The famous investing expression “don’t fight the Fed” was coined in the 1970s but has only grown in significance. The idea is simple: the Federal Reserve’s monetary policy decisions can have important effects on interest rates, and the money supply. Subsequently interest rates, and money supply impact the economy and markets. At any particular point the Fed will put its heavy thumb on the scale, and investors are wise not to be on the other side of the scale.

This is relevant today as the Fed cut policy rates by 0.25% at its September meeting, continuing the easing cycle that first began in 2024. The rate cut was widely expected by markets. The move comes at a time when markets are near all-time highs, economic signals are mixed, and uncertainty around tariffs and inflation remains.

Unlike the rate cuts during the 2008 global financial crisis or the 2020 pandemic, this cut is an attempt by the Fed to fine-tune policy and sustain economic growth rather than respond to a crisis.

Fed Chair Jerome Powell’s term will likely end in May 2026.The next Fed governor will be appointed by President Trump, which means the most likely path of the federal funds rate will be lower. This likely means that short-term interest rates will trend lower as well, but it’s important to remember that long-term interest rates are driven by the market, not Fed policy. If inflation was to trend higher, and/or confidence in the US government’s financial stability were to deteriorate longer-term rates could rise.  

A primary driver of the Fed’s decision was softening in the labor market. The economy added only 22,000 jobs in August. This was below expectations, and previous months’ numbers were revised down. The unemployment rate only ticked up to 4.3%, however, due to fewer workers seeking jobs. Some have characterized the labor market as one where employers are “slow to hire, and slow to fire.”

For investors, the critical distinction is whether rate cuts coincide with recession or support continued expansion. While there are some signs of economic weakening, there are not yet signs of a recession. In these situations, rate cuts typically provide broad benefits. Lower borrowing costs make it cheaper for companies to finance growth and reduce debt service expenses. Consumer spending and/or savings can increase if mortgage and credit card rates decline.

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 investors, history shows that the effects of rate cuts are typically positive across asset classes. Stocks typically benefit as lower rates reduce the discount rate for future earnings and improve corporate profitability, especially among large growth-oriented businesses. Bonds typically become more valuable due to their higher rates. In contrast, cash will likely experience lower yields, making it less attractive compared to investments like stocks and bonds.

The bottom line? The Fed’s latest rate cut may broadly support stocks and bonds. We would expect the biggest beneficiaries of lower rates to be large-cap US growth stocks and longer duration bonds which have higher rates locked in. The major risk is that inflation goes higher, rates rise despite the Fed, and the dollar continues to weaken. In that case the best hedge would be international developed and emerging stocks. Investors should consider overweighting to US large growth, and international DM and EM stocks relative their respective benchmarks.

Wyatt Swartz

9/24/2025