As you likely know by now, the Federal Reserve cut interest rates by 0.50% this week. While we have been under the impression that rates would fall for virtually all of 2024 (and have been having discussions with clients to that end for many months as a result), I certainly understand that things aren’t top of mind until the reality sets in.

With the first Fed cut (and an indication of more to come), the reality of lower interest rates is here. What should investors and savers do? Here are a few things I have been discussing with clients that you may wish to apply to your own facts and circumstances

Let’s start of the asset side of the net worth statement:

Cash – the past several years have been a wonderful environment for savers/investors in terms of the yields available on cash. Across the board, cash and cash equivalents like CDs, high-yield savings accounts, and money market accounts have paid meaningful yields (nearing 5.5% in some cases). It’s been over 20 years since the Fed Funds rate (and resulting cash yields) have been that high. This allowed for investors to carry cash balances without giving up all hopes of a meaningful return.

As that tailwind starts to weaken, it is the time to reassess cash balances. While we always advocate for the maintenance of an emergency fund held in cash or cash equivalents, any excess cash balances should be evaluated. Understand what that cash is for and consider altering your investment approach. For instance, if the cash is for a home remodel set to begin next year, you may wish to use a 1-year T bill or CD (that will lock in your rate now before further declines). Cash will always be a key part of an investment portfolio – but with rates falling, carrying too much will likely be a drag on returns over the long run

Fixed income- Keep in mind there is an inverse relationship between interest rate and fixed income values. As a result, as rates fall, the value of fixed income holdings will rise. Further, fixed income securities purchased today are also offering generous yields not seen in many years. Blackrock’s head of fixed income calls this the “golden age of fixed income investing” and there are many reasons why this is likely to be the case. We’d suggest looking at your weight in this asset class versus your target and consider adjusting as necessary. As with all investments, carefully consider your options and invest with care, considering yields, duration, and credit quality

Equities – Equity prices are the present value of future cash flows, and a lower discount rate for those cash flows should be supportive of equities – not to mention the benefits of the underlying companies of lower rates (ie: lower financing costs). Lower rates should be supportive of most equity securities but of course, there are many other factors that can swing markets one way or the other (including how much of the future path of rates is already accounted for in today’s valuations). Evaluate your equity allocation versus target and adjust accordingly, keeping in mind that fixed income can now carry some of the total return weight (versus equities having to do all the heavy lifting as has been true the past decade-plus)

Now, on the debt side of the net worth statement:

Housing debt – if you bought a home in the past few years, you are keenly aware of how high mortgages rates have been. While mortgage rates are not tied directly to the Fed Funds Rate, they do move pretty closely in step with the 10-year US bond yield, which has also been declining.

If you have a mortgage at a rate above today’s prevailing rate (~6.1% on a 30-year fixed a in today’s national average release), it may be worth considering refinancing. Keep in mind there is no one size fits all for whether or not to refinance – and there is a cost to do so. A very high level place to start is to compare the annual interest savings achieved with the lower rate against the refinancing costs (which will vary based on your credit, home value, etc). If you can “make up” the costs in a reasonable amount of time (considering also how long you will stay in this home), it may be worth looking into things further. There is no limit on the number of refinances you can do (so if rates fall further, you can act again) – just know there are costs each time

Home equity lines – rates on home equity lines of credit tend to be variable, so there is likely no actions you need to take to renegotiate your current rate. However, if you do not yet have a HELOC, you may wish to keep this on your radar as banks may offer intro specials at reasonable rates in the coming year. Also, as rates continue to decline, using a HELOC to pay off existing debt with a higher rate (like a car loan or student loan) may be a wise approach. Keep comparing the rates on all your debt and be strategic if possible

Car loans – Car loans tend to front-end load interest, so if you have had the loan for a few years, it may not be worth the time to refinance. But a newer loan may be worth a look. As always, do the math – keep an eye on market rates in the coming months and compare to your rate. See also note above on HELOC usage to satisfy a higher interest rate loan

Credit card debt – this is one of the worst types of debt to carry – so our first piece of advice would be to pay it off if at all possible! However, if you are carrying a balance, know that the rate should decline as market rates do the same. You should not have to do anything as the rate will automatically reset (just as it has sadly done on the way up)

Hopefully these ideas give you a few places to start as we enter a new interest rate world!