The FED cuts interest rates by 0.25%. The Yield to Maturity of the Dollar Savings Portfolio at 3.25%

The FED cut rates by 25 basis points (0.25%), fully in line with expectations. The target range for the federal funds rate is now 3.50%–3.75%, 175 basis points (1.75%) below the post-pandemic peak, of which 75 were applied this fall after the resumption of rate cuts.

On this occasion, the decision was not unanimous, breaking with the Fed’s usual practice. Two members of the FOMC, the president of the Kansas City Fed, Jeff Schmid, and Austan Goolsbee from Chicago, preferred to keep rates unchanged, while one, Miran, argued in favor of a larger cut.

Although the move itself was largely priced in by the market, attention focused on future expectations (guidance). Powell said that policy is now within a range representing a plausible estimate of neutral rates, i.e., the long-term equilibrium level for interest rates. This could imply that further cuts are not guaranteed, although the Fed chairman also emphasized that the current setting is at the top of that range.

Essentially, long-term equilibrium rates are seen around 3%, which still leaves room for additional easing, although opinions within the policy-setting committee remain deeply divided.

The decision also comes against the backdrop of the search for a new Fed president. Kevin Hassett has been mentioned as a favorite. Hassett, who led the National Economic Council at the White House and spent almost a decade working closely with Trump as one of his most trusted economic advisors, is generally seen as favoring a more accommodative stance: lower interest rates and a less aggressive Fed in fighting inflation, especially when growth and employment are weakening. The name of the next Fed president is expected to be officially announced in January.

Perhaps even more important than the rate cut was the central bank’s decision to resume Treasury purchases immediately. Over the next 30 days, it will buy $40 billion in short-term Treasury bonds. Thus, the FED’s balance sheet will begin to increase again, after a period of reduction that brought it from about $9 trillion to $6.5 trillion.

The volatility observed in November was partly driven by funding stress as liquidity declined across the system. This tightening pushed up short-term secured funding rates (repurchase agreements or repos). In contrast, the Fed’s direct purchases of securities increase bank reserves and improve system liquidity. When the FED buys a security from a commercial bank, it pays by crediting that bank’s reserve account at the central bank. Therefore, FED asset purchases inject liquidity into the system.

This is a strong signal that the central bank is ready to provide liquidity if funding markets come under pressure. This stance can be considered favorable for the market.

For our portfolios, yesterday’s decision mainly affects the Savings Portfolio, whose yield to maturity falls to 3.25%, with no additional impact on the accumulated value of the portfolios themselves.

The Dollar Savings Portfolio falls to 3.25%

Regarding our portfolios, official rates are especially relevant for savings portfolios, as these directly reflect the evolution of rates. As a result, the YTM falls to 3.25% for the dollar portfolio* (down 0.25%).

*Important note: for an investor whose life is exposed to euros, taking a portfolio denominated in dollars involves a currency risk that should be considered.

inbestMe’s savings portfolios are an ideal option for those seeking a solution for their liquidity and emergency fund. The YTMs of our savings portfolios have always remained a better option than traditional deposits, accumulating 13.5%, 8.5% more in dollars than accumulated by bank deposits (5%) at 1 year in this currency.

Important note: At the time of writing this article, the 0.25% reduction has not yet been reflected in the money market funds used in our portfolio. This is because some assets in the funds’ portfolio still have yields linked to previous rates. We have always acted prudently in communication related to the calculation of effective variable Yield. In cases of increases, we have not announced the change until it is effectively reflected. Regarding reductions, we prefer to be cautious and announce the decrease in advance, even if it is not yet fully reflected in the money market funds used, anticipating what will happen in a few days.