September’s Fed Rate Cut: A Primer
Last week’s 0.50% rate cut – the first in years – at the highly anticipated Federal Open Market Committee (FOMC) meeting in September signals a new-cycle of rate cutting by the Federal Reserve (Fed). After holding the federal funds rate at its highest level in two decades, the FOMC voted to lower it to a range of 4.75% to 5%. This reprieve from monetary tightening (raising interest rates) over the past two years suggests that the focus of the Fed has shifted from combating inflation to preparing for a potentially slower-growth environment.
Lowering the federal funds rate can have far-reaching impacts on the economy and companies by encouraging capital investment, boosting consumer demand, and impacting stock market performance. It’s a good time to check whether your retirement portfolio and other investments are structured to make the most of lower interest rates. Read on as we break down the potential impacts of these changes by asset class.
Fixed Income
Interest rate cuts can have a positive impact on existing bond portfolios. When interest rates fall, the prices of bonds in your portfolio may likely rise, and you may also reap the benefit of fixed coupon payments that are higher than those of newly issued bonds. However, future income from a maturing bond portfolio may be reduced as a result of reinvesting bonds at prevailing (lower) interest rates.
Equity Investments
A lower interest rate environment can fuel growth for companies through cheaper borrowing costs, which can increase stock prices over time. Dividend-paying stocks, which often provide consistent income through dividends, may offer a more attractive yield than investment vehicles like bonds or savings accounts, which may be impacted by lower yields when interest rates are low.
Alternative Investments
Lower interest rates can drive demand in the real estate market, ease mortgage payments, boost rental income from investment properties, and help finance new property purchases and capital investments. REITs can offer attractive yields in this environment as well. Because lower interest rates can signal future inflation, investment vehicles that are seen as a hedge against inflation, such as commodities, may experience higher prices due to increased demand.
Cash & Cash Equivalents
Cash and cash equivalents can lose value when interest rates fall, reducing their yields. They also do not offer protection against inflation generally, so when interest rates are low, their real return – adjusted for inflation – could even become negative. Excess cash can be re-allocated to higher yielding investments while maintaining liquidity and safety.
Higher for Longer
Despite the new cycle of rate cutting, it’s worth noting that rates are likely to stay at a higher level, relative to the past 15 years, for some time to come. There is still time to lock in relatively high rates on investment vehicles such as fixed-income securities and Certificates of Deposit (CDs). While lower interest rates may provide some relief to debt-service costs, paying off high-interest obligations sooner rather than later is wise.
IMPORTANT DISCLOSURES
Investment advisory services offered through HUB Investment Partners LLC, an SEC registered investment advisor f/k/a TCG Advisors LLC. Insurance Services offered through HUB International. HUB International, owns and operates several other entities which provide various services to employers and individuals across the U.S.
Note: This message is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. Remember all investing involves risk.
Part of this material was prepared by Broadridge Investor Communication Solutions, Inc. and powered by Advisor I/O under the Terms of Service. Although the information in this blog has been compiled from data considered to be reliable, the information is unaudited and is not independently verified.
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