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Rate Cuts & Your Portfolio

The market is now pricing in at least a 0.25% rate decrease by the Federal Reserve after September’s meeting, which would mark the first rate cut since December of 2024. 

After reducing the Federal Reserve’s overnight borrowing rate by a full 1.00% in the last 4 months of 2024, the Fed has taken a wait & see approach in 2025. 

Stubborn inflation data, coupled with the uncertainty of tariff policy & a resilient US economy have kept the Fed on hold through the first 8 months of the year. Recent weakness in jobs data, as well as a steady contraction in the ISM manufacturing survey over the last 6 months, is likely to be enough to push the Fed towards action this month.

What does this mean for your financial situation? First things first, the Fed’s overnight rate does not directly impact mortgage rates. Mortgage rates are primarily influenced by the 10-year U.S. Treasury yield, which is set by investor demand for 10-year U.S. government debt. That said, further evidence of weakness in the U.S. economy could also push that rate down as well, which would likely send mortgage rates lower.

The most direct impact from a rate cut by the Fed is a reduction in what investors can expect to earn from Money Market Funds and short-term U.S. Treasury bills. As of today, a 3-month US Treasury bill yields 4.00% and a 1-year US Treasury bill yields under 3.70%, which indicates the market expects at least one more cut over the next year. Investors in money market funds can expect an immediate reduction in the yield they receive coinciding with any action taken by the Fed.

On the positive side, borrowers with exposure to floating-rate loans will be among the first ones to see a little relief in their interest expenses. This generally includes people with Home Equity Lines of Credit, Securities-Backed Lines of Credit, and Margin Loans. These loans are generally based on either the Prime Rate or the Secured Overnight Financing Rate (SOFR), both of which are closely tied to the Fed Funds rate.

For stock investors, the effects of a rate cut are more mixed. On the positive side, lower borrowing costs are a boon to the U.S. economy and by extension, the stock market. On the negative side, the reason for a rate cut in the first place is evidence of a weakening U.S. economy. Will rate cuts be enough to offset the current weakness in the jobs market & tepid manufacturing backdrop? Time will tell, but it rarely pays to bet against the U.S. economy. Financial markets have a way of “muddling through” bad news until the outlook begins to brighten.