During the March 2024 Fed FOMC meeting, the chair of the Federal Reserve emphasised that the Fed remains “fully committed” to achieving its 2% inflation but at this point, he does not think it is appropriate to reduce rates until the FOMC is confident that “inflation is moving down sustainably” toward 2%.
At the conclusion of the meeting, the Federal Reserve elected to maintain the current interest rates but stuck with its forecast for three interest rate cuts before the end of the year.
And like ripples on a pond, the immediate market reaction saw all 3 major U.S. stock indexes rallied to their highest closing levels after the Fed’s announcement.
How a Rate Cut Will Impact You and Your Investments
Expect Capital Gains But Lower Dividend Yields
With the Fed’s eventual pivot toward rate cuts, income-focused investors can stand to benefit from capital gains across the fixed-income markets, and REITs are also poised to do well amid declining interest rates.
The prices of REITs and fixed-income products like Income+ are inversely related to interest rates; interest rate cuts would generally push the prices of these investment instruments up, providing a boost to total returns. But at the same time, investors have to brace for a decline in overall dividend yields as rates fall.
Is Now the Time to Lock-In?
The higher-for-longer interest rates environment has generally benefited savings accounts and fixed deposits, allowing returns to reach record levels. But with rates expected to fall by at least 0.75% starting from June, the yields from these instruments are likely to drop lower as well.
For savers looking to maximise their earnings from interest, it might make sense to consider locking in the higher interest rates now while they remain relatively high.
Syfe’s Cash+ Guaranteed offers 3.8% p.a. on its 3 and 6-month terms and 3.5% on its 12-month term. If you have enough savings that you can leave some untouched for a year, you might want to lock in your money to lock-in these yields before they go lower.
Existing Cash+ Guaranteed users are subjected to reinvestment risk once your portfolios mature. To mitigate this, you want to consider Income+ to capture the higher current yield with capital appreciation.
Opportunities for Growth-Focused Portfolios
It’s no surprise that interest rate cuts are good news for growth-focused investors, as lower interest rates make stock market returns more attractive compared to fixed-income investments, prompting more capital to flow into equities and potentially driving up stock prices.
For investors seeking growth, now might be the time to take action as underperforming stocks are expected to play catch up as rates fall. Our Core Growth or Core Equity100 portfolios are designed for long-term growth; while cash investors have gotten mid-single-digit returns, investors in our Core Equity100 portfolio enjoyed over 18% returns in the last 1 year (as of 29 Feb 2024). Alternatively, you can also choose to invest in stocks via Brokerage for a more hands-on approach.
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