As the Federal Reserve continues to lean on inflation data for any movement in interest rates, financial advisors are generally betting against a rate cut this year.

Even with five more Fed meetings scheduled before year end, market watchers have shrugged off earlier notions of a half-dozen cuts this year and are settling into the idea of no Fed activity before the November presidential election.

“The March dot plot still said three cuts this year, but it’s looking less and less likely to happen,” said Sam Huszczo, a financial advisor at SGH Wealth Management in Lathrup Village, Mich. In terms of a rate cut to help boost the equity markets right before the election, Huszczo said, “the Fed doesn’t want to create the perception that they’re meddling in politics.”

“I’m not in that camp that thinks the Fed is political, but I know some people are in that camp,” he added. “I think [Fed Chairman Jerome] Powell understands his role, and I think any decision on interest rates will be dependent on the inflation numbers.”

Advisors Embrace Higher for Longer

The current overnight rate set by the Fed is between 5.25% and 5.5%, after a series of that have brought inflation down to 3.4% from a 40-year high of 9.1% in June 2022.

While the equity markets like the risk-on trade that comes with rate cuts, financial advisors have been busy navigating a world of “higher for longer” rates.

“We have been positioned for a no-rate-cut 2024 since last year, as we have felt the market was misreading the data used by the Fed to inform their rate decisions,” said an advisor in Everett, Wash.

“For those advisors who followed the crowd, they should start by taking a long look at their equity exposures,” he added. “Given the large run up in U.S. equities, rotating into more defensive sectors or into shorter duration fixed income strategies is an efficient way to reallocate.”

Another advisor in Plano, Texas, is no longer considering rate cuts, but he is hearing talk of potential rate increases before year end.

“Almost halfway through the year and some Fed participants are willing to entertain tightening, not loosening,” he said. “For our clients, we are continuing with defensive bond ETFs in combination with agency mortgage-backed securities ETFs for better risk-adjusted returns.”

Other advisors are focused on the silver lining of the Fed’s standstill.

“Our belief is that the longer the Fed is on hold, the better it is for those that employ a disciplined investment philosophy and strategy,” said one. “It has almost been 300 days since the Fed last administered a rate change which is the second longest on record.”

It’s a similar take from Matthew Terrien, director of research at Taiko in Chicago.

“Professional economists’ forecasts of interest rate movements, historically, have had no better success than a random coin-toss, and it’s unlikely that a typical advisor will fare any better,” he said. “The impact of a slight increase or decrease in the Federal Funds rate on a typical investor’s portfolio should be de minimis in the grand scheme of things and an advisor who spends more than 10 minutes contemplating such concepts is likely doing their clients a disservice.”