Federal Reserve Chairman Jerome Powell recently made a strong statement on Friday that the central bank is ready to cut interest rates soon. This potential change, expected in September, marks the first rate cut in more than four years, a significant shift from the near-zero rates that began during the onset of the Covid-19 pandemic.
This expected change in monetary policy has prompted many investors to consider their next moves.
For those with diversified portfolios, significant changes may not be necessary right now, according to financial experts at CNBC’s Advisory Council. They liken the situation to small adjustments, much like tweaking a hairstyle, suggesting that while the news is favorable, it doesn’t warrant drastic portfolio changes, as explained by Winnie Sun, co-founder and managing director of Sun Group Wealth Partners in Irvine, California.
Investors with long-term strategies, especially those who have invested in target-date funds within their 401(k) plans, may find that no action is required. These funds are typically managed by professionals who adjust investment strategies based on market conditions, often without the need for investor intervention, noted Lee Baker, a certified financial planner and founder of Claris Financial Advisors in Atlanta.
However, for those who are more actively involved in managing their investments, some adjustments may be advisable, particularly in areas such as cash holdings and fixed income securities, and possibly in the composition of equity portfolios.
In his keynote address at the Fed’s annual meeting in Jackson Hole, Wyoming, Powell said “the time is ripe” for a shift in rate policy, following a significant decline in inflation from its peak in mid-2022 and a cooling labor market. These factors combined suggest that easing interest rates could alleviate some economic pressures.
Stephen Brown, deputy chief economist for North America at Capital Economics, suggested in a note on Friday that the Fed could opt for a 0.25-0.50 percentage point cut at its next meeting.
Marguerita Cheng, a certified financial planner and managing director of Blue Ocean Global Wealth in Gaithersburg, Maryland, said lower interest rates are typically good for stocks, potentially encouraging companies to expand because of lower borrowing costs.
Still, uncertainty surrounding the size and pace of future rate cuts suggests caution, preventing investors from making premature or significant portfolio changes, echoing advisors’ advice to avoid knee-jerk reactions to Powell’s comments.
Powell’s remarks also stressed that any rate decisions will be driven by new economic data, future economic prospects and risk assessments.
As for investment strategies, advisers suggest that falling interest rates typically lead to lower returns on safer investments such as money in savings accounts, money market funds or certificates of deposit, as well as short-term bonds. So far, high interest rates have allowed for decent returns on these low-risk investments.
Ted Jenkin, a certified financial planner and CEO of oXYGen Financial in Atlanta, recommends taking advantage of the opportunity to get higher rates on cash through instruments such as CDs, anticipating that renewals at those rates may not be possible next year.
Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners in Jacksonville, Florida, stressed the importance of educating clients about the risks of holding too much cash during a time of declining rates.
According to Sun, investors may want to consider changing the duration of their bond investments to maintain desirable returns: for many, longer durations of five to 10 years are feasible.
However, changes in stock-bond allocation ratios are not generally recommended by advisors. Instead, changes could be made in future contributions to various types of stocks, with sectors such as utilities and home improvement potentially growing in a lower-rate environment, as well as asset classes such as real estate investment trusts, preferred stocks and small-cap stocks, which historically perform well when rates fall.
