I talked with a client this week about things to consider as interest rates being to move lower after the Fed’s first cut in 2025. Here’s a quick recap of what we discussed.

Note: It’s important to remember that many of these actions were taken months ago for our clients as we anticipated that rate cuts were very likely to come at some point in 2025. If you haven’t taken any actions yourself, don’t panic. Now is the next best time to review your situation and consider making moves now that cuts are back on the table.

1.) Bifurcate Cash Needs – For over four years, investors have been able to obtain 4-5% in money market mutual funds. Rates on money market funds were equal to or higher than most other cash equivalent investment options (like T bills or 1-2 year treasuries). As a result, majority of cash positions could be held in a money market without sacrificing any yield. That dynamic is no longer true.

Money market rates will fall in lock step with Fed cuts, as will shorter-duration bond yields. As a result, for our clients, starting in late 2024, we encouraged them to take a closer look at their cash reserves.

For cash with a known purpose and timeline (such as a home remodel, vacation, college funding, etc), we swapped money market holdings for fixed maturity treasuries. This allowed us to lock in the rate (that will stay fixed even as the Fed cuts) until the cash will be needed.

For cash that is serving as more of a cash reserve/emergency fund, we left those holdings in the money market fund as next-day liquidity is what matters for these funds – not earnings potential.

For cash (neither earmarked or emergency reserves) but part of the target cash allocation, we utilized a combination of money market funds (to retain liquidity) and T bill ladders to mitigate some rate risk.

For any other cash balances exceeding reserve needs, earmarked cash allocation, and specified cash target allocation, we shifted those funds to other asset classes per client’s target allocation as the earnings potential on those funds is about to become even greater as compared to cash returns as rates fall

2.) Monitor debt and interest rates – Many of us borrow funds in some capacity – whether it’s a home mortgage, car loan, margin loans, car lease, or other form of debt. As rates comes down, its wise to pay attention to the rate you are paying and whether it would serve you to refinance any outstanding obligations. Mortgages are a key one to watch. Even though mortgage rates won’t fall in lockstep with Fed Funds rate, they are likely to trend lower in a rate cutting cycle. Homeowners that financed purchases in the past few years may soon benefit from refinancing (be sure to consider refi costs and your anticipated timeline in the home before taking any action).

3.) Review fixed income holdings – More than any other asset class, fixed income returns are highly dependent on the prevailing interest rate picture when you first invest. Today’s environment for fixed income is the best it has been in a very long time. Current rates/yields remain well above historical standards and principal values will also increase as rates decline over time. If there is any back-up in yields (ie: if rates move higher on an unexpected inflation increase, Fed rate-cutting halt, etc), you still have a meaningful amount of yield to offset that principal decline. Take a look at your fixed income weight vs. your target allocation. Review the composition of your fixed income positions and determine what duration profile you are exposed to (bonds with longer durations will do better as rates fall, worse as rates rise)

4.) Review equity portfolio – Certain segments of the equity market (such as small caps, growth stocks, etc) tend to do well as rates start to decline and as the market anticipates more cuts to come. As always, keep an eye on your overall positioning, sector weights, concentrations, and equity weight vs. target allocation – especially after meaningful swings on rate cut news. Make adjustments and stay the course

We’ve now seen our first rate cut in 2025. Times are changing – don’t get left behind.