Rate cuts are coming.

It’s a foregone conclusion that the FOMC will slash interest rates by 25 basis points tomorrow afternoon.

Even in the off chance ole’ Too Slow Powell throws us a knuckleball by holding Treasury yields at current levels, rate cuts are coming.

Trump’s man, Marin, was confirmed last night. That means the current administration now has its man on the board with voting rights, so you better believe Trump will have his cut.

But tomorrow’s anticipated announcement isn’t a win-win scenario by any stretch. Those long-awaited rate cuts are unlikely to affect the borrowing costs for most consumers.

Sure, some will reap the rewards. But many investors will miss out.

The key to positioning yourself with the winning side comes down to understanding what interest rate the FOMC is cutting — and what areas of the stock market benefit the most.

The Cut

For starters, the Federal Reserve tinkers with the Federal Funds rate, not longer-term interest rates such as the 10- or 30-year Treasury yields, and definitely not 30-year fixed mortgage rates.

Instead, Powell & Co. controls the overnight rate that banks charge one another for U.S. dollars. (More on that in a minute.)

Market participants and economic forces set long-duration rates that impact our day-to-day transactions.

Despite the Fed’s inability to directly manipulate long-term yields, what they do at the shortest end of the curve undoubtedly affects the longer end.

Regardless, for all my friends and family members who continue to rave about falling interest rates, it bears repeating…

The Fed adjusts the 24-hour interest rate that primarily applies to financial institutions. This simple fact, though often misunderstood, separates the winners from the losers.

The Pairs Trade

Since the FOMC is set to decrease the rate that larger banks charge smaller banks to meet overnight cash requirements, those smaller banks will benefit straight away.

The operating costs of regional and community banks will decrease immediately, allowing them to take on additional risks by loaning more money to the public.

Small businesses will have an easier time accessing much-needed capital, and small-cap stocks will benefit.

The Russell 2000 ETF (IWM) small-cap index is a straightforward approach to positioning your portfolio for tomorrow’s cut, especially since financials are the largest sector in the index.

But I prefer to go straight to the source.

I’m looking at SPDR Regional Bank ETF (KRE) first as a potential trade and then the First Trust Nasdaq ABA Community Bank Index Fund (QABA) for confirmation.

Community banks must also rally. I consider a KRE breakout suspect without community banks participating. (No community banks, no dice.)

Meanwhile, one market area is destined for downside: Bonds.

Don’t bet on cheaper financing anytime soon. The underlying trend for interest rates further out on the curve (10- and 30-year yields) continues to point higher.

Last September, the 30-year yield (TYX) surged and bonds plummeted when the Fed began cutting the Federal Funds rate.

Interestingly, TYX started to rally on September 17, the day before the FOMC announcement. Fast forward to today, and long-term yields have yet to make their move. Instead, they’re falling.

To be fair, the Fed cut 50 basis points last September, which isn’t on the table at this point.

Nevertheless, U.S. T-bonds are stuck in a downtrend that will likely pick up momentum as the Fed embarks on a new rate cut cycle.

One of the best ways you can position yourself will be long the Regional Bank ETF (KRE) and short the Treasury Bond ETF (TLT). That’s the logical pairs trade.

You may even want to throw a couple of potential 10x trades in there too (with the utmost responsibility).

I mean, why not?