Interest Rates Going Down? Actions to Take.
The Federal Reserve made a larger than expected rate cut in September 2024 and another smaller rate cut in November, as they now want to ease up their brakes on the economy. The first cut was a half percentage point, or 50 basis points, and was the first interest rate cut since the early days of the Covid pandemic. That decision is already trickling down into lower rates on some lending products, providing some financial relief to millions of Americans.
Often, the Fed lowers interest rates to help stimulate economic growth. Lower financing costs may encourage borrowing and investing, but if rates are too low, they may incite excessive growth, perhaps increasing inflation again. Most recent economic data has buoyed Fed confidence that inflation is on a sustainable path back to its 2% target. Powell cited the moderation in inflation along with the “cooling” in labor market statistics as evidence for the need to recalibrate policy and cut rates1. In the meantime, a soft landing remains the UBS outlook, with a low risk of recession, supported by solid corporate profits, strong consumer spending, and healthy corporate and household balance sheets.2
When interest rates are low, it typically benefits borrowers and long-term investors. The relationship between interest rates and capital markets tend to be inversely correlated. Typically, when the Federal Reserve cuts rates, it can cause the stock and bond markets to go up; when it raises rates, the stock and bond markets may go down.
Investors may wonder about which steps to take and where to put money to maximize yield when rates reduce. Before making any portfolio change decisions, however, here are some considerations to help you decide what your next move might be:
- Review your fixed income portfolio. You may want to choose fixed rate investments like high quality corporate bonds and treasuries that typically offer investors a higher interest rate or a steady stream of income over the life of the bond or debt instrument.
- Review pension benefits and Social Security. Monitor them frequently as you get closer to retirement so you will know what baseline income you will have. For pension benefits that offer “lump sum” rollovers, those “lump sum” options may go higher as rates descend. Confirm with your benefits department to ensure you have the most up-to-date forecast, factoring in lower interest rates.
- Review cash reserves. If you are a conservative investor and do not like to risk or cannot afford to lose any principal savings, you may want to consider options that are FDIC-insured.
- Look at your insurance products. Be aware of maturity dates and re-investment risk on fixed annuities. While you cannot lose money with most annuities in the traditional way, you could lose money if the insurance company issuing the annuity went out of business and defaulted on its obligations. Only work with reputable insurance businesses with professional money-management features and high ratings for financial strength from major independent rating agencies.
- Consider consolidating debt to reduce monthly expenses by refinancing or re-rating your mortgage. Analyze your current interest rates on your outstanding debts and compare it to the new interest rates available to you with other opportunities to borrow.
- As interest rates go down, pay attention to your credit cards and pay off those with the highest interest rates first.
- When interest rates are low, it may be worth considering dividend-paying stocks to complement your retirement income portfolio.
Keep in mind, a good financial advisor will be able to help you assess the opportunities and risks and help you to determine which of these actions will most impact your goals.
About Cameron Price
Cameron Price is a Financial Advisor with UBS Financial Services Inc. a subsidiary of UBS Group AG. Member FINRA/SIPC in Irvine, CA. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Furthermore, high yield bonds are considered to be speculative with respect to the payment of interest and the return of principal and involve greater risks that higher grade issues.
The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc. Neither UBS Financial Services Inc. nor its employees (including its Financial Advisors) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies, before you invest or implement.
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