WHAT THE FED'S RATE CUT MEANS FOR EVERYDAY INVESTORS
There’s a well-known investment rule called “don’t fight the Fed” that started in the 1970s. This rule means that the Federal Reserve’s decisions about interest rates can greatly affect the stock market and economy. So investors should pay attention to what the Fed does. But it’s also important to look at the big picture of where interest rates are heading, not just focus on one single Fed decision. This matters today as the Fed keeps lowering rates while the economy sends mixed signals.
As most people expected, the Fed lowered interest rates by 0.25% (or one-quarter of one percent) at its September meeting. This continued the process of lowering rates that started in 2024. This happened while stock markets were near record highs, economic data was mixed, and there was still uncertainty about tariffs and rising prices. Unlike emergency rate cuts during the 2008 financial crisis or the 2020 pandemic, today’s move is the Fed trying to fine-tune policy to keep the economy growing, not responding to a crisis.
For people investing for the long term, it’s important to understand why the Fed is cutting rates and how today’s situation is different from past times. While rate cuts usually help financial markets, the key is keeping perspective and staying focused on long-term financial goals rather than overreacting to each policy change.
WHY THE FED IS CUTTING RATES MATTERS MORE THAN WHEN OR HOW MUCH
When making policy decisions, Fed officials study economic data including growth, jobs, and inflation (rising prices) to form their outlook. When the outlook is unclear, it’s natural for Fed officials and other economists to disagree, resulting in different views on future rate cuts. This is happening today with wide differences among officials’ rate forecasts. While many news headlines focus on political battles between the Fed and the White House, the truth is that there has been disagreement all along.
Despite this disagreement, it’s important to keep a few facts in mind. First, the Fed had been expecting that it would cut rates for quite some time. Each of their recently published economic forecasts showed that rate cuts were likely to begin this year, even if the number and size have changed based on tariff news and market swings. The Fed’s latest forecasts show there could be two more cuts this year, with an improved growth outlook.
Second, the latest rate cut is fundamentally different from past cutting cycles that were mostly driven by emergencies. Today’s rate cuts continue to reverse the rapid increase in rates that happened in response to inflation starting in 2022. They also happen against a softening but still positive economic backdrop, even if jobs data is potentially weakening and inflation is more stubborn than expected. In other words, the Fed cutting rates by one-quarter of one percent to help steer the economy is different from large emergency cuts due to problems with the financial system or an economic crisis.
Third, Fed Chair Jerome Powell’s term will most likely end in May 2026. The next Fed leader will be appointed by President Trump, which means the federal funds rate (the main interest rate the Fed controls) will likely be lower. While this could mean that short-term interest rates will likely trend lower as well, it’s important to remember that long-term interest rates are driven by market and economic forces, not Fed policy. For example, if lower short-term rates were to drive inflation higher, this might unintentionally result in higher long-term rates.
So, while this rate cut represents the Fed continuing its path from 2024, rather than a complete change in direction, it also signals the Fed’s commitment to supporting economic expansion.
RECENT ECONOMIC DATA HAS BEEN MIXED
A main reason for the Fed’s decision was weakening in the job market. The economy added only 22,000 jobs in August, well below what experts expected, and previous months’ numbers were revised down significantly. The unemployment rate (the percentage of people looking for work who can’t find jobs) only went up slightly to 4.3%, however, because fewer workers were seeking jobs. Once again, this is different from past emergency rate cut periods. During the 2008 financial crisis, unemployment spiked from 5.0% to 10.0% and in 2020, it jumped from 3.5% to 14.8%. Today, the jobs numbers suggest a more gradual cooling that may reflect a softening of job market conditions.
Adding to concerns about job market weakening, recent payroll revisions have painted a more subdued picture of recent job growth than previous data showed. The Bureau of Labor Statistics’ annual revision process showed 911,000 fewer new jobs were created from March 2024 to March 2025, suggesting the job market was cooling more rapidly than policymakers realized when making earlier monetary policy decisions. These are preliminary estimates that will be finalized in early 2026.
While a weakening job market would support lowering interest rates, the Fed’s concerns around inflation (rising prices) support keeping rates steady, or even raising them if tariffs drive prices higher. The Fed’s preferred inflation measure, called the Personal Consumption Expenditures (PCE) Price Index, at 2.6%, remains well above the 2% target. Core PCE (which excludes food and energy prices) is hovering at 2.9%, while headline and core CPI (Consumer Price Index, another inflation measure) have remained sticky at 2.9% and 3.1%, respectively. Earlier progress on bringing down inflation has not only slowed, but some of the trends have reversed in recent months.
The Fed’s job is to balance these factors as part of its “dual mandate” (its two main goals of keeping unemployment low and inflation stable). The mixed signals these indicators are sending explain why there is disagreement both within the Fed and with the White House. For investors, understanding these trends will likely be more helpful in understanding the economic and interest rate environment than watching the day-to-day political headlines.
RATE CUTS GENERALLY HELP BUSINESSES AND INVESTORS
For investors, the important distinction is whether rate cuts happen alongside a recession (economic downturn) or support continued expansion (economic growth). While there are some signs of economic weakness, there are not yet signs of a recession. In these situations, rate cuts typically provide broad benefits across financial markets. Lower borrowing costs make it cheaper for companies to finance growth and reduce debt payments. Consumer spending can increase if mortgage and credit card rates decline, boosting demand for goods and services.
One concern with rate cuts today is that the stock market is already near all-time highs. While this is not typical, there have been historical cases when this occurred. For example, under Alan Greenspan, the Fed cut rates three times in 1995 and 1996, calling the cuts “insurance” against economic slowdown. The Fed also made cuts in 2019 at market highs to address global growth concerns. At the latest press conference, Powell described this most recent policy decision as “a risk management cut” due to the Fed’s view that “downside risks to employment have risen.”
For investment portfolios, history shows that the effects of rate cuts are generally positive across different types of investments. While the past is no guarantee of the future, stocks typically benefit as lower rates reduce the discount rate for future earnings and improve corporate profitability, especially among growth-oriented businesses. Meanwhile, bonds typically become more valuable due to their higher rates, although this can vary across bond sectors and time periods until maturity. In contrast, cash will likely experience lower yields (returns), making it even less attractive compared to investments like stocks and bonds.
While each economic cycle is unique, navigating policy change is a normal part of investing. Importantly, rate cuts are generally supportive for long-term investors, although balancing risk and reward requires a broad understanding of market trends.
PLAN WITH CONFIDENCE
The bottom line? The Fed’s latest rate cut may support the economy amid mixed signals. Investors should keep a long-term perspective, focusing on the overall market direction rather than individual Fed decisions.
If you want clarity on how the Fed’s rate cuts affect your investments — and how to adjust your strategy so you’re not reacting to headlines but positioning for long-term success — let’s work together. Reach out today to schedule a personalized strategy session with me. I help investors like you understand what rate changes really mean, align your portfolio with your goals, and stay steady no matter what the economic winds do. Contact me and let’s plan your next move.
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CHRIS WARD, CFP®
Chris has been helping clients as a Financial Advisor since 2007 and established EntryPoint Wealth Management as an opportunity to offer clients access to his best partnership for financial advice. He works as an integrated partner with you and your financial life, to help you better your financial situation and achieve your goals.
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