Interest Rates: Taking the Steps Up and the Elevator Down

May 13, 2024

Throughout the course of 2022 and 2023, the Federal Reserve embarked on one of its fastest tightening cycles in history by raising the federal funds rate from a range of 0-0.25% to 5.25-5.5%. This is the highest level in two decades. The clear winners from these rate changes? Savers. Now, you actually earn interest from just sitting in cash. However, it is time to revisit those cash positions.

Time to Revisit Cash Positions

The Federal Reserve left rates unchanged at the current 5.25-5.50% range since the July 2023 policy meeting. A thing to keep in mind is the Fed’s policy actions directly impact shorter-term rates; longer-term rates are driven by the economy, inflation, and U.S. debt levels. As a result, rates on money markets, short-term certificates of deposit (CDs), and Treasury bills mirror the rate set by the Fed. For the past year, if you owned one of these cash or cash-like investments, you likely earned a 5%+ income stream with no price risk. Not a bad place to be for a conservative investor. However, those times are likely to change in the coming months.

Where to Go When Rates Get Cut

The biggest debate this year is when the Federal Reserve will start to cut interest rates. The change in expectations on the timing and magnitude of cuts is why intermediate to longer-term interest rates rose from the beginning of the year. Short-term rates are largely unchanged, as they are controlled by the Fed as noted above. Yes, the yield curve is still inverted, i.e. short-term rates are higher than longer-term ones, but that difference has narrowed. In addition, the yield on the 10-year Treasury note is higher today than where it has been over 80% of the time the past twenty years. This presents an attractive opportunity for investors to start putting that cash back into high quality intermediate term bonds.

There is an old market truism that ‘interest rates take the steps up and the elevator down.’ History shows when the Fed starts to cut rates, the tide turns quickly. Short-term rates fall faster than longer term ones. This trend begins before the official rate cut announcement. Trying to time the right moment to get out of cash and into intermediate term bonds can be costly. Therefore, we encourage you to start adding back bonds to your portfolio and locking in these attractive rates for years in the future.

We are here to help you with this process.  Give your Wealth Management Advisor a call today to discuss strategies for your cash positions going forward. Your financial success matters to us.