💥Top Priority: Federal Reserve Cuts Impact On Cash

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Introduction

On September 18, 2024, the U.S. Federal Reserve announced a 0.5% rate cut—the first in over four years. So, what does this mean for you and your money?

At first glance, the inner workings of the U.S. Federal Reserve might seem like a bunch of "boomers" talking about things that don't affect you. But, in reality, the Fed’s decisions play a huge role in how assets like stocks, real estate, and savings accounts are valued. Let’s break it down, especially for those of us thinking about our cash.

1. Why Does the Fed’s Rate Cut Matter to You?

First, it’s important to understand that the Federal Reserve controls what’s called the "Fed Funds Rate." This rate influences almost everything: from the cost of borrowing for homes to the interest earned on your savings accounts. Before COVID-19, interest rates were near zero for nearly a decade. Fast forward to now, and even with this recent cut, the Fed Funds Rate remains in the 4.75%-5% range, which is still high by recent standards.

For context, every time the Fed adjusts interest rates, it sends ripples around the globe, impacting economies everywhere. So, what happens to your cash when these rates fall? Let’s explore.

2. The Real Impact on Your Cash and Savings

When interest rates fall, so do the returns on cash. For much of 2023, high interest rates made cash savings appealing. You could park your money in a money market fund (MMF) and earn 4-5% a year with minimal risk. For example, if you had U.S. dollars, you could snag over 5%. In fact, global MMF assets ballooned to a record $9.9 trillion by the end of 2023.

However, as interest rates drop, these juicy returns are no longer guaranteed. The Fed’s move signals that the golden days of high cash yields are likely behind us, and the opportunity cost of holding too much cash increases.

Interest rates are falling, and the market is shifting—are you ready to seize the opportunity? 💡

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3. So, Should You Still Hold Cash?

While it’s essential to have an emergency fund (typically 6-12 months’ worth of expenses), holding excessive cash during a falling rate environment might not be the best strategy. As the Fed continues cutting rates throughout 2024 and into 2025, your annual returns on cash will decrease, making it less attractive.

4. Investing Opportunities: Look Beyond Cash

Real Estate Investment Trusts (REITs): If you’re looking for potential upside, REITs might be appealing. They thrive when interest rates are low because they rely on borrowing (debt) to expand their property portfolios. When borrowing becomes cheaper, REITs can grow faster. Over the past two years, many REITs took a hit due to high debt costs, but this rate cut could provide them some relief.

Banks: Conversely, major U.S. banks— JPMorgan Chase, Bank of America, and Wells Fargo—may face challenges. Their profits largely come from lending at higher interest rates (while paying you less on your deposits). As rates fall, their margins shrink, so their stock prices might face headwinds.

5. What Should You Do Now?

The recent rate cut is like an early Christmas present for investors, but it’s also a reminder that the U.S. Federal Reserve may be worried about the economy. A recession in the U.S. could impact markets globally. While the Fed’s rate cuts might push people out of cash and into other assets, it’s essential to watch how future cuts unfold.

The Bottom Line

If you're looking to diversify beyond cash, REITs, and banks, here are some other compelling investment options to consider:

• Reassess your cash holdings: Cash is safe but less rewarding as interest rates fall. Maintain your emergency fund, but consider alternative investments.

• Look into REITs and other low-debt investments: Lower interest rates mean cheaper borrowing, making REITs and certain companies more attractive.

• Monitor banks and financial stocks: Lower interest rates might hurt the profitability of major banks.

Stay informed and make smart investment choices!

Happy Investing!!