The Fed’s Rate Cut and What It Means for Investors

For months, investors have been anticipating a reduction in the federal funds rate—and now it’s finally here.

After a nine-month pause, the Federal Reserve lowered its key lending rate by 25 basis points on September 17. Markets cheered the news, and stocks climbed following the Fed’s announcement, which also hinted at the possibility of additional rate cuts in 2025 and 2026.

The Fed’s decision comes at a pivotal moment, as investors have been navigating mixed signals about economic growth. Even with markets at record highs, there’s been some uncertainty about what’s next. A lower rate, which makes borrowing cheaper for both consumers and businesses, is expected to give the economy a boost and investors more confidence.

Why Did the Fed Lower Interest Rates?

For much of this year, Fed Chair Jerome Powell and members of the Federal Open Market Committee (FOMC) resisted adjusting rates, carefully weighing the long-term effects of trade tariffs, tighter immigration policies, and other headwinds. While inflation has been cooling, August brought a small uptick to 2.9%, keeping it stubbornly above the Fed’s 2% goal.

But the Fed has a dual mandate from Congress: maintain price stability while fostering maximum employment. And as you might expect, the Fed’s attention pivoted toward the latter goal as the latest jobs numbers—including some heavily revised reports—showed that hiring has been slowing considerably.

It’s a balancing act, for sure, as policymakers continue to engineer the “soft landing” we’ve been talking about since the COVID crisis. Cut rates too quickly, and inflation could flare back up; wait too long, and the softening labor market could slide into recession.

At the FOMC press conference after the announcement, Powell cited the weakening labor market as a factor in the decision to lower the benchmark rate. “You can think of this, in a way, as a risk management cut,” he said.

What Does All This Mean for the Markets?

The Dow, S&P 500, and Nasdaq all hit record highs last week following the long-awaited rate cut. While a quarter-point interest rate reduction isn’t exactly seismic, investors seemed generally excited about the prospect of a rate-cutting cycle.

Still, there is some lingering uncertainty. Powell’s announcement framed the decision as a hedge against the possibility of slower growth, which gives some investors pause. But historically, rate cuts have generally been good for stocks—cheaper borrowing can potentially fuel higher corporate profits, making investing in equities more attractive.

Of course, past performance can’t guarantee future results. If investors fret about an economic slowdown, things could get bumpy. Less than a week after the rate cut was announced, Powell remarked that “equity prices are fairly highly valued.” Investors got nervous and the markets pulled back. Volatility is always in play, but that can also create opportunities.

If you haven’t revisited your portfolio recently, now may be a good time. With all that’s going on—inflation concerns, interest rate changes, evolving market trends—it’s possible your portfolio has drifted from its original asset allocation. Rebalancing could help you manage risk and position you for growth.

Is It Risky to Buy at the Top?

We all know the old mantra says “buy low, sell high,” but what does that mean for investors when stocks keep hitting new record highs?

It’s a common concern for investors: “Am I buying at the top?” But you may be surprised to learn that the markets have historically delivered strong positive returns after reaching peak levels.

Since 1950, the S&P 500 has reached an all-time high on about 7% of trading days, according to J.P. Morgan Asset Management. Nearly a third of those highs became new market floors—levels the index never dropped below again. Average cumulative returns one, three, and five years after record highs have also been strong.

Most investors don’t want to buy right before a downturn, and even short-term volatility can be stressful. But as long as you stay disciplined, make thoughtful choices, and stay invested for the long term, market timing shouldn’t be a worry.

Preparing for What’s Next

Rate cuts, market swings, and economic shifts are all part of the cycle.

It can be hard to tune out the noise sometimes, but reacting emotionally to headlines or trying to time the market rarely works. History shows that patience and discipline tend to pay off for investors. By staying focused on your goals, knowing your risk tolerance, and building a diversified plan, you can help weather uncertainty and take advantage of opportunities.

If you’d like guidance on navigating today’s markets, please reach out to Octavia Wealth Advisors to discuss your portfolio and overall financial strategy.