The first rate cut by the Federal Reserve will have a profound psychological impact! Investors "must have enough courage"

This week, Federal Reserve policymakers will gather at Jackson Hole, Wyoming, where Federal Reserve Chairman Powell is scheduled to speak on Friday. Investors may closely watch Powell's remarks as they try to understand the Fed's outlook on the U.S. economy and whether the Fed will begin cutting interest rates at the next meeting in September.

For the past few months, investors have been speculating on when and if the Fed will take rate-cutting measures. The Fed began raising rates in 2022 to curb spending and combat inflation, and the current Fed policy rate level is at its highest point in over 20 years. However, with signs of slowing inflation, investors hope the Fed will ease its restrictive policies to boost the economy and capital markets.

But before the Fed takes action, investors may need to deal with higher levels of market volatility.

Macan Nia, Co-Chief Investment Strategist at Manulife Investment Management, said, "Look at how much the Fed's rate expectations have changed over the past two years. The changes have been significant, and I think all of this has caused market volatility."

The Fed has not formally announced its rate-cutting plan, leading to various speculations about the timing, extent, and frequency of rate cuts. All these speculations have brought uncertainty and exacerbated market volatility, but Nia believes that when the first rate cut arrives, it will help alleviate these speculations.

Nia said, "The impact of the first rate cut is the most profound because it affects investors' psychology. We have been waiting for the Fed to cut rates, and when the first rate cut actually arrives, it's like ripping off a band-aid."

Central banks in other countries have different timelines for rate cuts. The Bank of Canada was the first in the G7 to take action, cutting rates by 25 basis points in June and another 25 basis points a month later.

Nia pointed out, " We have seen a similar dynamic in Canada, where after the first rate cut, subsequent second, third, and even fourth rate cuts become more foreseeable. But there is always some uncertainty before the first rate cut arrives."

Generally, investors do not like uncertainty as it leads to market volatility. The market has already seen this this month, with the Nasdaq entering and exiting correction territory, and the Chicago Board Options Exchange Volatility Index (VIX) surging in early August.

Nia suggests that in the short term after the first Fed rate cut, market volatility may persist, but once this "band-aid" is ripped off, it could lead to more sustainable long-term growth. He said, "There will be volatility in the short term, and you must have the courage to overcome the short-term weakness that may arise, as it actually paves the way for you to achieve your financial goals. Because typically, when the Fed cuts rates, the subsequent three- and five-year rolling return rates are often quite positive."