Quarterly Client Letter: 2024 Q3

Well, it finally happened. After months of will-they-or-won’t-they speculation, the Federal Reserve cut interest rates in September. And it was a relatively big one: The half-percentage-point decrease was the biggest the Fed has made since its emergency rate reductions in March 2020 at the onset of the pandemic. Before that, the country hadn’t seen a half a point decrease since the global financial crisis in 2008.

The good news: With these cuts, policymakers acknowledged the progress they’ve made in wrangling inflation, which peaked at 9.1% in June 2022 and hit 2.5% this August, nearing the Fed’s traditional 2% target rate. The Fed fell short of declaring all-out victory, but came close: “We know it is time to recalibrate our [interest rate] policy to something that’s more appropriate given the progress on inflation,” Fed Chair Jerome Powell said. “We’re not saying, ‘mission accomplished’...but I have to say, though, we’re encouraged by the progress that we have made.”

Now the less-good news: If you’re wondering what the big rate cut actually means for you and your money, you may get wildly different—and in some cases wildly misleading—answers depending on whom you ask. (Spoiler alert: Whatever you hear is not enough to risk disrupting your long-term investment plan.)

One group of talking heads declares that lower rates will juice the economy. After all, lower policy rates make it less expensive for banks to borrow, so they might charge lower interest on mortgages, auto loans and credit cards. Theoretically, that could leave consumers with more money to spend, bumping up economic activity.

On the other hand, some economists are arguing that high interest rates since 2022 have actually boosted the economy by putting more money in bond investors’ pockets, so lowering rates could actually cause growth to soften. Others point out that the Fed historically has made big rate cuts when it thinks the economy is in trouble. “We don't have a lot of examples of cutting in a healthy economy, in one that's not showing serious signs of distress,” said Jon Faust, former senior special adviser to Fed Chair Jerome Powell. 

And what about the stock market? Some say lower rates will help stocks, since it’s cheaper for companies to borrow…except that historically, higher interest rates tend to be associated with higher stock prices. That tracks with recent history: The S&P 500 has been up about 30% since the Fed started raising rates in March 2022.

Noticing a pattern? There’s a bit of a bipolar nature to the commentary surrounding rate cuts. Fact is, it’s hard to know what will happen after the Fed cuts, in part because outcomes have varied in the past. It’s especially unclear what will happen given the extraordinary circumstances of the last few years.

Amid this uncertainty, investors may take comfort in remembering that the market is an incredibly sensitive pricing mechanism. By the time a cut is made, that information has already been included in all manner of financial instruments, from stocks to bank loans. So if you have the impulse to make moves to take advantage of—or protect yourself from—whatever might come, you’re probably too late.

That’s not a bad thing. After all, your best course of action in response to any market development is to stick with your long-term investment plan. Your portfolio is built to work across economic and interest-rate cycles—during which rates may rise and fall several times.

These rate cuts may offer a good opportunity in the coming months to make some smart money moves, including refinancing debts like mortgages, auto loans or student debt. But when it comes to your long-term investments you probably don’t need to do anything—at least not unless your own circumstances warrant a change to your existing plans. 

If you ever have any questions about how rate cuts affect your portfolio, or anything else, please let us know how we can support you.