Money moves to make before the Fed lowers interest rates (2024)

FAQs

Where to invest before rate cuts? ›

Here are 3 ways to earn attractive returns for years to come instead. LPL says to consider shifting from cash to medium-term bonds as the Fed plans rate cuts. Options for medium-term bonds: ETFs, separately managed accounts, and bond ladders. Medium-term bonds also offer protection in a recession.

Key takeaways

Not only inflation but a potential deterioration in the job market could also prompt the Fed to reduce interest rates to safeguard the U.S. economic expansion.

Late last year, the Fed was widely expected to cut the benchmark federal-funds rate in 2024 as many as six times. But at the conclusion of its June 11 and 12 policy meeting, the central bank is expected to announce that it's keeping its rate target between 5.25% and 5.5%—right where it's been since July of 2023.

If you are a short-term investor, bank CDs and Treasury securities are a good bet. If you are investing for a longer time period, fixed or indexed annuities or even indexed universal life insurance products can provide better returns than Treasury bonds.

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

The median projection for the benchmark federal funds rate is 5.1% by the end of 2024, implying just over one quarter-point cut. Through 2025, the FOMC now expects five total cuts, down from six in March, which would leave the federal funds rate at 4.1% by the end of next year.

The consumer discretionary, technology, real estate, and financial sectors have historically been especially likely to outperform the market when rates fall and earnings rise. Financial stocks look particularly appealing, due to how inexpensive they've recently been.

Certificates of Deposit (CDs)

Many investors like the idea of locking up cash in a certificate of deposit, or CD, which guarantees a return for a certain holding period. For example, several one-year CDs currently have rates of a little over 5%.

How to prepare for lower interest rates? ›

To prepare for falling interest rates and the subsequent effect on savings account yields, consider reallocating your cash to other investment opportunities or uses that can offer a more favorable risk-reward trade-off.

Currently, no banks offer an interest rate of 8% on savings accounts. However, some banks provide a 7% APY on checking accounts. These include Landmark Credit Union Premium checking account with an APY of 7.50%, and OnPath Credit Union High Yield checking account with an APY of 7.00%.

Digital Federal Credit Union has an account that pays over 6% APY, but you must meet membership requirements to get started. You also won't earn this high interest rate on your entire Digital FCU savings balance. Plenty of savings accounts are available around the U.S. and still offer great rates — over 5% APY.

The highest high-yield savings account rates today are offered by First Community Bank (6.00%), MyBankingDirect.com (5.55%), and Sovereign Bank (5.40%). The high-yield savings accounts we highlighted offer interest rates from 4.60% to 5.25% – at least 10 times the national average on traditional savings accounts.

Buy short-term bonds instead of long-term bonds

In a period of rising interest rates, the price of existing bonds will decline. Bonds with a longer time to mature will feel a greater impact from an increase in interest rates than a bond with a shorter maturity. This is also true with bond mutual funds and bond ETFs.

The best recession stocks include consumer staples, utilities and healthcare stocks. Consumers can't do without these companies, no matter how bad the economy gets.

Purchase Precious Metal Investments.

Precious metals, like gold or silver, tend to perform well during market slowdowns. But since the demand for these kinds of commodities often increases during recessions, their prices usually go up too. You can invest in precious metals in a few different ways.