Download the Schwab app from iTunes®Get the AppClose

A Closer Look at the Fed’s Rate Cut

Click to show the transcript

Recently the Federal Reserve lowered short-term interest rates for the first time in over a decade, and while the move was widely anticipated, it raised a question in the marketplace as to whether it was just a one-off adjustment to policy or whether it’s the start of a longer-term cycle of interest rate cuts. I’m Kathy Jones and this is Bond Market Today.

When the Federal Reserve lowered its benchmark interest rate, the Fed Funds Rate, by a quarter of one percent recently, the Fed Chair Powell indicated that they viewed it as a mid-cycle adjustment to policy rather than the start of a cycle of more rate cuts to come; and that ran counter to what the marketplace was anticipating. The market had actually built in expectations for two or three more rate cuts over the next year. Now, Powell’s reasoning for the rate cut was the headwinds from the global economy. The global economy slowing down, inflation is drifting lower, and the potential negative feedback from trade conflicts could slow the economy even further.

I would add that there probably were a few other reasons the Fed decided to lower rates. One would be that the yield curve is inverted. Short-term interest rates are above intermediate and long-term interest rates, and that’s often a signal of an impending recession in the next year; and also U.S. interest rates are significantly above those in other major developed countries, and that has driven up the value of the U.S. dollar, which in turn tends to make U.S. exports less competitive and slow the economy.

So, all that being said, though, the Fed’s attitude seems to be that this minor adjustment may be enough to counter those headwinds that the U.S. economy is facing, but the market is very much of the view, still, that we’re going to see further rate cuts down the road.

So, what can investors do with this information now that there’s more uncertainty about the future direction of interest rates? Well, one strategy you might consider is a barbell, and that is holding some short-term bonds and some intermediate-term bonds in the portfolio, and it actually doesn’t have to be weighted fifty-fifty. If you’re more comfortable with more short-term bonds than intermediate-term bonds, it can be weighted differently; but the idea is that with the short-term bonds you have low volatility, if you have high-credit quality bonds like treasuries. So, that low-volatility is an anchor in the portfolio, while the intermediate-term bonds lock in some yield that you could hold on to, should short-term interest rates continue to fall, and again we suggest higher-credit quality bonds, because in an uncertain economic environment, adding credit-risk to the portfolio is only going to create more volatility. So, we like to reduce that by holding higher-credit quality bonds like treasuries and investment-grade bonds.

To watch future episodes of Bond Market Today, subscribe to the Schwab YouTube channel.

Recently the Federal Reserve lowered short-term interest rates for the first time in over a decade, and while the move was widely anticipated, it raised a question in the marketplace as to whether it was just a one-off adjustment to policy or whether it’s the start of a longer-term cycle of interest rate cuts. Kathy Jones discusses more on this topic and what bond investors can do on this episode of Bond Market Today.

What you can do next 

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.  Investing in emerging markets may accentuate these risks.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

©2019 Charles Schwab & Co., Inc. (“Schwab”). All rights reserved. Member SIPC (0819-9U9U).


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.