The Federal Reserve is set to lower the federal funds rate by 0.25 points with the potential for future cuts. This approach generally affects the economy in two ways. For borrowers, it lowers the cost of credit, thus easing financial strain for individuals and businesses looking to make big purchases. And for investors, it raises the prices of bonds. Investors can choose to sell these bonds at a higher price in the secondary market.
After nine months, it feels like this cut is a long-time coming. But the market instability has made it challenging to act. High inflation and growing unemployment have fostered more economic tension over the past several months, threatening the markets with a downward spiral.
This interest rate cut is an attempt to ease the intense pressure.
While inflation has plagued the US economy for the past five years, low job growth and recent tech layoffs have further influenced market dynamics. Between March 2024 and 2025, 911,000 fewer jobs were created and the unemployment rate stands at 4.3%. In June, the jobs market faced its first decline since 2020, losing 13,000 jobs. Business didn’t exactly bounce back in July or August, with employment numbers minimal compared to previous months.
"The overall job-finding rate is very, very low, but the layoff rate is also very low," said Fed Chair Jerome Powell in his recent press conference. "The concern is that if you start to see layoffs, the people who are laid off, there won't be a lot of hiring going on."
Typically, lower interest rates allow businesses to borrow more easily, and take more risks. The goal is that companies borrowing at lower rates can invest in innovative strategies and technology to foster growth. If successful, the lower rates may indirectly stimulate job growth and stave off a recession.
However, lower rates can also be beneficial for individuals. A reduced federal interest rate translates into lower mortgage and car loan rates, which can support spending.
This is the idea. However, there is always a risk of lower rates spurring price increases. The higher Federal Fund rate was meant to temper inflation.
I expect that the Federal Reserve will confirm further cuts if it appears that inflation is stable under the new rates.
Lower rates will affect everyone’s portfolio differently. However, there are some key ways this move will influence investors. For example, if you need more liquidity, it will be possible to sell recently purchased bonds for a higher price.
For others with mortgages or other forms of debt, refinancing your monthly payments can result in savings. The new influx of cash can offset high inflation costs or be invested into your retirement portfolio.
However, the cuts will also reduce interest earned on fixed income assets, like CDs, high-yield savings accounts, and bonds. If the Federal Reserve continues to reduce the interest rate, it may be worth it to find additional avenues to increase savings.
Interest rate changes are only one variable, albeit it an important one, in selecting investment. When making financial decisions, it’s helpful to have a trusted team of advisors and communicate regularly with family members about big financial decisions.
More importantly, it helps to have insight into investing principles and the state of the economy. Sign up for our newsletter to keep up with key economic shifts and investing strategies from Encompass Advisors.
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