AT LONG LAST, RATES ARE DROPPING

Consider these portfolio moves now that the Federal Reserve has cut its benchmark interest rate.

- JEFF REEVES AND ANNE KATES SMITH

THE salad days for cash holders are wilting. Investors who’ve been happy to earn cash returns of 5%-plus with little risk now need a plan B after the Federal Reserve kicked off a rate-cutting cycle in September. The central bank reduced its benchmark federal funds rate by half a percentage point, to a range of 4.75% to 5.0%. Expect more cuts to come as the Fed strikes a balance between supporting the job market and keeping a lid on inflation.

Strategists at Wells Fargo Investment Institute see the fed funds rate dropping a total of one percentage point this year and note the Fed’s expectations for four more rate cuts in 2025. So, they say, now is the time to deploy some of your cash hoard into intermediate-term bonds, which offer attractive yields, with more limited price risk than currently is the case for longer-term bonds. High-yield taxable bonds, especially during price pullbacks, could be another attractive target for excess cash, according to Wells Fargo.

An intermediate-term fund we like is Baird Aggregate Bond (symbol BAGSX), holding investment-grade IOUs and recently yielding 3.7%. Or explore Vanguard High-Yield Corporate (VWEHX), yielding 5.8%. Both fixed-income funds are members of the Kiplinger 25, the list of our favorite actively managed no-load funds.

Mixed record. History shows that the stock market’s reaction to Fed rate cuts over time is decidedly mixed. Since 1973, the S&P 500 index has fallen an average of 0.5% in the three months following an initial rate cut. But the range is broad, from a drop of 24.5% in 1974 to a gain of 16.9% in 1998, according to a recent report from Morgan Stanley Research. Much depends on the health of the economy at the time of the cut. Many on Wall Street are betting on a so-called soft landing, with the economy slowing but avoiding recession. All eyes will be on labor and other economic indicators in coming months to see whether that thesis plays out.