What Federal Reserve Rate Cuts Mean for Your Money

Sept. 24, 2024 Rotating away from technology stocks. Trimming cash. Peeking at opportunities in the housing market. This is some of the advice comin

The rate cut marks a key turning point for the world’s largest economy, ending a long stretch when the Fed kept borrowing costs high in a bid to tame inflation. But what will lower interest rates mean for your finances? Here are some of the changes ahead and what you can do about them.

Check Your Tech Exposure

It’s been a lingering concern for retail investors all year: Is it time to trim exposure to some of the high-flying technology names and diversify into other sectors?

The so-called Magnificent Seven tech stocks including Apple Inc. and Nvidia Corp. have been on a tear, with the latter up more than 130% this year. The sector has lifted the S&P 500 even amidst broader concerns about the economy. Now, with rates moving lower, it’s a good time for investors to consider pivoting to companies outside tech, according to Jeremy Keil, a financial adviser at Keil Financial Partners.

“Now is probably one of the best rebalancing chances you’ve had in a long, long time,” Keil said, noting that major stock indexes like the S&P 500 have become heavily weighted toward tech. “If you’re ever going to rebalance, you want to rebalance at a high.”

But where to rebalance to?

Katie Nixon, chief investment officer at Northern Trust Wealth Management, sees potential for some areas of the market that have lagged during this year’s bull run, including small cap stocks. Smaller companies tend to underperform in high-rate environments because they have higher debt levels than larger companies and rely more heavily on loans with floating rates. Cheaper financing and improved earnings could boost their share-price performance.

Cash Returns

The highest interest rates since 2001 have been a boon for risk-averse investors who embraced cash. High-yield savings accounts proliferated, and certificates of deposits were, in some cases, offering more than 5%, giving Americans an easy way to earn money with almost no risk. That time is drawing to a close.

“There are few periods over the course of history where cash is the winning asset class,” said Peter Lazaroff, chief investment officer of wealth-management firm Plancorp. “As interest rates are going down, now is the time to reevaluate.”

It’s important to remember that your bank won’t necessarily let you know that the amount of interest you earn — the annual percentage yield — is going down on your high-interest savings account. With that in mind, Byrke Sestok, financial planner at Rightirement Wealth Partners, said it’s important to check it every month.

Fixed-Income Positions

Beyond helping savings accounts, the high-rate years have benefitted investors in ultra-safe Treasury bonds. But now that rates are headed lower, such investments, especially those with shorter maturities, present “reinvestment risk.” This is the problem that arises when such securities mature at a time when yields are lower than they were before. It's less of an issue for those who are holding 10-year and 30-year Treasuries at what are now above-market rates.

To boost your return, consider pivoting from cash-like securities into corporate and municipal bonds, said Lauren Goodwin, economist and chief market strategist at New York Life Investments. Such bonds, even those with the highest ratings, pay a premium above Treasuries, which are considered the safest debt because they're backed by the full faith and credit of the US government. But for that risk, they offer the sorts of higher returns that cash is unlikely to generate in the months ahead.

Samuel Nofzinger, general manager of brokerage at investing platform Public, said he’s already seeing clients moving away from high-interest savings accounts and toward corporate bonds, which can still earn some 6-7%.

Housing Boost

Lower interest rates mean it’s cheaper to borrow money. That includes borrowing for real estate. Higher rates have kept many buyers and sellers on the sidelines of the housing market. Borrowing has been prohibitively expensive for many buyers, and sellers have been reluctant to switch out of cheap mortgages from the low-rate era.

Even before the rate cut, mortgage rates had been heading down to levels unseen since 2023.

Some real estate experts have said the period early in the Fed easing cycle could be a sweet spot for buyers ready to pull the trigger: Mortgage rates have been trending down, but prices have not yet ratcheted up in a housing market that has long been effectively frozen.

Still, advisers caution that cheaper borrowing costs should only form one part of the calculation on buying a home. Lower rates may drive more competition to the market, increasing prices and mitigating the overall benefit of a cheaper mortgage.

“Put the emphasis on why you’re doing it from a family perspective — and a little bit less on what the rate is,” said Sestok, of Rightirement Wealth Partners.

Cars, Cards

Outside of mortgage borrowing, lower rates should also help borrowers with other types of debt. Consumers have struggled in recent years to secure auto loans, thanks in part to higher interest rates. Vehicle financing is influenced by a combination of several factors, including price, type, down payment and the Fed’s key rate. The latter going down should help, at least to a degree.

Credit card balances have also been mounting lately. People struggling with high rates may be able to consolidate their debt and pay it off with lower-rate home-equity loans, notes Choice Wealth Management adviser Greg Corneille.

© 2024 Bloomberg L.P.

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