The imminent interest rate cut by the Federal Reserve! What will be the impact on investments, savings, and debts?

The Federal Reserve has sent its clearest signal yet that a rate cut is imminent. According to Zhitong App, during the Fed's rate decision on Wednesday, Chairman Jerome Powell stated that his current focus is on deciding when to lower the benchmark interest rate in 2024. This sparked a cross-asset rally, driving global stock prices higher and causing the yield on the US 10-year Treasury bond to fall below 4% for the first time since August.

Investors now expect the Fed to cut rates six times in 2024, with each cut being 25 basis points, which is twice the Fed's own expectations. Of course, Powell also stated that if inflation pressures reemerge, officials may raise rates again. So, what does all this mean for investors' funds?

Will investments be affected?

After Powell's speech, everything from global stocks to corporate bonds saw significant gains, making it the best day for all asset classes in the past 15 years under the Fed.

Rate cuts are typically a positive catalyst for stock prices, especially for growth companies whose value comes from their future earnings potential. Risk assets, including low-quality tech stocks and high-yield bonds, should receive a boost.

Matt Maley, Chief Market Strategist at Miller Tabak + Co., said, "Assuming this doesn't mean the Fed is now worried about a recession, it has given investors the green light to continue buying risk assets with both hands."

At the same time, global assets may also benefit from the US rate cuts.

Chamath De Silva, Senior Fund Manager at BetaShares Holdings in Sydney, said, "The standard dovish shift in stocks and the US dollar should be positive for Asian stock markets." "The exception may be Japan, which will have to deal with a stronger yen."

What about the 60/40 investment portfolio?

The classic investment portfolio structure of 60% stocks and 40% bonds has recently underperformed, but it may now be ready for success.

For decades, this portfolio has generated strong risk-adjusted returns, meaning that investors have achieved higher returns while taking on lower or acceptable levels of risk. The long-standing idea is that stocks provide growth while bonds offer relative stability, based on the assumption that the two are not closely correlated.

However, with the Fed raising rates, this strategy is no longer effective, as both stock and bond prices have fallen. Last year, the 60/40 mixed investment portfolio actually declined by 17%, its worst performance since 2008. Some studies have even found that over time, certain all-stock portfolios have outperformed mixed portfolios with bonds in terms of both making money and preserving capital.

Next year's Fed rate cuts may boost stock prices and lower bond yields. But much depends on why they are cutting rates. If a recession occurs, the situation will be more challenging. However, Elliot Pepper, Financial Planner and Tax Director at Baltimore Northbrook Financial, suggests that if the Fed cuts rates based on inflation normalization and achieves a soft landing, investors may be wise to buy bonds now.What does this mean for investors' cash savings?

For cash returns, this is a good period as the interest rates on many high-yield savings accounts in the US exceed 4%. Meanwhile, the highest savings rate in Australia is around 5.7%, and the interest rate on a one-year fixed deposit in New Zealand has already exceeded 6%.

However, rate cuts could end this golden age as banks tend to adjust their yields based on benchmark rates. Nevertheless, competition among banks for deposits may prevent them from lowering rates too quickly.

As for exchange rates, it depends on the currency. For the US dollar, the situation is not looking great - on Wednesday, all G10 currencies against the US dollar saw an increase, and the upward trend continued in Asia on Thursday. The Japanese currency strengthened for the first time since August and further rose earlier on Thursday. The Korean won and Malaysian ringgit appreciated by more than 1% against the US dollar, demonstrating the strength of emerging market currencies.

What about mortgage and credit card rates?

By 2024, homebuyers may finally see some relief. Mortgage rates typically decrease with Fed rate cuts, which will help alleviate the global housing affordability crisis.

Mortgage rates in the US have just dropped for the fourth consecutive week, reaching the lowest level since July. The contract rate for a 30-year fixed-rate mortgage is now at 7.07%.

The cost for credit card users may also decrease as card issuers typically use benchmark rates influenced by the Fed as a base, plus an additional spread to charge interest. This will benefit consumers burdened with debt.

How does the Fed's decision affect global interest rates?

Higher US rates make dollar-denominated assets more attractive, drawing funds away from other markets and causing their currencies to depreciate. Some countries have to defend against a strong dollar, exacerbating inflationary pressures and making it more difficult to repay debt issued in dollars. The Fed's policy shift may reverse this trend.

Some central banks and monetary authorities are also in sync with the Fed, including Hong Kong, where the currency is pegged to the US dollar. However, European Central Bank President Christine Lagarde stated on Thursday that policymakers should not relax their vigilance against inflation, while her counterpart at the Bank of England, Andrew Bailey, noted that "there is still a way to go in the battle against rising consumer prices."