Hayley P. from Pocatello, ID asks: Hi Mitch, with the comments from the Fed last week confirming lower interest rates, do you have some portfolio or financial moves to keep in mind heading into next month? Thank you.
Mitch’s Response:
Thanks for sending in your question. Allow me to provide readers with context about ‘lower interest rates’ before diving into some ideas for portfolio/financial moves.
As I write, futures markets are pricing in a 100% chance of a 25-basis point cut to the benchmark fed funds rate at the September 17-18 Fed meeting. Markets see a 25% probability of a 50-basis point cut.1
As I’ve written previously, markets have been wrong about rate cuts many times in the past couple of years, so these futures market projections should not necessarily be taken at face value. Federal Reserve Chairman Jerome Powell’s direct comments, however, make September rate cuts seem more assured.
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At the Fed’s annual gathering in Jackson Hole last week, Chairman Powell said “We [the Fed] do not seek or welcome further cooling in labor market conditions,” adding that, “the time has come for policy to adjust.” Though the Chairman did not use the words “rate cut” specifically, that is what’s implied here.
The labor market cooling that Chairman Powell is referring to has to do with the unemployment rate rising from 3.4% in April 2023 to 4.3% in the latest July reading. Inflation has also been cooperating lately, with good readings across consumer and producer prices in July. According to the Fed’s preferred inflation gauge, inflation was 2.5% in June, well within reach of the target 2%.
As Chairman Powell summarized it, “We will do everything we can to support a strong labor market as we make further progress toward price stability.”
As far as portfolio or financial moves are concerned, we have not altered our outlook for stocks for the year, which remains constructive based on the expected earnings growth we expect to see in the next twelve months. If inflation and interest rates are both lower in the future than they are today – which we also expect – that would add to the bull case, in my view.
As far as savings and/or fixed income are concerned, investors should expect to start earning less on cash in the back half of this year. That might mean looking at T-bills or CDs for cash that you do not necessarily need tomorrow but also want to earmark as ‘risk-free’ emergency savings. It could also mean extending the duration on fixed income portfolios, but those types of decisions depend on your specific goals and objectives, as well as your risk tolerance, cash flow needs, and other factors.
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- Match your income source with your goals and time frame
If you have $500,000 or more to invest, click on the link below to get your copy of “4 Steps to Managing Your Retirement Assets.”
Disclosure
1 Wall Street Journal. August 23, 2024. https://www.wsj.com/economy/central-banking/powell-issues-strongest-signal-yet-that-rate-cuts-are-on-the-way-62952bd6?mod=economy_lead_pos4
2 ZIM may amend or rescind the “4 Steps to Managing Your Retirement Assets” guide for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the “4 Steps to Managing Your Retirement Assets” guide for any reason and at ZIM’s discretion.
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