Election Drama: Trump, Powell, and the Future of Interest Rates

Written by: Joseph Wang

The recent presidential election intensified the dynamic between President-elect Trump's economic policies and Fed Chair Powell's more hawkish strategy. Two days after the election, on November 7, 2024, the Fed cut interest rates by 25 basis points, marking its second consecutive rate reduction amid signs of cooling inflation.

As a showdown between Trump and Powell is increasingly likely, how should financial advisors navigate this increasingly volatile interest rate environment? Here is some food for thought:

Decreasing Returns on Cash and Savings - Is High Yield Savings Still Worth It?

One of the most immediate effects of the Fed's actions is the decline in yields for cash-like assets, such as high-yield savings accounts and money market funds. For clients, this means that the once-lucrative returns seen during the Fed’s fight against inflation will decrease, highlighting the need to evaluate more active investment strategies.

Consider reallocating excess cash to longer-term, low-risk assets. Victoria Trumbower of Trumbower Financial Advisors suggests locking in today’s relatively high rates with instruments like CDs or U.S. Treasury bonds. By committing to a fixed rate over two or five years, clients can guarantee returns that may outperform money market funds if the Fed continues to cut rates.

However, the safety element of cash might be more important than ever. As Fatima Iqbal of Azzad Asset Management puts it, “Your cash allocation really needs to be geared toward your personal financial planning goals rather than what the interest rate environment might be doing.” Despite the declining yields, it’s essential to keep emergency reserves safe and accessible.

Increasing Opportunities for Debt Refinancing - Time for a Chat.

With the Fed’s rate cuts driving down borrowing costs, now may be an opportune moment for clients to consider refinancing existing loans or taking on new debt for strategic purposes, such as investments or major purchases. Shorter-termed loans taken out just a year ago are now seeing rate reductions of 1% to 1.5%, creating meaningful savings and cash flow benefits.

Advisors should encourage clients to proactively explore mortgage refinancing opportunities to be ready for future rate drops. The mortgage rate stayed stubborn for the moment, due to strong economic growth and uncertainties surrounding Trump’s economic policies, including potential tariffs and tax cuts. However, the consensus still expects the rate to drop in the coming months. Initiating refinancing conversations now not only positions clients to act quickly and secure better rates when they become available, but also serves as a valuable touchpoint to strengthen client relationships. By helping clients understand the refinancing process and strategize for potential opportunities, advisors demonstrate their proactive approach and commitment to adding value. This readiness can translate to significant savings and reinforces the advisor’s role as a trusted partner who stays ahead of market changes to benefit their clients, especially in the face of high certainty.

Finally: Talk to Your Clients, and Stay the Course!

While fluctuating interest rates can feel significant, it’s crucial to remember that cash typically constitutes only a small portion of a comprehensive investment strategy. The bigger picture—a diversified, goal-oriented financial plan—remains paramount. One of the golden rules in financial advising is to encourage clients to stay invested and keep their eyes on their long-term goals, despite short-term market shifts. In the same spirit, we must remain committed to these principles, ensuring that our guidance is rooted in stability and strategic focus.

Related: 9½ Election Connections You Need To Know