The Federal Reserve has shifted its focus from fighting inflation to supporting employment, cutting interest rates by 0.50%. This change affects fixed-income yields, including Treasury bonds and annuities, with additional cuts anticipated in 2025. Investors should revise their strategies to take advantage of current short-term rates.
Key Takeaways
- In a surprising move, the Fed cut interest rates by 0.50% in September, highlighting the need for a more flexible monetary policy.
- The Federal Reserve has shifted its focus towards supporting employment, signaling the end of its inflation-driven rate hikes and a new era of rate cuts.
- With interest rate cuts expected through 2025, investors should plan for continued downward pressure on yields, making it essential to seize favorable rates.
The Federal Reserve’s Interest Rate Cutting Cycle Explained
On September 18th, the Federal Reserve cut interest rates by 0.50%, exceeding the 0.25% cut that the market consensus had expected. This marked a potential end to the fight against inflation that the Federal Reserve has been waging since 2022, when inflation spiked as high as 9%.
The Federal Reserve has a dual mandate to maintain full employment and price stability. Under certain conditions, one takes priority over the other. For the past two and a half years, regaining price stability by combatting inflation was the only priority. The US economy remained resilient despite the furious hiking cycle that began in 2022. Only in recent months have there been clear signs of weakness in the labor market.
The cut in September and the comments from Federal Reserve Chairman Jerome Powell demonstrated that the priority has shifted back towards a greater focus on employment. While maintaining low inflation is still a priority, it is no longer the only priority. In Powell’s words, “the time has come for policy to adjust.” Over the summer months, job growth waned, and unemployment began to rise steadily. The Federal Reserve’s schedule of future cuts shows that it is attentive to these trends and expects to ease monetary conditions, which may stifle growth.
The Impact of Falling Rates
While the 0.50% interest rate cut was announced on September 18th, financial institutions had been anticipating it for months. Many banks and insurers had already begun reducing the yields on their products ahead of the Federal Reserve’s official announcement.
In the month since the rate cut, yields on most fixed-income products have not changed substantially. Some securities, like treasury bonds, which trade actively, can fluctuate daily based on purchase and sale trends and interest rate changes. In this case, anticipating the rate cut pushed Treasury rates lower than today. One-year and five-year Treasury yields hit their lowest rate in two years on September 16th and have risen steadily to 4.18% and 3.86%, respectively.
| Product | Yield on 8/17/24 | Yield on 9/17/24 | Yield on 10/17/24 |
| 3-Year Fixed Annuity | 5.90% | 5.35% | 5.35% |
| 5-Year Fixed Annuity | 6.00% | 5.50% | 5.50% |
| 10-Year Fixed Annuity | 6.60% | 5.70% | 5.70% |
| Money Market Yield | 5.33% | 5.33% | 4.83% |
| 1-Year Treasury | 4.49% | 3.99% | 4.18% |
| 5-Year Treasury | 3.77% | 3.44% | 3.86% |
| 30-Year Treasury | 4.15% | 3.96% | 4.32% |
| 1-Year CD | 4.73% | 4.38% | 4.38% |
| 5-Year CD | 3.97% | 3.71% | 3.71% |
The Federal Reserve is expected to cut interest rates well into 2025, which will likely continue to put downward pressure on all fixed-income products for the foreseeable future. Investors should plan accordingly and capitalize on available rates for short- or medium-term investment goals requiring principal protection.
Editor Norah Layne contributed to this article.