Inflation has dominated the economic landscape over the past two years, with the Federal Reserve at the center of efforts to bring it under control. While political figures often take the heat—or the praise—for economic conditions, it is the Fed that shapes monetary policy and sets the course for interest rates.
To combat persistently high inflation, the Federal Reserve has raised interest rates 11 times between 2022 and 2023. These hikes increase the “cost” of money, making borrowing more expensive and less accessible. The underlying goal is to reduce the money supply, cool down economic activity, and ultimately bring down inflation.
Currently, U.S. inflation stands at approximately 2.9%. While this figure is still above the Fed’s long-term target of 2%, it marks a significant improvement from the peak of 9% seen around two years ago. Given this progress, speculation is building that the Fed may be preparing to taper its rate hikes.
Rate Cuts in Sight? Fed Signals Possible Shift
At the recent Fed Economic Symposium, Chairman Jerome Powell hinted that changes to monetary policy could be imminent. While the specifics remain unclear, market observers widely interpret Powell’s comments as a signal that rate cuts could be on the table as soon as this month.
For investors, this potential shift presents both risks and opportunities. One stock that may benefit significantly from a rate cut is Rithm Capital (NYSE: RITM), a real estate investment trust (REIT) with a focus on mortgage origination and real estate asset management. If the Fed cuts rates, Rithm could see a boost in its business as borrowing becomes more affordable and market activity picks up. Now might be an opportune time to consider adding this high-yield dividend stock to your portfolio.
How Rate Cuts Could Propel Rithm Capital
Rithm Capital’s business model is heavily influenced by the broader interest rate environment. As rates climbed over the past two years, the cost of borrowing increased, which directly impacted sectors like real estate. Higher rates have made it more challenging for individuals and businesses to secure loans for home purchases, renovations, or expansions, causing some volatility in Rithm’s financial performance.
However, a shift in the Fed’s stance could set the stage for renewed growth. Lower rates would reduce borrowing costs, potentially driving a surge in mortgage refinancing and stimulating property purchases. Rithm Capital stands to benefit significantly from such trends, offering a pathway to stabilize its earnings. Rithm’s CEO, Michael Nierenberg, is optimistic about the potential impact of upcoming rate cuts. During the company’s Q2 earnings call, he stated, “Looking at the macro picture, we are extremely well-positioned for the future… with the expectations of the Fed lowering rates beginning in September, this bodes very well for our company. This will help lower our borrowing costs and hopefully lead to higher earnings.”
The Case for Investing in Rithm Capital Now
Currently, Rithm’s stock is trading at $11.50, close to its 52-week high. Despite the rising share price, its price-to-book (P/B) ratio remains at 0.92—higher than the lows seen two years ago but still reflective of some investor caution. This fluctuation suggests that the market remains divided over the timing and likelihood of rate cuts.
Throughout much of 2024, many economists and analysts on Wall Street anticipated multiple rate cuts. Prominent investors like Bill Ackman expressed similar expectations. While those cuts have yet to materialize, the mere possibility of rate reductions has injected some optimism into the market, driving interest in stocks like Rithm.
However, the company’s P/B ratio has oscillated frequently in recent months, reflecting a mixed sentiment among investors. This uncertainty is likely due to the Fed’s inaction thus far; many market participants appear to be waiting on the sidelines for concrete policy moves.
Conclusion: A Window of Opportunity
Given the current signs of cooling inflation, Chairman Powell’s recent comments, and the positive outlook from Rithm’s management, there is a strong possibility of a rate cut in the near future—perhaps as soon as September. If that happens, Rithm Capital, with its nearly 9% dividend yield, could become an attractive investment for those looking to capitalize on a favorable shift in the interest rate environment.