US Fed makes big interest rate cut. What does this mean to you?
The Federal Reserve (Fed) made a significant move yesterday to lower the benchmark interest rate by 50 basis points (bps)—the first rate cut since March 2020. I understand that market shifts can spark questions and concerns, and I’m here to offer some perspective.
In the FOMC September 2024 meeting, the Fed cut its key interest rate by 50 bps (0.50%), bringing it down to a range of 4.75% to 5% from 5.25% to 5.50%. This larger-than-expected cut came in response to falling inflation and a weakening job market.
Here are a few key takeaways from the meeting:
1. Shifting Focus to Support Growth: With the Fed gaining confidence that inflation is approaching its 2% target, it is shifting its focus toward fostering economic growth and a healthy labour market. This marks a recalibration of US monetary policy to an environment of lower inflation and gradually moderating growth.
2. Economic Resilience: Despite some weak spots, recent data suggests that the overall US economy remains in good shape. Job growth has slowed, and unemployment has edged up slightly but remains low. Consumer spending continues to be robust.
3. An “Insurance Cut”: The Fed’s decision to cut rates isn’t a response to a crisis, but rather a proactive move — an “insurance cut” — to address potential future risks. The significant 50 basis point reduction underscores the Fed’s readiness to take decisive action if needed.
As we progress through the remainder of 2024 and into 2025, we expect interest rates to continue on a downward trajectory, which should help support both economic growth and market performance.
Fed policymakers currently forecast the benchmark rate to reach 4.4% by the end of 2024. This suggests they anticipate two more 25 bps rate cuts at the final meetings of the year in November and December. By the end of 2025, policymakers project a rate of 3.4%, implying four additional 25 bps cuts next year. And by early 2026, the policy rate is expected to reach a terminal level of 2.9%.
The recent rate cut signifies a major shift in the Fed’s policy direction. This change presents a crucial opportunity to review your portfolio and make necessary adjustments. Consider focusing on these key areas:
Shift from cash to investmentsThe era of high yields on cash is coming to an end. In fact, we’re already seeing a decline in returns on cash. The recent drop in the 6-month Singapore T-bill auction yield is a prime example, falling from 3.8% in March to 3.1% in September. With the Fed lowering rates, we expect the cash yield to continue declining and settle around the 2% range.
Holding onto excessive cash in this environment poses significant reinvestment risks. Now might be time to shift some of that cash into investments that can potentially offer greater growth potential and income opportunities.
Lock in attractive yields with bondsBonds thrive in a falling interest rate environment, benefiting from their inverse relationship with rates. In this cycle, high-quality bonds like US government and investment-grade corporate bonds stand out for their strong historical performance during rate cuts, whether or not a recession hits.
You might think it’s too late to invest in bonds after their recent rally, but there’s still significant potential. The rate-cutting cycle has just begun, with plenty of room for further declines. Meanwhile, bonds continue to offer compelling yields, positioning them for strong total returns.
Our managed bond portfolios, Income+ Preserve and Income+ Enhance, exemplify this opportunity, offering impressive yield-to-maturities of 6.4% and 6.9% p.a., respectively. Both maintain high credit ratings (A+ for Preserve, A for Enhance) and are fully currency-hedged, safeguarding against USD volatility.
Capitalise on the S-REITs recoveryS-REITs have surged over 15% in the past two months, driven by record inflows in the second half of 2024. This surge has been mirrored in our REIT+ portfolios, where investor interest has grown substantially, leading to a significant uptick in inflows.
The upside for S-REITs remains strong. Lower interest rates can sharply reduce financing costs, while boosting the value of their underlying assets. With robust operations and attractive valuations, S-REITs present a compelling opportunity to tap into some of the highest-quality commercial real estate in Singapore.
Our REIT+ Portfolio, centred on the top 20 REITs in Singapore, offers a highly attractive yield of 5.8% p.a., making it a prime option for investors seeking stable income in this evolving economic landscape. With favourable market conditions and continued rate cuts on the horizon, there’s still significant upside potential for S-REITs.
Equity markets may experience increased volatility. Concerns about the economy, uncertainties surrounding the US election, and the relatively high valuations of US stocks could lead to wider price swings. In addition, mega cap stocks concentration in market cap indices presents a risk-management challenge for passive investors.
With interest rate cuts in place, high quality small and mid cap stocks (SMID cap) are positioned to benefit. Historically, after the first rate cut, these stocks often catch up and outperform large caps within 12 months due to their ability to capitalise on lower interest rates.
Using Syfe’s Equity100 portfolio, investors can gain exposure to market-cap weighted ETFs that can capitalise on any future outperformance of the ‘Magnificent 7,’ while also diversifying with equal-weight and high quality SMID cap stocks, thus benefiting from sectors beyond AI and technology. This approach can help stabilise the portfolio during periods of volatility and position it for consistent, long-term growth.
For risk averse investors looking to navigate the market uncertainties, we have also launched Syfe Protected Portfolio S&P 500, a Singapore-first solution, designed to capture the upside of the S&P 500 while limiting downside to just 3%.
Best wishes for your continued investment success,
Ritesh Ganeriwal
Managing Director, Head of Investment and Advisory
Read More:
Syfe H2 2024 Market Outlook: When Monetary Inflection Meets Election
