HOW TO NAVIGATE YOUR PORTFOLIO AS FED EASES RATES

The US Federal Reserve reduced its overnight rate - the rate at which banks can borrow from one another-by one percentage point from September to December 2024 to support economic growth. Currently, markets expect further cuts in the coming months.

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The Fed's next review meeting is scheduled for 17 September.

According to the CME FedWatch Tool, the probability of a 25-basis-points (bps) rate cut that day is 85%. It also predicts two or three additional 25 bps rate cuts by December 2025, leading to a total 200-bps drop in the Fed funds rate by December 2026.

The reason for these expectations isn't an easing of inflation pressures, but rather a weakening of the US economy due to the impact of President Donald Trump's tariffs.

How does all this affect your portfolio?

Fed rate cuts affect your investments in several ways but aren't a reason to overhaul your entire portfolio. Some small tweaks at the margin are all you need to stay aligned with your goals.

A drop in interest rates is positive for equities, as money becomes available at cheaper borrowing costs. When bond yields in the US are relatively low, less capital flows there, improving the situation for other markets. Often, a lowering of interest rates by the Fed can prompt the Reserve Bank of India to cut rates as well.

However, with the Indian central bank having already cut the repo rate by one percentage point in August, chances of further cuts in the near future are slim.