Market Update

Falling Leaves, Falling Rates

As Fall officially settles in here in New England, leaves are not the only thing dropping suddenly. The Federal Reserve (Fed) just wrapped up their latest meeting and announced they were cutting interest rates by 0.5%.  While a cut was widely expected, there had been some disagreement among economists and market analysts as to whether it would be 0.25% or 0.5%.

The Fed has, officially, two goals: promote maximum employment (support the labor market) and promote stable prices (keep inflation in check).  In 2021, when inflation started increasing over the Fed’s target rate of 2%, they started raising interest rates.  Lowering rates means that the Fed is a little less focused on inflation and a little more focused on the labor market.  Lower rates make it easier for people to pay back debt, for businesses to take out loans, and even for the US government to keep up with interest on the national debt.  It leaves more money for spending, which supports the economy and labor market.

What does this mean for you? On a practical level, some interest you pay may be dropping.  Most credit cards and HELOCs have variable rates, and those may drop by the same 0.5%. If you have a mortgage or car loan with a high fixed rate, the rate won’t change automatically, but refinancing may be more appealing now.  Unfortunately, this means that the interest your savings, money market accounts, and CDs earn will also decrease.  However, it is important to maintain that cash reserve for life’s unexpected events such as a major home repair or loss of a job.

Lower interest rates also have important portfolio implications.  All else being equal, lower interest rates lead to higher bond prices, and that is good for those who currently own bonds.  It also helps to support stock market valuations.  And it’s a sign the Fed wants to support the economy, which is generally good news for corporate profits and therefore the stock market.  This is why the stock market often – but not always – does well when the Fed cuts interest rates while there’s no recession.

Lots of people are asking if they should change their portfolio because of this.  The short answer is probably not.  Interest rates may be an important one, but they are only one driver of capital markets.  There’s also inflation, corporate profit margins, geopolitics, government regulation, and market sentiment, just to name a few.  It’s hard to predict any one of those, never mind all or most of them, consistently.  That’s why it’s always important to maintain a diversified portfolio, with risk appropriate to your goals, that is designed to weather a wide variety of possible outcomes.

Disclosures

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. 
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