Strategic Financial Moves to Consider Before the Fed Lowers Interest Rates
Key Points
As the Federal Reserve prepares to lower interest rates, it may be wise to reassess your cash management strategies. According to the CME FedWatch Tool, a rate cut is expected in September, potentially reducing the federal funds rate by at least a quarter percentage point.
Currently, many investors are holding significant cash reserves, including trillions in money market funds, which are still offering yields above 5%. However, these yields are expected to decline once the Fed reduces rates.
Market Insights
Investors have significantly increased their cash allocations following a series of rate hikes, with a near-record $6.15 trillion in U.S. money market funds as of July 17. This includes $2.48 trillion in retail investor funds, according to the Investment Company Institute.
Ken Tumin, founder and editor of DepositAccounts, notes that money market fund yields typically mirror the federal funds rate. Therefore, a rate cut by the Fed in September will likely result in lower yields for these funds.
Opportunity to Secure CD Rates
The upcoming Fed meeting could provide clearer signals about a potential September rate cut. Banks often reduce rates for high-yield savings accounts and CDs in anticipation of Fed rate cuts.
"CD rates are expected to decline rapidly once it becomes evident that the Fed is close to reducing rates," Tumin explained.
As of July 25, the top 1% average rate for high-yield savings accounts was slightly below 5%, while the top 1% rate for one-year CDs was around 5.5%.
Certified financial planner Ted Jenkin, CEO and founder of oXYGen Financial in Atlanta, suggests locking in rates for 9-month or one-year CDs now to maximize returns. Jenkin, a member of CNBC’s Financial Advisor Council, highlights the benefits of securing these rates before they fall.
Consider Longer-Term Bonds
For those building a bond portfolio, it’s essential to consider duration—a measure of a bond’s sensitivity to interest rate changes, factoring in the coupon, time to maturity, and yield.
Experts recommend transitioning from money market funds to longer-duration bonds for long-term investments. This strategy could be advantageous as bond prices typically rise when interest rates fall, whereas money market funds will likely offer lower yields without price appreciation.
While predicting Fed policy can be challenging, bonds may experience a substantial boost if the Fed cuts rates by a full percentage point over the next year, according to Jenkin.
Ultimately, the best cash management strategy depends on your individual goals, risk tolerance, and investment timeline.
Recent Developments
In related news, former President Donald Trump has indicated that he would allow Federal Reserve Chair Jerome Powell to complete his term if he wins the November election.
This is a significant shift from his previous stance, as Trump has had a contentious relationship with Powell over interest rate policies. Trump criticized Powell in 2019 for not lowering rates quickly enough, arguing that it disadvantaged the U.S. economy compared to other nations. However, in a recent interview with Bloomberg Businessweek, Trump stated, “I would let him serve it out, especially if I thought he was doing the right thing.” This suggests a more cooperative approach toward the Fed if Trump were to be re-elected.
Remember, while these factors offer a robust framework for understanding market dynamics, unforeseen events can always alter the landscape. Stay informed with IUX for continuous analysis and expert insights as we navigate this pivotal period in the markets.