The Fed is Shifting Gears - But Does it Matter?
The Fed is Shifting Gears - But Does it Matter?
On September 17, 2025 the Federal Reserve cut its benchmark interest rate by 25 basis points, bringing the federal funds rate down to a target range of 4.00%-4.25%. This marks the first reduction since December 18, 2024 and reflects growing concerns over a cooling labor market and rising economic risks—even as inflation remains above target.
What Drove the Decision
In addition to political pressure, several economic indicators have pointed to slowing momentum. Job gains have softened, with many businesses delaying hiring. Unemployment has edged higher, particularly among younger workers, recent graduates, and minorities.
Inflation—still running at about 2.9% year-over-year in August—has moderated from last year’s highs, but the Fed acknowledges that pricing pressures persist. As investors, we must continue to watch inflation closely.
Balancing its dual mandate of stable prices and maximum employment, the Fed judged that the risks to employment have grown more pressing. This rate cut reflects a pivot: not abandoning inflation goals but giving greater weight to labor market weakness.
Much like a driver shifting gears, the Fed’s rate cut signals a recalibration. Timing, control, and forward vision matter more than speed alone.
The Fed sets short-term rates like the Federal Funds rate, which influences the prime rate, but longer-term yields are ultimately driven by the bond market. The 10-year U.S. Treasury—which heavily influences mortgage rates—actually rose after the Fed’s announcement. This underscores that Fed rate cuts can benefit some areas of the economy more directly than others.
What the Fed Declared
According to the FOMC statement, key updates include:
Rate Cut: The Federal funds rate was lowered from 4.25%–4.50% to 4.00%– 4.25%.
Future Path: Projections suggest as many as two more cuts this year, though opinions differ.
Dissent: Fed Governor Stephen I. Miran pushed for a deeper, 50 bps reduction.
Balance Sheet: The Fed will continue reducing its holdings of Treasuries, agency debt, and mortgage-backed securities.
Immediate Impacts
Borrowing Costs – Banks have already lowered prime lending rates, easing costs for variable-rate consumer loans, credit cards, and business financing. These areas stand to benefit most directly.
Housing & Mortgages – Mortgage rates typically follow the 10-year Treasury. With the 10-year yield rising after the cut, immediate relief for borrowers has been muted. Still, additional rate cuts could provide longer-term support for housing finance.
Business Investment – Cheaper borrowing costs may encourage companies to restart capital spending, though challenges such as trade policy uncertainty, labor costs, and supply chain issues remain.
Stock Market – Equities often rally on rate cuts, but with inflation still above target, easier policy could also reignite pricing pressures. The Fed signaled it will remain vigilant. Importantly, the impact will vary from company to company depending on capital structure and sector exposure.
What It Means for Your Strategy
At Nollenberger McCullough, we don’t recalibrate hastily—we adjust with purpose. Here are the areas we’re watching most closely:
Debt Sensitivity – For those with variable-rate loans or business financing, the cut provides immediate relief. For new borrowing, fixed-rate structures may be more attractive in a falling rate environment.
Cash & Short-Duration Fixed Income – Short-term instruments remain attractive. If you’ve been holding large cash balances expecting higher rates, this may be a time to consider redeploying into yield-producing vehicles. Call us to discuss options.
Inflation Path – With inflation still elevated, deeper cuts aren’t guaranteed. We’re monitoring housing, energy, and food—core drivers of inflation—to guide inflation-hedging strategies.
Equity Sector Sensitivity – Rate-sensitive sectors such as real estate, utilities, and financials will respond differently. Active rebalancing remains essential to avoid concentration risk.
Flexibility – The Fed emphasized it will remain “data dependent,” adjusting policy meeting by meeting. We’re preparing for multiple outcomes—soft landing, hard landing, or moderate growth—so portfolios stay resilient across scenarios.
Looking Ahead
Many forecasters believe the Fed could deliver up to two more cuts this year, though that depends on the trajectory of employment and inflation.
While growth projections have been revised slightly upward, risks remain. Global trade policy, the strength of the U.S. dollar, domestic fiscal policy, immigration, and consumer sentiment all add uncertainty. Inflation is expected to gradually drift toward the Fed’s 2% target, though the path will likely be uneven and prolonged.
Bottom Line
This rate cut is significant—not because of its size, but because of what it signals: the Fed is shifting its focus, giving greater weight to labor market health.
For long-term investors, the move creates opportunities: lower borrowing costs, attractive yields in short-term fixed income, and greater flexibility in debt management. At the same time, it reinforces the importance of vigilance and adaptability.
As a reminder, we are investors, not traders. Our approach is to study the economy, identify which sectors are likely to benefit or struggle, and own quality companies for three to four years with the potential for meaningful returns.
If you’d like to explore how these changes could affect your portfolio—or ensure your strategy is aligned with the road ahead—we’d be glad to sit down and review.
All the best,
Bruce
Nollenberger McCullough Investment Advisors
Performance - Trust - Experience
415-287-5100
Nollenberger McCullough Investment Advisors
100 Shoreline Highway Bldg B, Suite 380
Mill Valley, CA. 94941
220 Newport Center Drive #11-375
Newport Beach, CA 92660
415-956-8700 or 415-287-5100