As Fed Rate Cuts Loom, Investors Rethink Cash Strategies
With interest rate cuts anticipated from the Federal Reserve, experts advise investors to consider shifting their cash strategies. Traders expect a rate cut in September, according to the CME FedWatch tool, which could lower the target range for the federal funds rate by a quarter percentage point or more. This presents a potential opportunity for investors to move their assets from high-yield savings and money market funds to investments that could benefit from falling interest rates.
Key Takeaways:
- Rate cuts on the horizon: The Federal Reserve’s anticipated rate cuts could lead to lower yields on cash-like investments, such as money market funds.
- CD rates expected to fall: Banks may begin reducing rates on high-yield savings accounts and CDs before the Fed officially cuts rates, creating an opportunity to lock in higher yields now.
- Shifting to longer-term bonds: Longer-duration bond investments could benefit from falling interest rates, offering potential for both higher yields and price appreciation.
Time to Lock In CD Rates
Next week’s Fed meeting could provide clarity on the timing of a September rate cut. However, banks often preemptively lower rates on high-yield savings accounts and certificates of deposit (CDs) ahead of official Fed announcements. As a result, investors seeking to capitalize on current high CD yields should act swiftly.
“CD rates will likely fall pretty quickly once it becomes clear that the Fed is on the verge of cutting.” explained Ken Tumin, founder and editor of DepositAccounts.
According to DepositAccounts, the top 1% average rate for high-yield savings accounts was hovering below 5% as of July 25, while the top 1% for one-year CDs sat around 5.5%.
Ted Jenkin, a certified financial planner, CEO and founder of oXYGen Financial in Atlanta, and member of CNBC’s Financial Advisor Council, recommends locking in rates for 9-month or one-year CDs. “It’s a great time to lock in rates,” he said.
Shifting Towards Longer-Term Bonds
When evaluating bond portfolios, advisors consider duration, which measures a bond’s sensitivity to interest rate changes. Duration, expressed in years, incorporates the bond’s coupon, time to maturity, and yield to evaluate its price volatility in response to interest rate movements.
Several experts suggest shifting from money market funds to longer-duration bonds for longer-term investments. This strategy could prove profitable as interest rates decline. Bond prices typically rise as interest rates fall, while money market funds may experience lower yields without price appreciation.
“While it’s difficult to predict Fed policy, bonds could see a healthy lift if the Fed cuts interest rates by a full percentage point over the next year,” said Jenkin.
Choosing the Right Investment Strategy
Ultimately, the best approach for managing cash depends on individual goals, risk tolerance, and investment timelines. Although shifting from money market funds and savings accounts to potentially higher-yielding bonds or CDs may seem appealing, it’s crucial to weigh the potential risks. For example, rising inflation or unexpected policy changes could impact investment performance.
Before making any substantial shifts to investment strategies, seeking advice from a qualified financial professional is essential.
Disclaimer: This news article is for informational purposes only and does not constitute financial advice. Readers should consult with a qualified financial professional before making any investment decisions.
