Federal Reserve’s Latest Rate Decision – Key Implications and Opportunities

Written by: Nate Burstin, Portfolio Manager

Following a very recent Federal Open Market Committee (FOMC) decision, Merit’s investment team discusses key implications and opportunities this presents. As expected, the Federal Reserve announced its first rate cut, reducing the target range from 5.25%–5.50% to 4.75%–5.00%. While this outcome was widely anticipated, the market’s response has been positive, with equities rallying. Federal Reserve Chair Jerome Powell reinforced the Fed’s focus on inflation and employment noting that inflation is under control while employment is weakening. This rate cut is important because things like home mortgages and credit card rates will follow.

It’s worth noting that although the market had predicted a 50-basis point cut, future rate cuts may not follow this pattern, as Powell emphasized the Fed’s data-dependent approach. Importantly, this rate cut, and any future adjustments, will likely have the greatest impact on cash and cash-equivalent investments as those rates will fall fastest. This environment creates attractive opportunities for investors seeking to extend bond average maturities and lock in real yields as inflation trends downward.

For the first time since 2005, the FOMC’s decision was not unanimous. Governor Michelle Bowman dissented, favoring a smaller 25-basis point cut. Nonetheless, Powell reiterated confidence in a “soft landing” scenario, where economic growth and inflation move toward sustainable levels, supported by a stable labor market.

As we navigate this evolving rate environment, it’s essential to reassess portfolio positioning, especially with cash and short-term investments likely to deliver lower returns. With the bull steepening of the yield curve (short interest rates falling faster than longer rates), there are strategic opportunities to add longer-term positions that benefit from the generally attractive level of yields.

Our recommendation to clients is to schedule a brief call with your Merit advisor to review how these changes may impact your portfolio and discuss any adjustments we should consider to optimize your investment strategy moving forward.

Investment advice offered through Merit Financial Group, LLC, an SEC-registered investment adviser.