Rate Cut Breakdown: What You Need to Know

What happened at the September Federal Open Market Committee (FOMC) meeting?

The Federal Reserve changed its policy stance to ensure that the economic cycle will continue. A 50-basis-point move sends a clear message that the Fed wants to support growth, but a bigger move should not be taken as a sign of bigger problems in the economy. Chair Jerome Powell said it himself in his news conference, explaining that this policy pivot is a “recalibration.”

In other words, the decision to cut interest rates is a normalization of monetary policy from a restrictive level, and not an urgent shift to combat a crisis. Powell continued: “The U.S. economy is in good shape… It’s growing at a solid pace. Inflation is coming down. The labor market is in a strong place. We want to keep it there. That’s what we’re doing.”

Despite some stabilization, the recent slowing in the labor market now stands as a bigger risk than inflation. The unemployment rate is still low at 4.2%, but that is up from 3.7% at the start of the year.

What can we learn from history about cutting cycles?

The Fed could deliver a lot of rate cuts, and we believe the Fed is likely to achieve a soft landing. The average soft landing cutting cycle over the past 53 years has seen roughly 200 bps of easing, but in the “modern” era, it has only been 75 bps. This cutting cycle, if it meets expectations of another 200 bps of easing through 2025, will be the deepest “soft landing” cutting cycle since 1984–1986.

Above all, cutting cycles hurt cash. If there is one thing we can learn from past rate-cutting cycles, it’s that cash is likely to underperform as yields fall. In all but two of the last 12 cutting cycles, bonds have outperformed cash.

What could it mean for your portfolio?

We encourage investors to use the rate-cutting cycle to their advantage, starting with assessing outsized cash positions. Cash is a necessary part of any lifestyle. Many think of cash as a safe haven or even a source of income when interest rates are high, but cash isn’t designed to beat inflation or produce long-term returns. Even if policy rates settle in a higher range than the last cycle, today’s elevated cash yields won’t last forever.

We believe better opportunities outside of cash exist today, especially for long-term investors looking to grow and compound their wealth over time. Bonds, for example, may provide consistent income and downside protection, while equities may stand to provide long-term capital appreciation.

Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles

Source: J.P. Morgan Private Bank, September 20th 2024, Rate Cut Breakdown: What you need to know now, Sarah Stillpass, Global Investment Strategist, J.P. Morgan Private Bank.