Asset Management Insights: Inflation Cooling – and Rate Cuts Coming?

Cash is king – or at least it has been a pretty stable asset since March 2022, when historic low interest rates rebounded as the Fed attempted to control rising inflation. From CDs to money market funds to short-term treasuries, investors began flocking to these investment vehicles to take advantage of higher returns as a result.

Inflation is Cooling

Late last month, data was released showing the Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, decreased again, dropping another basis point to 2.5 percent for the 12 months ended in June.

This is another positive indicator that inflation is continuing to ease from its four-decade high.
Paul Gottlieb, portfolio manager with Regions Asset Management covering Florida and North Carolina

“Many investors who have made large allocations to cash amid higher rates may find that this strategy may no longer match their intermediate and long-term goals as this environment may soon begin to shift,” noted Tom Cochran, portfolio manager with Regions Asset Management in Birmingham, Alabama.

Gottlieb and Cochran shared that now may be a good time to review financial goals – long-term and short-term – and perhaps re-evaluate investment strategies. Those with excess cash beyond what is needed for near-term needs and day-to-day expenses may want to shift that into investment vehicles that offer the opportunity to lock-in higher rates for a longer period.

Rate Cuts are Coming

“The main thing that is changing in the landscape is the Federal Funds rate,” said Gottlieb who referenced Regions Chief Economist Richard Moody’s prediction that the Fed will cut rates three times this year. “The likelihood of rate cuts this year is very high. Let’s say they do 25 basis point cuts each time. Anyone in a cash type vehicle will see their rate drop by an equivalent amount. Money market accounts will adjust quickly while CDs are obviously locked in until they mature.”

He noted that shorter term instruments such as these and savings accounts will be impacted fairly quickly, and it may be time to make some adjustments.

Time for an Investment Review

Portfolio managers like Gottlieb and Cochran, along with their Private Wealth teammates are having planning and investment strategy reviews with clients as the market reacts to signals of potential rate cuts in the near-term.

A few questions to consider for those with excess cash on the sidelines:

Sometimes sitting on excess cash, at least temporarily, is prudent.

“If there is a short-term need such as a tuition payment or large business expense, it makes sense to keep that cash available,” noted Gottlieb. “This is about investing excess cash outside of those more immediate large expenses. For many investors, we find that there can be a disconnect between the time horizons of their personal goals and the allocations to their cash investments currently.”

He noted that Private Wealth clients typically have long term goals that may include retirement, paying for a college education, purchasing a vacation home, or leaving a legacy – and for them holding excess cash may only makes sense in the short term.

“In an environment of decreasing interest rates, the return on cash is unlikely to help investors accomplish those long-term goals,” Gottlieb said.

It is also a good practice to regularly review investment strategies over time.

We look at risk tolerance with our clients, which is their ability to take risk. In that conversation, we help our clients balance the ability to achieve long term goals by generating higher rates of return versus the emotional willingness to take risk in volatile markets.

The Influence of Age

“If you are in your 30s or 40s and you have assets that you don’t need access to live every day, you should consider investing that cash,” said Gottlieb. “Millennials may be asking themselves how much should be invested in stocks versus bonds, and this goes back to risk tolerance – but generally they have a longer time horizon, so the market volatility won’t necessarily impact their day-to-day financial life.”

Though market drops may make members of any generation nervous, it remains good practice no matter the net worth to avoid taking on too much debt and consider living beneath your means to build wealth.

As an example, if you are retired, a market drops of twenty percent may have a bigger impact than on someone who is 35 and working and not necessarily dependent on assets to support the lifestyle.

“That is where buying bonds and/or extending duration of bonds makes sense,” explained Gottlieb “When interest rates begin to drop, bonds may be a good investment option for those looking for less risk but continued higher rates for longer terms.”

For those who have been investing in short-term higher rate vehicles such as CDs and Treasuries, now is the time to consider alternatives that would lock in those higher interest rates for longer ahead of any Fed moves to decrease rates.

“Instead of investing in that 6-month vehicle, consider putting that money into something with a 3-to-5-year duration,” said Gottlieb who pointed out that after rate cuts begin, it often becomes a cycle. “You may not be able to find another 5 percent rate when your 6-month investment term ends, but if you choose a three-year option, you’ve locked in that higher rate despite the number of cuts that happen in that timeframe.”

Watch the full-length video featuring Cochran to learn more here.

Explore more advice and guidance from the Regions Asset Management team.

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The commentary expressed during this call and reported in this article are statements of the Speaker(s) opinion, are intended only for informational purposes, and are not formal or binding opinions of Regions Bank, its parent company Regions Financial Corporation, or its subsidiaries. This content is solely for information and educational purposes, and nothing contained in this presentation constitutes an offer or solicitation to purchase any security, the recommendation of any particular security or strategy or a complete analysis of any security, company or industry or constitutes tax, accounting or legal advice. Information is based on sources believed to be reliable but is not guaranteed as to accuracy. Commentary and opinions provided reflect the judgment of the Speaker(s) as of the date of this presentation and are subject to change without notice. Certain sections of this presentation may contain forward-looking statements based upon the reasonable expectations, estimates, projections and assumptions of the Speaker(s), but forward-looking statements are not guarantees of future performance and involve risks and uncertainties, which are difficult to predict. Investment ideas and strategies presented may not be suitable for all investors. No responsibility or liability is assumed for any loss that may directly or indirectly result from use of information, commentary or opinions.

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