Federal Reserve chair Jerome Powell strongly indicated that the Fed would start cutting rates at its next Federal Open Market Committee (FOMC) set for September 17-18. This would be an enormous sigh of relief for consumers as high rates have made borrowing more expensive and impacted everything from mortgages to loans and credit cards.
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While how substantial the rate cut will be remains to be seen, experts said there are a few financial moves individuals should consider before the September meeting.
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” Powell said on Aug. 23, speaking at Kansas City Fed’s annual conference in Jackson Hole, Wyoming.
Here are some money moves experts said investors should consider before the cut — which has a 100% chance of occurring, according to the CME FedWatch Tool odds, as of Aug. 26.
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1. Diversify With Bonds
Before the September rate cut, investors should consider diversifying their portfolio to hedge against potential market volatility — at least according to Michael Collins, CFA, founder and CEO of WinCap Financial.
This could include investing in a mix of stocks, bonds, and real estate to offset any potential losses.
“However, out of these investment vehicles, bonds are likely to benefit the most,” he said. “This is because when rates get cut, the value of bonds that are currently in circulation increase.”
JPMorgan analysts also indicated that bonds should be part of investors’ “rate cut playbook,” as they “can play a key role in a defensive investment strategy by providing capital preservation, income enhancement and diversification.”
2. Buy Closed-End Municipal Bond Funds
This is “one of the smartest strategies investors can implement before rates fall,” according to Patrick Galley, CFA , CEO and CIO for RiverNorth Capital Management.
According to Galley, buying closed-end municipal bond funds is compelling now, as they provide tax-free income and equity-like yields.
“Significant discounts on municipal closed-end funds provide enticing yields and improved liquidity compared to individual municipal bonds,” said Galley. “And with the leverage they employ, these funds stand to appreciate considerably when the Fed eases rates as expected later this year.”
3. Lock in High Interest Rates
Another beneficial move is to consider locking in higher interest rates now — on the cash bucket of your portfolio — by purchasing CDs or Treasury bills. This was recommended by Jason Dall’Acqua, CFP, founder and financial advisor for Crest Wealth Advisors.
Erika Kullberg — attorney, personal finance expert and founder of Erika.com — also noted that CDs are great options. You put your money in one for a set amount of time, and in exchange the bank (or credit union) guarantees you will earn a certain interest rate for the full CD term.
“By locking into a CD now, you can take advantage of these high rates, and your savings can grow at a faster rate than if you invest in a CD in September,” she said. “Some Treasury bonds also have fixed rates that last for the entirety of the bond term.”
It’s important to note that even a small percentage saved now can make a difference if the cut pushes rates down further, according to Edward Corona, trader and publisher at The Options Oracle.
4. Consider Investing in Real Estate Investment Trusts (REITs)
REITS — in essence, mutual funds that buy real estate instead of stocks — provide portfolio diversification and are a great way to derive passive income.
Abby McCarthy, SVP of investment affairs for Nareit, argued that this is a great move to make. Research shows that, historically, REITs outperform both equities and private real estate after Fed tightening cycles end.
“Currently, total returns for the FTSE Nareit All Equity Index is 12.6%, quarter to date, compared to 3.4% for the S&P 500,” she said. “Their recent Q2 earnings also show solid operational and balance sheet fundamentals. With the Federal Reserve signaling a rate cut in September, REITs could have more fuel in the tank for further performance.”
5. Increase Your Stake in Tech, Consumer Discretionary and Financial Stocks
This is the moment to aggressively increase your stakes in sectors like technology, consumer discretionary, and financials, which flourish when borrowing costs fall.
“As the countdown to the September interest rate slash ticks louder, remember the old Wall Street adage ‘Fortune favors the bold,’” said David Materazzi, CEO of Galileo FX.
As a matter of fact, historical trends show that smaller companies, highly sensitive to economic shifts, often outperform their bulkier peers in these reduced-rate periods, he concluded.
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This article originally appeared on GOBankingRates.com: 5 Financial Moves To Make Before the September Rate Cut
