Gregory Clifford is Founder and CEO of The Clifford Group.
Most investors were expecting the Federal Reserve to cut rates by 0.25% or 0.50%. The move was already well-baked into the market, so it’s not surprising to hear they went for the full 0.50%. But this is only the beginning of a series of cuts expected over the next year or two.
When rates fall, the big question becomes, how does that impact everything else in the economy? The bond market, for one, is going to change rapidly. Bonds are likely to appreciate as rates drop, but for those holding liquidity, you have to be careful about locking into long-term bonds. It will be hard to outpace inflation as those rates become less enticing
As a financial advisor, I have noticed that people most often struggle with decisions regarding cash, borrowing or investing when the market is fairly uncertain (which seems to be always these days.) I wanted to write this article to provide clear and practical advice that helps make these choices easier for consumers.
What Lower Rates Mean For Homebuyers
As rates continue to drop, which Fed policymakers expect will decrease by a total of 2.5% by 2026, we’ll start seeing significant changes for homebuyers. Over the last year or so, with higher rates, people were putting larger down payments on their homes—which had not occurred in mass for 15 years. But as rates get more attractive, we are going to see more people revert to the standard 20% down payment. Individuals will take on more leverage because borrowing will become more favorable.
While rates continue to drop, it’s important to remember that mortgage rates alone don’t determine housing affordability. As mortgage terms become more attractive, we expect demand for homes to increase faster than supply. This imbalance could lead to rising home prices in the short to mid-term, offsetting the benefits of lower mortgage rates. Until new housing is built to meet this demand, homebuyers may face higher prices, which could limit affordability despite lower borrowing costs
Home equity lines of credit (HELOCs) have been unpopular for a while now, primarily because the carrying costs have been so significant. People were focused on paying off their lines when rates spiked. But now, with these rate cuts, we are going to see HELOCs come back into favor. People might start thinking about renovating their homes, funding a business venture or tapping into their home equity for general liquidity. Although these ventures carry their own risks, they become a much more palatable option with lower borrowing costs.
How Smaller Businesses Can Leverage Lower Borrowing Costs
For businesses, the rate cuts are going to be a game changer, especially when it comes to using leverage. Over the last year, financing projects has been really challenging, so we’ve seen businesses put off certain initiatives—whether it’s R&D, hiring or real estate acquisitions. But as rates come down, I expect to see companies start using debt to fund these projects again.
What’s interesting is how competition increases when businesses can lean on debt. If you’re a small business that’s been solely reliant on cash, it’s harder to compete in a tight market. But with lower rates, more businesses can gain access to capital, meaning more participation and more competition. Whether it’s recruiting talent or acquiring property, we are going to see a lot more businesses in the game.
Smart Investment Strategies In A Dynamic Market
For retail investors, the big question right now isn’t necessarily whether you should invest but rather how much to put to work in the market. Over the past year, a lot of people were holding onto too much cash because interest rates on savings were relatively high. As I wrote in a previous article, I advise people to actively manage their cash positions for this reason.
High-yield savings made sense for a while but as rates continue to drop, cash won’t yield as much and inflation will start eating away at those savings. It’s time to reassess how much you’re holding in cash. These kinds of decisions should always be carefully deliberated, and at times it may be prudent to consult a financial advisor for guidance.
Bonds have been attractive for the past year or so because rates peaked but as rates drop, bonds won’t yield as much in the future. If you already hold bonds, you’ll see appreciation, which is great. But I would caution against putting new money into long-term bonds right now—it’s going to be hard to outpace inflation with the lower yields coming.
Divesting from cash in times of uncertainty makes dollar-cost-averaging a critical practice. You don’t want to make an all-or-nothing decision, so spread out your investments over time. This approach allows you to benefit from market moves without risking everything at once. If the market does really well, you’ve already got some money working for you. If things take a downturn, you can pause and reassess. It’s a win-win strategy in a volatile market.
Inflation And Managing Cash
Cash has been an easy asset class for people to sit on because it’s safe, and for the past year, interest rates were high enough to make it worthwhile. But the invisible enemy here is inflation. As rates continue to drop, your cash isn’t going to hold its value the same way. You have to be mindful of how much cash you really need to cover your monthly expenses and keep an emergency fund, but anything beyond that is likely just losing value over time.
The real question is: What’s your time horizon and what are your financial goals? Holding too much cash won’t help you hit those long-term goals, whether it’s buying a second home, funding retirement or putting your kids through college. You need to start thinking about reallocating those funds into investments that will grow over time and protect you from inflation.
Now my focus shifts to the pace of future cuts. Financial planners, business owners and homeowners are all asking, how aggressive will the Fed be from here on out? It’s a critical moment because stimulating growth through easing fiscal policies acts as a stimulus to the economy, and that’s something we all should be keeping an eye on.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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