What a difference two years can make in monetary policy and the economy.  Here are excerpts from Federal Reserve Chair Jerome Powell’s 2022 and 2024 Jackson Hole, Wyoming speeches: 

August 26, 2022: We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done. 1

August 23, 2024: We do not seek or welcome further cooling in labor market conditions. …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. 2

From speech to speech, look at what happened between the key indicators:

With the same zeal Chair Powell communicated to markets in 2022 that interest rates were going up to moderate demand and inflation, he now is communicating the Federal Reserve is changing policy to interest rate cuts.  While the direction of travel for the Federal Reserve may be clear, the final destination is murky at best.  As opportunity practitioners, we search for the compelling risk-adjusted opportunities that markets create at any given point in time.  So at this inflection point, here are two opportunities we see today:

1.        Maximize yield.  As interest paid is a direct expense to banks, they were slow to increase yields on savings accounts when rates were rising. I expect an opposite reaction if rates decline and anticipate banks to move quickly to lower interest rates on savings account.  Based on risk and time horizon, here are two ways you could consider to maximize yield:

• Institutional money market funds.  Many institutional money market funds offer higher yields than savings accounts and typically move in line with the Federal Funds Rate.  This means the yield gap between institutional money market funds and saving accounts may widen during a rate cutting regime.

• Corporate bonds.  For funds earmarked for longer or indefinite time horizons, corporate bonds often provide (1) higher yields than cash and/or (2) lock in yields for a longer period of time.  This may provide some insulation from potential interest rate cuts. 

2.        Small Cap Companies.  US based smaller cap companies often have higher leverage on their balance sheet than their large cap peers.  Higher interest rates had a greater impact on smaller companies, creating a headwind and underperformance compared to large cap companies.  That headwind may pivot to a tailwind for profitable US small companies in a rate cutting environment.

If you or someone you know have questions about the current investing landscape, please contact us today at 615-370-1253.

1 https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm

2 https://www.federalreserve.gov/newsevents/speech/powell20240823a.htm

3 https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm, https://www.forbes.com/advisor/investing/fed-funds-rate-history/, https://data.bls.gov/timeseries/LNS14000000

All investing involves risk, including the possible loss of principal. Nothing contained herein should be construed as individualized investment advice and is for informational purposes only. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client's investment portfolio. Past performance is no guarantee of future performance. Information contained herein is from sources believed reliable but cannot be guaranteed.

Andy Michael, CFA
Portfolio Manager