The months-long debate over whether the Fed would cut rates, whether it should, and by how much has finally ended. The Federal Reserve announced a 0.25% rate cut, setting the new target range for the federal funds rate at 4.00%–4.25%. This marks the first change to the target since last November.
The Federal Reserve has two stated goals: maximum employment and price stability. Most of the time, these objectives complement each other. As the Federal Reserve Bank of St. Louis explains, “The Fed’s goals of maximum employment and price stability are generally complementary. An economy with low and stable inflation provides economic conditions that are friendly to business planning, saving, and investing, which results in a growing economy. A growing economy needs workers to produce goods and services.” However, these two mandates may be working against each other currently.
Recent signs of slowing job growth and downward revisions (highlighted in last week’s newsletter: RSWA Blog) have pushed the Fed toward cutting interest rates. At the same time, inflation remains stubbornly above its 2% target. The Fed’s preferred measure, the “core” Personal Consumption Expenditures (PCE) index, which excludes food and energy prices, has hovered near 3% for much of the year. While lower rates can help stimulate growth and support employment, they also risk fueling inflation. The Fed will be looking to thread the needle—supporting the job market without reigniting inflation. Whether it can succeed remains to be seen.
Fed Cuts Impact on Markets
Markets are forward looking and move based on expectations, not just on actual events. This means that by the time an announcement is made, the market has likely already adjusted.
On August 1st, the Bureau of Labor Statistics (BLS) released its July jobs report, which came in below expectations. This coincided with President Trump firing the BLS Commissioner. Following these developments, it became nearly unanimous that the Federal Reserve would cut interest rates in September, and markets began reacting ahead of any official action.
Since that time, the US 10-year Treasury yield has fallen from roughly 4.38% to about 4.1%, with similar declines across other bond maturities. This drop reflects investors’ expectations for lower interest rates in the future, prompting them to buy bonds now to lock in current yields.
The stock market has also responded to anticipated rate cuts. Over the same period, the S&P 500 has risen nearly 6%, while smaller, rate-sensitive companies, represented by the Russell 2000 Index, have gained almost 12%. Overall, investors appear to view potential interest rate cuts as a positive for their portfolios.
Chart of the Week:
The chart above tracks the Fed Funds Rate back to 1954. One interesting item to note is the correlation between cuts in rates and recessions (shaded in grey). This pattern makes sense: when the economy slows, the Fed lowers rates to encourage borrowing, spending, and investment. By doing so, it aims to support businesses and protect jobs—two things that are especially important during a recession.
Although the U.S. economy is not in a recession and shows no imminent signs of entering one, the Fed’s rate cuts reflect a proactive effort to reduce the risk of a downturn.
Financial Planning Corner:
Impacts of Lower Interest Rates
Enough on how interest rates impact the economy and markets. What does all this mean for you?
How interest rates affect you depends on which side of the fence you are on. If you’re a net borrower, carrying more debt than cash, lower rates can bring welcome relief. For savers, though, it can mean earning less on cash and deposits.
Benefits for borrowers: The Federal Funds Rate has a significant influence on the Prime Rate, the rate banks charge their most creditworthy customers. The Prime Rate is generally set about 3% higher than the Fed Funds Rate. Many common types of borrowing are tied to the Prime Rate, including home equity lines of credit (HELOCs), auto loans, credit cards, adjustable-rate mortgages, and some personal loans. For individuals with these loans, or those considering them, changes in the Fed Funds Rate can lead to reductions in borrowing costs.
It’s important to note, however, that longer-term fixed-rate debt (like 15- or 30-year mortgages and many student loans) is influenced more by the 10-year Treasury yield than by the Fed’s actions. Unlike the Fed Funds Rate, the 10-year yield is determined by market forces. As highlighted earlier, yields on the 10-year Treasury have already declined, which has contributed to rising demand for mortgages. CNBC
Consideration for savers: For nearly three years, savers have benefited from money market yields at or above 4%, a welcome contrast to the preceding 15 years when returns were virtually nonexistent. Yields on money market funds and high-yield savings accounts move closely with the Federal Funds Rate, so even a small adjustment has an impact. A 0.25% cut might not seem like much on an individual level, but with nearly $7.5 trillion currently in money markets, it translates to about $18.75 billion less interest paid to savers over the course of a year.
The upside is that cash is still earning more than the current rate of inflation, allowing savers to preserve purchasing power. But if the Fed continues to lower rates, it may become increasingly important to look beyond money markets when deciding where to keep cash that isn’t reserved for emergencies or short-term needs.
Quick Hits:
- Vacationland or Retirementland? Maine tops all states in the share of residents receiving Social Security retirement benefits: Visual Capitalist
- The saga of bringing TikTok under the control of US based businesses continues. Here is the latest update on where things stand: WSJ CNBC
- Fall is here! Track peak foliage with these interactive maps: MaineFoliage VisitNH
- From lesson plans to world-class marathoner: Susanna Sullivan, a sixth-grade math teacher, just finished 4th in the marathon at the 2025 World Championships: RunnersWorld
Money & “Freedom”
The question, “Can money buy happiness?” is an age old, unanswerable question. In past newsletters, I’ve written about the relationship between money and independence, which lends itself to a more straightforward analysis: does your current level of assets and income cover your needs, wants, and wishes? If so, you’re likely financially independent and no longer dependent on a paycheck.
Money’s role in happiness and freedom, however, is far more complex. I recently came across a blog (Frederik Journals) in which the author compared himself to a drifter he met on a road trip. The author had everything he needed—food, shelter, gas, entertainment, money for repairs, etc., but was on the trip seeking time away from his busy career and life. In comparison, the drifter was walking along a highway in Eastern Oregon, hoping to make his way to New Mexico eventually. He had a lifetime of incredible stories and seemingly no obligations. However, he lived in a constant search for free food, showers, and a place to sleep.
So, who was freer? That depends on how you define freedom. The author believed that accumulating enough wealth would eventually allow him to shed responsibilities and live on his own terms. But life rarely works out so neatly.
There is no magical number that guarantees happiness or true freedom. What matters most is finding a balance – having enough to support your needs and desires, but not so much that the pursuit or management of wealth becomes its own burden. And that balance is easier said than done.
Quote: “A “wise man’s life” is based not only on ‘f-you money’ but on the willingness to use it when it matters.” – Frederik Gieschen
