Investors and borrowers hoping for interest rate cuts from the Federal Reserve may soon get their wish.
A second straight month of weak job numbers, Wall Street pros say, gives the nation's central bank all the reasons it needs to begin lowering rates.
Wall Street is betting on it. Federal Reserve chair Jerome Powell is hinting at it. And President Trump is aggressively pushing for it.
So, what's a saver or income investor to do now?
Interest Rate Cuts Coming?
First, let's look at where borrowing costs stand.
The Fed's target for its key lending rate is now 4.25% to 4.5%. The central bank last cut rates in December 2024. Since then, the Fed has held rates steady, citing sticky inflation, solid employment data, and the potential negative impact of Trump's tariffs on consumer prices going forward.
But a weakening job market this summer appears to have changed the Fed's tune. It paves the way for cuts to borrowing costs. In July, the U.S. economy created just 22,000 new jobs. That's far below the 75,000 economists expected.
Wall Street is now placing 86% odds on a quarter-point rate cut at the Fed's Sept. 16-17 meeting, according to CME Group's FedWatch. And there's a 66% probability the Fed will trim rates another quarter-point at its October meeting. Plus there's a 62% chance they'll cut another 25 basis points at the last meeting of 2025 in December.
Odds Of A Rate Cut
All this means there's a one in four chance that rates could be 1-1/2 percentage points lower (or in a range of 2.75% to 3%) by this time next year.
Slower-than-expected job growth in July could accelerate the pace of Fed rate cuts, says Jamie Cox, managing partner for Harris Financial Group. "A 50-basis point cut is now in play (for the Fed's September meeting)," said Cox.
The bottom-line? Rates appear to be heading south. And that has implications for savers, retirees who rely on income and bond investors.
How Fed Rate Cuts Impact Savers
The interest that savers earn on risk-free cash, such as certificates of deposits (CDs) and high-yield savings accounts, will fall in lockstep with Fed rate cuts. The downside? Shrinking yields will crimp the income earned on cash.
"When the Fed cuts rates, say a quarter point or half a percentage point, you're going to see almost an immediate reaction," said Chris Kampitsis, a certified financial planner at Barnum Financial Group. "Savings are going to be penalized immediately."
The roughly 4% yield you're getting on your high-yield savings account now may shrink to 3.25% by year-end, if Wall Street rate-cut prognosticators are right. That means $10,000 in savings now generating $400 a year in income will shrink to $325, which amounts to a nearly 20% pay cut for savers.
Avoid inertia. Don't let your cash languish. That will help you avoid having to reinvest your cash at lower yields as the Fed keeps cutting.
Your Next Move
What to do now? If you have excess cash sitting in savings accounts that are not earmarked for short-term needs or financial emergencies, lock in today's higher rates. Do that by buying CDs now. Do it before the Fed starts cutting rates, says Kampitsis.
Currently, CD rates on most maturities still sit above 4%, according to Bankrate.com. The highest CD yield tracked by Bankrate for a one-year CD is 4.25% offered by Morgan Stanley Private Bank. And the average rate for a five-year CD from Bankrate partner banks is 4.06%.
Wall Street places a 29% probability that the Fed's key lending rate will be 1.5 percentage points lower by September 2026. Lock in today's higher-yielding CDs now.
Now's also the time for savers with excess cash on the sidelines to start moving those dollars into higher-yielding bond investments with longer durations, adds Bill Merz, head of capital markets research and portfolio construction at U.S. Bank Asset Management.
How Fed Rate Cuts Impact Bond Investors
Bond math is simple. When rates go down, prices go up.
If you purchase a U.S. Treasury bond or an investment grade corporate bond today and interest rates go down tomorrow, you can profit in two ways, says Kampitsis.
"You'll lock in today's (higher) yield, and you'll potentially stand to get some capital appreciation as a result of the rate cut," Kampitsis said.
Spread any cash or fixed-income assets around by funneling these assets into bonds with slightly longer duration, such as intermediate-term bonds, says Merz.
Given the risk of inflation reigniting, though, Merz recommends moving into investment-grade bonds or bond funds with a duration of roughly six or seven years. To gain exposure to bonds with this type of duration, consider a core fixed-income fund like iShares Core US Aggregate Bond ETF, or a broadly diversified fund that invests in Federal tax-exempt municipal bonds, such as iShares National Muni Bond ETF.
"That means migrating out to the middle of the yield curve," Merz said.
Don't Sit Still
Don't just stand pat, hang out in cash and ride rates down as the Fed cuts, Merz says.
An investment in a core bond fund like the AGG should net you 4% to 4.5% over the term of the portfolio. And muni bond investors in high tax brackets can expect to get an extra percentage point of tax-equivalent yield thanks to the federal tax-free nature of these bonds.
"You get paid for taking a little more risk," said Merz.
When it comes to taking additional risk to grab a little more yield, consider so-called "core plus" bond funds, says Merz. These funds invest primarily in investment grade fixed-income assets. They go beyond that asset mix by adding higher-yielding assets. Such assets include high-yield junk bonds, non-agency residential mortgages and emerging market debt, says Merz.
"You can earn extra yield, get extra diversification, but do so without taking disproportionately greater risk," said Merz.
Does A Recession Loom?
Possibility of a recession is risk-moderate and corporate profitability and business fundamentals are healthy. There isn't a lot of risk of default on investment-grade bonds issued by corporations.
Stretching too far out on the yield curve and loading up on longer-term Treasury bonds, such as the 10-year Treasury note or 30-year Treasury bonds, means taking more risk, says Merz. These longer-term bonds are more interest rate sensitive.
Just because the Fed is cutting short-term rates, doesn't necessarily mean market-driven longer-term Treasuries will follow suit. That's because there is more uncertainty pertaining to inflation and other factors that can drive rates farther out on the curve.
There's no doubt that Fed rate cuts do pressure longer rates down, too. But counterbalances include inflation and more Treasury supply hitting the market. These events could happen as the U.S. borrows more to pay for Trump's new tax-and-spending bill. Such counterbalances could offset the normal rate-falling behavior of longer-term debt after Fed cuts.
How Fed Rate Cuts Will Impact Borrowers
The threat of inflation reigniting is a big reason why this Fed rate-cut cycle might not be as aggressive or beneficial to borrowers as prior easing cycles, argues Ross Mayfield, investment strategist at Baird Private Wealth Management.
"There's still a real open question of how much they can cut given the inflation backdrop," said Mayfield.
Fed rate cuts will lower rates on home equity lines of credit (HELOC), variable rate debt and personal loans. But homeowners looking to refinance or potential homebuyers looking to purchase their dream home may not get the interest-rate relief they might expect, adds Mayfield.
Fixed-rate mortgages and home refinance loans are tied to the market price moves of the 10-year Treasury note rather than Fed rate cuts. So, there's a chance today's elevated mortgage rates might not come down all that much, says Kampitsis.
Mortgage Rates Shift
The national average rate on a 30-year fixed mortgage hit a 10-month low of 6.48% in the first week of September, according to Bankrate.com. There's no guarantee that they will be a full percentage point lower a year from now if, say, the Fed cuts its short-term rate by a full percentage point.
"We could get a scenario where we get a rate cut or rate cuts, but mortgages (tied to the 10-year Treasury) don't adjust downward simultaneously, or to the degree that's expected," said Kampitsis.
The news is better for homeowners with HELOCs (Home Equity Line of Credit). They are tied to rate changes by the Fed. But the benefits may be farther down the road, adds Kampitsis.
A full-point drop in the Fed's key lending rate isn't seen until at least early next year, Kampitsis says. Homeowners looking to tap an existing HELOC, or open a new one to finance a home renovation or refinance debt at lower rates, should not jump at the first quarter-point hike. It's better to wait until there are more cuts done so the rate savings are larger.
"Unless there is a very attractive (low) teaser rate, I would try to avoid a home equity line of credit that locks you into a higher rate for six months to a year, because there are many speculating that we get more than one rate cut before the year is over (and more next year)," said Kampitsis.
The same strategy applies to home shoppers looking to buy. Patience may be the way to go. A year from now you may be able to lock in a lower rate than you can in the next few months.
How Rate Cuts May Impact Stock Investors In Search Of Yield
Stocks aren't known for their income traits. The S&P 500, for example, yields about 1.25%. And while that's nothing to sneeze at, it's lower than rates you can earn on cash and bonds.
Investors in search of income, though, can seek out higher-paying dividend stocks in certain sectors of the stock market. Mayfield likes utilities, a sector known for its higher yields than the broader market. In addition to grabbing extra yield, utilities are also benefiting from the tailwind as power needs grow in the buildout of data centers and AI continues.
"With utilities, there's a structural growth case to go with your income," said Mayfield.
