut last week, the Fed Funds rate remains significantly above the Fed’s “neutral” estimate. This gives the Fed meaningful scope for additional cuts going forward.
• The Fed’s aggressive move is not risk-free. If inflation begins to re-accelerate the market could become concerned the Fed acted prematurely in declaring victory against the inflation fight and made a policy mistake. We see this scenario as possible but unlikely.

What This Means for You?

With interest rates decreasing, simply holding onto cash is not the most advantageous strategy. We believe now is an opportune time to strategically allocate resources and potentially achieve greater returns in the fixed income markets or equities, depending on one’s risk tolerance. We're here to help you navigate these changing market dynamics.?

As always, we encourage you to stay invested and focused on your long-term financial goals. We will continue to communicate with you regularly and are always available to answer any questions you may have.?

The opinions expressed are those of Socium Advisors as of the date stated on this newsletter and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss.