Fed Cuts Rates - What It Means for Investors - Cobblestone Capital Advisors

Fed Cuts Rates – What It Means for Investors

As widely anticipated, Fed policymakers lowered the Fed funds target range by 50 basis points this afternoon.

9.18.2024

Rate Cut!

We finally got our rate cut! In addition to the 50 basis point rate cut, policymakers guided towards two more 25 basis point cuts by year end. At this point, what more can we say? A few notes:

No Surprise

Surprises cause market volatility. The Fed worked hard to communicate its intentions ahead of time. Today’s rate cut was not a surprise.

More Cuts Coming?

This cut is widely seen as the beginning of a rate cut cycle. Fed Chair Jerome Powell was clear that policymakers anticipate additional cuts by year end. There is a strong chance that rate cuts will continue into 2025. This does not mean the Fed will cut rates at every meeting or that rate cuts will happen in a straight line, but we expect gradual cuts as long as employment is stable and inflation is benign.

What Happened With Other Rates?

We’ve said it before, the Fed only controls the short end of the yield curve. The rest of the curve is determined by the market.

Money markets and high yield savings accounts now offer 0.5% less yield. Money market rates still look pretty good but after a few more cuts we might see investors redeploy assets out of money market funds.

Shorter term rates (like credit cards and auto loans) will see a more direct and immediate impact from today’s cut.

The impact on longer term rates (like mortgages) is unclear. The 10-year Treasury yield, after some initial volatility, ended the day 5 basis points higher. The market sees today’s rate cut as a positive sign for future economic growth and is placing higher odds on the probability of a soft landing.

Of course, we need to take today’s moves in the 10-year Treasury with a grain of salt: interest rates are dynamic and ever-changing. Today’s datapoint is important but we shouldn’t weight it too heavily.

What Does History Suggest Comes Next?

Good question! The truth is we don’t know because economic context matters and the number of historical analogues is limited. Many times, the Fed cuts rates in response to a crisis like the 1987 crash, September 11^th attacks, or COVID-19. These crises are not a good guide for today’s market environment.

Rather than responding to a crisis, today’s Fed cuts are from a position of strength: inflation is trending down, and employment is normalizing. As Chair Powell said, “You see growth at a solid rate. You see inflation coming down. You see a labor market that’s still at very solid levels.” It’s early but we agree. We do not see evidence of a deep, protracted recession.