Practical Money: The Fed Cuts Interest Rates, Changes I'm Making
Changes to my investments with the Fed cutting rates
Introduction
The Fed announced today that they're cutting rates by 50 basis points to a range between 4.75%-5%. The last time the Fed cut rates by this much was in 2008 during the financial crisis. They also indicated cuts of 50 more basis points by the end of the year.
The market initially reacted positively to the news, before ending the day down with the DOW dropping 0.25%. In this newsletter, I’ll look at what the Fed’s interest rate cuts mean for the economy, and how it will impact my investments.
A quick reminder that this is not financial advice, just myself sharing my strategies, investments, stocks, index fund strategies, what I'm buying, and where I plan to take those investments. Everyone’s financial goals are different. No financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert.
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What The Rate Cuts Mean
The Federal Reserve’s decision to lower interest rates is largely influenced by softer-than-expected inflation and concerns over a potential economic slowdown. Despite efforts to tame inflation with higher rates in recent years, inflation has gradually moderated, giving the Fed room to pivot. Additionally, ongoing concerns about slower global growth have weighed on the decision.
With rate cuts, the Fed aims to stimulate borrowing, investment, and consumer spending to counteract these headwinds and ensure a “soft landing” for the economy rather than a deep recession.
Here are some potential impacts of the rate cut:
Economic Stimulus: By making borrowing cheaper, the Fed aims to encourage businesses to invest and consumers to spend.
Consumers: Can expect cheaper loans, credit card rates, and mortgages, though savers will see lower returns on deposits.
Job Growth: Increased economic activity can lead to higher demand for goods and services, creating more jobs.
Investors: Lower interest rates can make stocks more attractive to investors, potentially driving up market prices. However, long-term fixed-income returns could suffer with lower bond yields and money market interest payments.
How The Cuts Affect My Investments
In the past, I’ve revealed my stock market portfolio (which is primarily for growth), as well as my ETF portfolio (primarily for dividend income with some growth). Earlier this month, I also revealed my fixed-income portfolio for monthly income.
How I invest in my stock portfolio will remain unchanged. I will continue to buy and sell as needed, and try to buy at least a couple of times per month. My ETF account will mostly be unchanged. I will continue to dollar-cost-average weekly in my ETFs. The one change will be transferring funds from my fixed-income portfolio into this account. Which brings me to…
The biggest change will be to my fixed-income portfolio. I had been laddering a mix of treasuries, corporate bonds, agency bonds, and CDs over the years to generate monthly income (which is explained here). By the time we see the next rate cut, I plan to stop buying any more bonds or CDs unless there is a really attractive rate.
Many of the agency bonds, CDs, and corporate bonds that I own are callable, which means the issuer can redeem them before maturity. Earlier this month one of my 5-year agency bonds that was set to mature in 2028 - Federal Home Loan Bank System (FHLB) - was called. I received my full initial investment and a final partial interest payment, in addition to a full interest payment made back in June. As interest rates drop, I expect more of these to get called (why would they pay higher interest when they can get the same loan at a lower rate?), and I will transfer those funds to my ETF portfolio. With those funds, I will purchase more shares of my high-dividend investments like SCHD, JEPI, JEPQ, SPYD, and O.
Conclusion
The impact of a rate cut can vary depending on a variety of factors, including the overall health of the economy, consumer confidence, and global economic conditions. It does affect my investment plans, and I believe it’s important for people to stay informed about how the Fed's monetary policy may affect their personal finances. It’s always beneficial to consult with a financial advisor to discuss how rate cuts might impact your specific situation.
That's it for this week! As always, no financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert.
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