How to Invest Now That the Fed Rate Cut Is Here

This Wednesday, September 18, 2024, the Federal Reserve board of governors met and reduced the Fed Funds effective rate for the first time since COVID-19 shuttered global economies in 2020. Not only was this the first Fed rate cut in four years, but it was a lot bigger than markets had anticipated. Up until the past week or so, most of the bets were placed on a 25-basis point, or quarter-percent, reduction.

But on Wednesday, the Fed surprised many by cutting double the expected amount and reducing rates by 50 basis points, or half a percent. And while that 0.25% difference might not seem like such a big deal, it could signal that the Federal Reserve isn’t as confident in the economy as it’s been letting on. So let’s take some time today to talk about this latest Fed rate cut, what it might say about the future of the economy and stock market, and how you can best invest to maximize your profit potential…

The Fed Rate Cut: What It Is

First off, let’s just briefly cover what exactly a Fed rate cut is and what it’s meant to accomplish. Because that’s going to be very important when it comes to understanding what this Fed rate cut might mean. And it’s also important when it comes to crafting an investment strategy to take full advantage of the Fed rate cut (and any more that might come out way).

You see, the Federal Reserve has what’s called a dual mandate. That means it’s supposed to keep an eye on two things: maximum employment and price stability. And it’s got two main tools in its tool belt for dealing with those: interest rates and the balance sheet. And while the Fed’s balance sheet plays a major role, it’s the Fed interest rates that command the most attention.

• Price stability = Fed rate increase
• Maximum employment = Fed rate cut

Raising interest rates is a tool that can slow down economic growth and, in turn, reduce the pace that prices rise. The Fed raises rates when prices are growing too fast and they want to slow that down.

And vice versa, when the Fed wants to stimulate the economy and get more companies hiring more people, we’ll see a Fed rate cut come through. Reducing the interest companies pay for a loan makes it easier for them to borrow money to grow. And growing companies hire more people.

So when the Fed thinks that prices are stabilized but employment might be in trouble, it’ll cut interest rates in the hopes of stimulating the economy before companies start to fire people and unemployment grows.

The Fed Rate Cut: What It Means

So that’s all pretty simple. When prices go up too fast, Fed rate hikes help slow them down. And when unemployment goes up too fast, Fed rate cuts can help slow that down. But now is where it starts to get a little more complicated. Because now we’re talking about what this Fed rate cut actually means. And I’m not so sure it means the Fed feels confident about the U.S. economy.

You see, if the Fed were confident in the economy, there would be no need for a Fed rate cut at all. If the economy is growing and inflation is low and employment is historically high, we’re in good shape and we don’t need to reduce rates and stimulate growth.

And if the Fed thinks that the economy is doing all right but might need a little extra energy to really kick into high gear, then it calls for a small Fed rate cut. And that’s what markets figured we’d get up until the last week or so.

But if the Fed thinks that the economy is on the brink of a major slowdown, or if the Fed thinks that it kept rates too high and unemployment is about to jump, then that calls for a big Fed rate cut. And that’s the Fed rate cut we got earlier this week.

So that should make investors wonder what the Fed is so worried about. If all is fine, which is the narrative they’ve peddled the past two years, then we don’t need any Fed rate cut at all. And if the economy is just slowing down a little bit and needs a bit of a boost, then we only need a small Fed rate cut.

The fact that they came out with a BIG Fed rate cut that was twice as large as what the market had been looking for tells me that maybe they’re not as confident as they’re trying to appear in public. Maybe the same Fed that waited too long to fight inflation is worried it’s waited too long to stimulate growth. And if that’s the case, maybe investors should be a bit concerned too.

The Fed Rate Cut: What It Impacts

And finally, that brings us to the best part of today’s lesson: how you can profit from this Fed rate cut (and any other that come our way this year). But in order to talk about that, we’ve got to talk about what the Fed rate cut impacts the most. And that’s the U.S. dollar…

You see, higher interest rates make holding U.S. dollars more profitable. The dollars represent a safer asset, and with higher rates, they provide investors with a risk-free yield. And like any asset, as demand grows, prices rise too.

But lower interest rates weaken the dollar’s strength compared to other currencies. And when investors sell one asset to buy another, the price of the asset they’re all selling tends to drop. That’s what happens to the value of the U.S. dollar when there’s a Fed rate cut.

And if the value of the dollar falls, we can safely assume that the price of anything priced in dollars will rise. So the investments that get impacted the most by a Fed rate cut are things like commodities, real estate, energy, and infrastructure.

Commodities, like gold and even copper, are priced in dollars. So when the value of a dollar falls, the number of them you have to exchange for that gold or copper rises. That’s why gold is hitting all-time highs every other week and has been one of the best-performing investments in the run up to this Fed rate cut.

But real estate is also priced in dollars too. And as those dollars buy less stuff, that real estate commands more of them to purchase it. Plus, lower interest rates make it easier to finance purchases. And that’s how most people buy real estate. Therefore, lower interest rates often translate into higher real estate prices. That’s why, when there’s a Fed rate cut, you’ll often see real estate investors licking their chops in anticipation of the outperformance their investments are about to see.

Then we come to energy and infrastructure. And I’m talking about both of them together because when I say infrastructure, I mean the stuff we use to get energy from producers to consumers. Things like electric power lines, oil and gas pipelines, shipping companies that transport crude oil or liquefied natural gas, even logistics providers fulfilling those crucial middle steps. Both of these asset classes tend to benefit a lot from a Fed rate cut. And investors would be wise to get some exposure if they haven’t already.

The Bottom Line on the Fed Rate Cut

The bottom line here is that the Fed cuts rates for a variety of reasons, but it rarely gives us a big Fed rate cut unless it’s worried about trouble ahead. Now, this doesn’t mean that we’re guaranteed to hit a recession and market crash just because there was a big Fed rate cut. But it does mean that investors need to be vigilant and prepared.

And you can do that by getting some of your portfolio allocated to those four sectors we’ve covered today. If we head into a recession, they’ll sell off with everything else, but they won’t fall as hard and they’ll recover far faster. And if we don’t get a recession but we do get a resurgence of inflation, you’ll own the assets that do best in that situation, too.

But no matter what this Fed rate cut ends up meaning about what the Fed sees coming down the road…. and no matter if it’s the first Fed rate cut or one of may rate cuts coming down the pike…

You can always make sure you’re set up to maximize your profit potential by keeping informed and staying one step ahead of the rank-and-file world. And the best way to do that is by coming back to Wealth Daily every day to stay on top of everything this market and the Fed rate cut throw at you.