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Fed’s First Rate Cut of 2025 – What Difference Will It Make?

Hello readers, it’s time once again to gaze into the halls of Wall Street’s financial funhouse and see if we can make sense of where we are and what we are doing. If you’ve been glued to the headlines this week, the Federal Reserve finally trimmed interest rates— by a meager quarter-point on September 17. This rate cut moves the benchmark rate to 4.00%-4.25%, which hardly moves the needle, but it does give us a little bit more breathing room. With additional rates forecasted by the year’s end, we might see a mid-cycle expansion (one can hope). Fed Chair Jerome Powell called this rate adjustment a “risk management cut,” which is fair. Amid slowing job numbers and sticky inflation, it is difficult to justify drastic measures. The economy isn’t terrible.

By adjusting interest rates up and down, the Fed can control the direction economy much like manipulating the gas and brake pedals on a car. Lowering interest rates will lower borrowing costs, which widens profit margins and allows the economy to expand. Conversely, higher interest rates will raise borrowing costs, squeeze profit margins and restrict growth when out of control inflation outpaces the economy. Whether up or down, the Fed has been traditionally reluctant to make any big or sudden moves. The risk is over-correcting an economy that may otherwise do well on its own. Under-correcting shows restraint and allows market dynamics to work its magic. We have a capitalistic economy after all.

With these rate cuts long-overdue (and long-forecasted), the markets may not react wildly like some people think. Markets have had a long time to “price in” the cuts, working out and fine tuning their forecasts and adjusting model outcomes of buying and selling accordingly. With one cut behind us and up to two more ahead before the end of the year, at least according to the Fed’s own “Dot Plot,” the economy could stand to benefit even as the markets do not react. Lower borrowing costs and higher profit margins create jobs and opportunities.

The Market’s Post-Cut Shrug (With a Side of Optimism)

The S&P 500 is up about 12% year-to-date as of mid-September, shrugging off the Spring-time slump and overtaking 60/40 portfolios as it should. Volatility has been quite cool as well– the VIX (that “fear gauge” index) hovered around 15.72 on September 18, signaling calm waters rather than choppy seas. Anything under and approaching 20 is considered calm, which enables investors to confidently buy and sell without out-of-control fears. Small-Cap and Large-Growth styled companies, particularly the Tech Sector, has seen growing bullish sentiment across social media and business news writ-large. Together with the Financial sector, this rate cut should give them an extra boost to the bottom-line. As one strategist put it, “a dual positive” emerges for business confidence with stock price and now economic fundamental benefits coming to fruition. This is a welcome change following h-hum business sector confidence meandering below 50 (the neutral midpoint) for most of the year.

As we look further across the funhouse mirrors, we are seeing managers cautiously lean into the United States over foreign stocks, and positioning portfolios for long-term growth by selectively capturing growth names as well.  At the same time, they are eyeballing higher yielding bonds to lock in rates as a ballast against volatility shocks—which should begin once the Fed’s interest rate cuts are finished.  The Fed rarely lowers and raises rates in quick succession. Earnings season forecasts seem neutral to positive thanks in-part to continued interest in Artificial Intelligence (AI) and declining rates even amid job growth pressures and stagnating inflation. If things hold steady, Align thinks we could see some growth through the New Year, ending the last on a positive note. Will that actually happen? Nobody has a crystal ball.  All eyes are on US economic data, specifically jobs, energy and food costs, as well as housing prices. We are wary of the potential for domestic civil unrest, and continued uncertainties surrounding geopolitical conflicts and international trade.

In the meantime, if you have any questions or concerns, feel free to give your advisor a call.

Fun Fact: The S&P 500 has ~500 companies, but if you tally all the employees, that’s over 28 million folks – 21% of America’s working population (and enough to fill Yankee Stadium 580 times over)!