The excitement for rate cuts is building after months and months of Fed watching. Following accelerated rate hikes, the Fed looks to have largely cooled inflation off to a more comfortable place. That being said, however, the rate cut excitement, even as soon as September, may be missing a key question that investors should consider carefully.
The Big Question on Rate Cuts
It’s not just when the rate cuts are starting that matters; investors should also think carefully about how quickly the Fed will cut. Historically, the Fed has cut rates very quickly after slowly raising rates. In this instance, however, the Fed raised rates at a historically rapid rate. Will the pace of cuts match that speed, or will cuts arrive more slowly to balance?
Much of that dynamic owes to the nature of the inflation that hit markets. The pandemic’s supply chain impact and the response of governments around the world, in part, saw inflation spike dramatically and stick. After months and months of tightening, it has begun to cool — but how much has it really?
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Yes, the Fed’s 2% target has seemingly been met, but the fear at the Fed focuses on the risk of reigniting inflation. That may lead to a slower rate-cut cycle than the average investor would assume given how fast rates went up. Indeed, many may already be expecting multiple cuts this Fall. That type of thinking would in some ways reflect the repeated predictions of cuts at the start of 2023.
While waiting and watching, then, investors may want to consider active ETFs for a cautiously optimistic outlook. Active ETFs offer more flexibility than index strategies, able to weight individual holdings based on the managers’ use of deep research and experience in asset management. For those investors on the lookout for options as rate cuts near, active ETFs could appeal.
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