| Altavia |
09-21-2024 10:38 AM |
A perspective from Neil Gilfedder, Executive Vice President of Investment Management and Chief Investment Officer, Edelman Financial Engines, LLC
On Wednesday of this week, the Federal Reserve made a long-awaited decision to start cutting interest rates. I wanted to share with you what we think about this and how we are stewarding your investments.
First, let’s cover the facts. The Fed has kept its target “Fed funds rate” at the same level since it paused its rate increases in July 2023 in its fight against inflation. This week’s decision marks an assessment by the Fed that inflation is largely under control. So far, we’ve managed to avoid falling into recession, and lower interest rates should help lower that risk. The Fed’s decision to implement a half-percent reduction signals a strong conviction, in contrast to what could have been a more modest 0.25% change.
There are two remaining Fed meetings this year, in November and December. It is widely expected that more cuts totaling a further half- to full-percentage point reduction are coming by the end of the year, but there’s no guarantee. Expectations have changed a lot over 2024, with news about inflation and the economy painting an unclear picture. The speed and magnitude of further cuts will depend on how inflation and economic growth continue to evolve.
So, what does this mean for the bond and stock market outlook, and what are we doing to look after your investments?
First, keep in mind that the Fed only controls short-term interest rates. By way of contrast, looking at the five-year Treasury yield shows the rate was trending down even before this week’s decision (from about 4.7% in April down to below 3.5% in September). This shows that bond investments are driven by factors other than just Fed decisions, such as inflation, recession risk, global events, the election and other factors. The same is true for stock markets.
The lengthy list of potential market-moving events means there will surely be some surprises in the coming months. We do expect interest rates to continue to fall, which will help mitigate what bonds have experienced in the last couple of years. That’s why for portfolios invested for long-term growth, we recommend a portion be invested in bonds. Some parts of the bond market may move faster than others, so we aim to hold a diverse mix of bonds, comprising different issuers (Treasurys, corporates and mortgage-backed) and different maturity exposures (short, intermediate and long-term).
Bonds of varying types offer different potential rewards for taking on risk, and they usually belong in a well-diversified portfolio along with stocks.
We’re maintaining our disciplined approach of sticking with portfolio strategies designed for long-term growth at a risk level suitable for you. That means not being tempted to try to outguess exactly when interest rates are going to move or making a big bet on whether a recession happens.
Falling interest rates may have other impacts on your household finances, whether it’s due to falling CD yields or lower mortgage rates.
If you have a pension and are considering retiring soon, lower interest rates could have some impact on the value of lump sum pension payouts. Now may be a good time to review your pension options and talk with your planner about your retirement goals.
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