BT Money Hacks: ‘T-bill and chill no more’ - investors brace for Fed rate cuts
This episode dives into the recent interest rate cut by the US Federal Reserve and its implications for investors.
IN SEPTEMBER 2024, the US Federal Reserve - the central bank of the world’s largest economy - announced a much-anticipated cut in its benchmark interest rate by an arguably surprising number. While some were taken aback, others expected the move due to reassuring inflation and labour data points. Daphne Tan from CMC Markets Singapore highlighted that inflation data such as the core PCE and core CPI remained constant, and there was a slight decrease in the unemployment rate, further increasing the probability of a larger rate cut.
What the divided decision means
The rate cut decision reflected a divided stance within the Federal Reserve, as shown by the votes being split. Charu Chanana from Saxo noted that even before the decision, the market was pricing in a high probability of either a 25 or 50 basis points cut. Short-term yields, such as the two-year bond yields, did not move significantly, indicating that the market had already priced in the cut to a degree.
The cut has sparked varied reactions from analysts and strategists. Daryl Ho from DBS suggests that holding cash may no longer be advisable, as the practice that served investors in high-yield savings accounts is ending. Instead, he recommends an overweight position in fixed income, as bonds promise higher rates for the long term and potential capital gains in a declining interest rate environment. Equities also appear promising if the Fed’s soft landing narrative continues, with potential earnings growth and valuation expansion.
Where the investment opportunities are
Investors are advised to reduce exposure to financials like banks, which suffer from lower net interest margins in a rate cut environment. Defensive sectors, including utilities, consumer staples, and healthcare, usually perform well during rate cuts, but Chanana counters that this might not be the case in the current risk-on environment. Small caps, emerging markets, and commodities are showing good performance.
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Gold emerges as a highly recommended asset. Lower interest rates reduce the opportunity cost of holding gold, making it more attractive as a safe haven asset, especially with the upcoming US elections. However, market participants are cautioned against fully relying on defensive strategies because the economic environment remains uncertain.
More information may become available
With more data expected at the end of September, market participants are in wait-and-see mode. The lack of clear forward guidance from the Fed adds to the uncertainty. Investors are advised to gradually rebalance portfolios, favouring safe haven assets like gold and defensive stocks in the short term, and to stay prepared for potential volatility in the coming months.
In summary, the recent rate cut by the Federal Reserve brings both opportunities and challenges for investors. While fixed income and equities appear attractive, a cautious and diversified approach is recommended.
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Highlights:
01:49 Why understanding Fed decisions is important
04:29 What the divided decision means
06:02 Where the investment opportunities are
12:10 More information may become available
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Send us your questions, thoughts, story ideas, and feedback to btpodcasts@sph.com.sg.
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Written and hosted by: Howie Lim (howielim@sph.com.sg)
With Charu Chanana, head of FX strategy and global market strategist, Daphne Tan, director of business development, CMC Markets Singapore and Daryl Ho, senior investment strategist, chief investment office, DBS Bank.
Edited by: Howie Lim & Claressa Monteiro
Produced by: Howie Lim
Engineered by: Joann Chai Pei Chieh
A podcast by BT Podcasts, The Business Times, SPH Media
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