On September 18, 2024, the Federal Reserve lowered its benchmark interest rate by half a percentage point. This substantial move comes after they raised interest rates multiple times in 2022 and 2023 in order to address inflation. By early 2024, inflation had eased, with August seeing an annual rate of 2.5%, according to the Consumer Price Index—close to the Fed’s target of 2%.

This rate cut is welcome news for consumers, as lower rates typically reduce borrowing costs. While the Fed doesn’t directly set rates for mortgages, auto loans, or home equity loans, its policies have a significant impact on what borrowers end up paying.

You might be wondering if this change should affect your retirement savings strategy, but the short answer is no. Here’s a closer look at how Fed rates do, or do not, impact retirement savings.

How Will The Fed Rate Cut Affect My Retirement Savings?

A Fed rate cut typically doesn’t have a direct impact on long-term retirement savings. The Fed’s actions mainly influence short-term borrowing rates and consumer loans like mortgages and credit cards, but not retirement accounts like 401(k)s or IRAs. However, lower interest rates can lead to reduced returns on savings accounts and bonds, which could be a concern if your retirement portfolio is heavily invested in fixed-income assets.

If your retirement savings are mainly in stocks or a diversified portfolio, you’re less likely to feel an immediate effect. Stocks are necessary for portfolio growth, and they tend to do well after a rate cut. It’s generally a good idea to stay focused on your long-term financial goals and not make hasty changes based on short-term rate adjustments.

Will CD Rates Go Down When The Fed Lowers Interest Rates?

Yes, CD (Certificate of Deposit) rates typically decrease when the Federal Reserve lowers interest rates. When the Fed cuts rates, borrowing becomes cheaper, and banks may reduce the interest they offer on savings products like CDs, as they don’t need to attract as many deposits to fund loans. As a result, CD rates tend to drop following a Fed rate cut.

This won’t impact CDs you have actively open. If you’re considering opening a new CD, it’s a good idea to lock in rates before further rate cuts if you expect them, as future CD offerings may have lower rates.

How Do Fed Interest Rates Affect A Diversified Portfolio?

The Federal Reserve’s interest rate changes can impact the various parts of a diversified retirement portfolio in different ways:

• Stocks:
  • Rising rates can hurt stock prices by increasing borrowing costs for companies. Financial stocks may benefit.
  • Falling rates often boost stocks as borrowing gets cheaper.
• Bonds:
  • Rising rates lower bond prices since newer bonds offer better returns.
  • Falling rates increase bond prices.
• Cash:
  • Rising rates increase returns on savings and short-term CDs.
  • Falling rates reduce these returns.
• Real Estate (REITs):
  • Rising rates can hurt real estate by making mortgages more expensive.
  • Falling rates benefit real estate with cheaper borrowing.
• Commodities:
  • Rising rates can increase demand for safe-haven assets like gold.
  • Falling rates reduce demand if conditions stabilize.

In short, how much your retirement portfolio is affected depends on your asset mix, but it’s important to stay focused on long-term goals.

Have questions about the Fed rate cut and your retirement? Contact Zynergy Retirement Planning today.