[Music in background]
[Animated glitches containing various letters flip to spell out the following financial terms]
On screen copy:
Bear Market
Business Cycle
Risks
Bull Market
Fixed Income
Inflation
Equities
Diversification
Interest Rates
Opportunities
Geopolitics
Market Catalysts
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On screen copy:
Please read important information at the end of this program. Recorded on 8/13/2025.
[Matthew Diczok speaking throughout]
It just may be the hottest question of the summer: Will the Federal Reserve pivot towards lower interest rates?
If changes do come, it'll be especially important for bond investors to consider the ripple effects.
Lower third:
Matthew Diczok
Head of Fixed Income Strategy
Chief Investment Office
Merrill and Bank of America Private Bank
In late July, the Fed held rates steady for the fifth straight time, despite growing calls from the administration and others for cuts to help stimulate economic growth.
On screen copy:
Fed funds target rate: unchanged at 4.25 - 4.5% from December 2024 through July 2025.
Source: The Wall Street Journal, "Fed Holds Rates Steady, but Two Officials Back a Cut," July 30, 2025.
Let's look at some reasons why the Fed paused its rate cut campaign this year, why we believe cuts could be coming soon, and how investors can prepare for that possibility.
Why did the Fed pause? The Fed's two mandates — stable prices and maximum employment — are often at odds. While rate cuts can spur hiring and economic activity, they can also lead to prices moving higher. With the economy still strong and concerns that tariffs could make goods more costly, the Fed has been careful to not prime a new round of inflation.
Why do we anticipate a pivot? We believe the Fed is now more concerned with the other mandate, full employment — especially after slower-than-expected job growth in July.
On screen copy:
The Bureau of Labor Statistics reported 73,000 new U.S. jobs in July.
Source: NBC News, "The U.S. job market was weak in July, and previous months were worse than thought," August 1, 2025.
Though timing is uncertain, the market currently expects two rate cuts this year, starting as early as this September. Markets yields appear to be anticipating as much: the short end of the yield curve has inverted — something that typically happens only when rate cuts are expected.
On screen copy:
Extending duration before Fed rate cuts can potentially reduce the reinvestment risk.
Source: Chief Investment Office Capital Market Outlook, July 21, 2025.
So, how can investors prepare? Start by reviewing your bond investments. If lower rates are on the way, shifting some short-term bonds to longer durations could help you lock in higher income before a rate cut pushes yields down.
And keep in mind that cash accounts are particularly susceptible to declining rates. You might consider moving excess cash in your portfolio to bonds or other investments.
Of course, rate cuts aren't a certainty until they happen. And interest rates are just one factor to consider in a well-diversified portfolio. Speak with your advisor about what changes, if any, might be suitable for your situation.
And that's the Market Decode.
On screen disclaimers:
Important Disclosures
The opinions expressed are as of 8/13/2025 and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government.
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[End of transcript]
Market sentiment appears to be shifting from "Will they?" to "When will they?" on the question of the Federal Reserve's next move on interest rates. Heading into the Fed's September meeting, expectations have grown around its board voting for the first drop in rates since December 2024. What could drive this possible change of direction? Concerns about the potential inflationary effects of tariffs may be lessening, and the Federal Reserve is instead shifting its focus to supporting hiring and employment.
In the video above, Matt Diczok, head of Fixed Income Strategy for the Chief Investment Office, offers perspective on what a rate cut could mean for fixed-income investors. "Start by reviewing your bond investments," says Diczok. "If lower rates are on the way, shifting some short-term bonds to longer durations could help you lock in higher income before a rate cut pushes yields down."