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
There are no style points when investing.
There is no bonus for degree of difficulty. As investors, our goal is to increase our probability for success.
One of the biggest problems for individual investors just starting out is that they try to pursue the grail of earning higher returns with lower risks without the proper understanding of how hard it truly is to obtain.
They want to try to beat the market by using sophisticated strategies, but they don’t have the resources or knowhow to do it. In this case, trying to be above-average leads to below-average performance.
As individuals, we are much more emotionally invested in our portfolios because it’s our money.
Investing doesn’t have to be about beating others or beating the market. It’s about not beating yourself.
Patience will always be the great equalizer in the financial markets.
For many doing something, anything, is much easier because it gives you the feeling of control.
Trying harder does not mean doing better in the financial markets. In fact, trying harder is probably one of the easiest ways to achieve below average performance.
What are floating rates?
A floating interest rate, also known as a variable interest rate, is an interest rate that is continuously moving with the rest of the market. Floating rates refer to any debt instrument, including loans, bonds, mortgages, or credits, that do not have a fixed rate of interest over the payback period. The rate varies over the duration of the debt obligation compared to a fixed interest rate, which is a rate that stays constant for the duration of the debt obligation. Floating interest rates will change based on a reference rate, typically an Index.
How do they work?
The rate on a floating rate debt instrument is typically referred to as a spread or margin over the base rate. To calculate the rate, you add the spread/margin defined by the lender plus the rate that is determined by the index tied with the debt instrument.
Debt instruments with floating rates will typically cost less than fixed rate loans. Because the borrower is paying a lower loan rate in the beginning, they are taking on interest rate risk, which is the risk that rates will go up in the future.
Mortgages with Floating Rates
Adjustable-rate mortgages (ARMs), which are mortgages that utilize floating interest rates, have rates that change based on a preset margin and a major mortgage index, such as Libor, or with the monthly treasure average (MTA). So when a borrower takes out an adjustable-rate mortgage based on1 1% margin based on Libor, and Libor is at 3% when the mortgages rate changes, the rate of the mortgage will reset at 4%, the sum of the margin and the index.
Floating rate mortgages are uncommon in the United States, although they are still popular in Europe and other foreign places. Loan officers believe they are risky for the consumer because taking out a mortgage is a long term commitment and is a large investment. When a home owner is taking out a loan they need to plan for the future and taking a floating rate mortgage is too unstable to help them plan for future expenses.
Credit cards with floating interest rates
There are many credit cards that utilize floating interest rates. These rates are tied to an index, usually the current prime rate, the rate that reflects the interest rate set by the Fed.
Advantages
An appealing factor of taking a debt instrument with a floating interest rate is that the initial rate is lower than taking a fixed rate tool. With a floating rate instrument the borrower also may pay less in future interest payments if their interest rates decrease. While paying less for their current interest payments they can keep their savings on each payment for if and when the interest rates increase.
What makes adjustable-rate mortgages to home purchasers is that the interest rates in the beginning are lower than fixed rate mortgages. Borrowers who plan to sell the property and repay the loan quickly, before there is much change in rates, will often to choose ARMs.
Disadvantages