How To Guide Clients As The Fed Cuts Interest Rates

RBC Portfolio Strategist Shares How Advisors Should Prepare Clients For A Falling Rate Environment
Tom Garretson, Senior Portfolio Strategist, RBC Wealth Management
Tom Garretson, Senior Portfolio Strategist, RBC Wealth Management
Michael Madden, Contributing Editor & Research Analyst, Wealth Solutions Report
Michael Madden, Contributing Editor & Research Analyst, Wealth Solutions Report

A mere two years ago – March 17, 2022 – the Federal Reserve began hiking interest rates aggressively to fight raging inflation. A short time later, we find ourselves in a different scenario that our economy has not faced in many years, as the Fed balances fighting the embers of inflation against the risk of toppling the economy into a recession. Analysts predict the first rate cut in June, and the Fed’s dot plot shows three anticipated cuts for the full year.

Clients also have not faced a decreasing rate environment since the Great Recession, except for the much shallower drop from 2019 to 2020, and advisors must prepare to navigate them and their portfolios. We spoke with Tom Garretson, Senior Portfolio Strategist at RBC Wealth Management, to ask about how advisors should approach this sea change with their clients.

WSR: What should advisors be monitoring and communicating to clients as the rate environment changes in the next few quarters?

Garretson: Given that inflation remains elevated compared to historically normal levels and the Fed’s annual 2% target, clients might be wondering why the Fed is even entertaining the idea of rate cuts, let alone following through with them, as policymakers, on average, expect will be necessary later this year.

To us, it’s simply a matter of policy calibration. Even if the Fed cuts rates, monetary policy will likely remain restrictive for some time, weighing on inflationary pressures.

Beyond that, it’s important to remember that markets discount the future – waiting to make portfolio adjustments until something actually occurs likely means it’s already too late.

It’s simply a matter of policy calibration.

With that in mind, what should advisors communicate to clients in terms of portfolio strategy, particularly those focused on fixed income investments? Cash, such as money market funds, has been a wildly popular strategy to this point of the Fed’s rate hike cycle, which began two years ago. Over that stretch, money market fund assets have swelled from above $4.5 trillion to over $6 trillion, while offering yields above 5%.

This means, based on market history, it is wise for advisors to get ahead of rate cuts and start talking to clients about the need to gradually move out of cash and into longer-dated securities. That could help lock currently high yields into portfolios before yields begin to fade, or perhaps disappear altogether.

WSR: Are there any special concerns that advisors should address with clients, such as emotional issues, investor psychology, client education, effects on major investments or retirement, etc.?

Garretson: It’s fair to say that it has been a unique, and at times challenging, decade-plus run for clients, particularly for those in or near retirement. Following over a decade of low – and even zero – interest rates, rates have quickly ascended to multi-decade highs. The post-pandemic experience has seemingly flipped everything on its head and rendered past investment rules of thumb meaningless. Even for investment professionals it can seem like we’re simply feeling our way through the dark.

Volatility breeds opportunity.

But advisors and clients have an opportunity to take a step back and think about investment portfolios relative to goals and objectives amid an investment landscape that hasn’t been seen in quite some time.

As is often said, volatility breeds opportunity, and we can all use the market developments of the past two years to our advantage and to reposition for long-term success.

WSR: What are best practices for advisors in providing sound advice to clients on investments that hinge on a major decision from the Federal Reserve?

Garretson: As is often the case, any investment that hinges on a singular event probably isn’t much of an investment at all. But we are nearing an inflection point from the Fed as the decision to begin dialing back policy rates looms ever closer, a point where advisors and clients will need to focus on longer-term implications while not overreacting to what are likely to be notable – and normal – market gyrations.

Certainly, the Fed does garner a lot of attention from investors, the media and market participants – and rightly so – as it exerts significant influence over markets and the economy, both domestically and globally.

Remember that the Fed manages monetary policy through entire business cycles. Policymakers are either raising rates as economic strength grows or cutting rates as activity wanes, which is then typically followed by a recession. Historically, there hasn’t been much in-between.

So as the Fed approaches that first rate cut, what does that mean for portfolios and portfolio positioning over a longer horizon? For example, in terms of the classic 60%/40% equity/fixed income portfolio, should allocations to fixed income be increased as rates potentially fall and growth slows? Or should equity positions become more defensive? Those are the issues that advisors and clients should be thinking about right now.

Michael Madden, Contributing Editor and Research Analyst at Wealth Solutions Report, can be reached at

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