What the Fed’s rate cut means for investors & borrowers

Read what GSB Wealth’s ? Daniel Clarke had to say about the U.S. Federal Reserve’s recent decision to cut interest rates, ?marking a significant shift in monetary policy with wide-reaching implications for the global economy. While the Fed’s primary focus is on fostering growth and curbing inflation, this move has sparked reactions across markets, affecting investors, borrowers, and businesses alike. Below, we will dive into what the Fed’s rate cut means for these groups and how to navigate the current economic landscape strategically.

Why did the fed cut rates?

On September 18th, the U.S. Federal Open Market Committee (FOMC) reduced interest rates by 50 basis points, the first cut in over four years. This decision comes as the Fed turns its attention to the labour market, acknowledging that inflationary pressures are easing. Policymakers project further cuts of up to 100 basis points in 2025, reflecting a new focus on economic stability rather than aggressive inflation management.

Fed Chair Jerome Powell emphasised that the cut should not be seen as a sign of economic weakness but as a precaution to prevent a slowdown. While concerns about inflation remain in the background, the Fed is now positioning itself to support growth, particularly in the job market, which is cooling but remains stable.

Impact on the stock market

Historically, Fed rate cuts have often sparked positive movements in the stock market. Julius Baer data from the 1980s shows that, on average, the S&P 500 has returned 14.2% in the 12 months following the first Fed rate cut. Lower interest rates reduce borrowing costs, making it easier for companies to expand and consumers to spend, both of which boost corporate profits and stock prices.

In line with this trend, analysts suggest that the Fed’s rate-cutting cycle could provide a tailwind for both equity and bond markets. U.S. equities, particularly in sectors outside of the tech-heavy “Magnificent Seven,” are expected to benefit from slower inflation and lower costs of debt, further supporting earnings growth.

For investors, this presents a valuable opportunity to reassess their portfolios. Historically, equities tend to rally during periods of rate cuts, especially when combined with a soft-landing scenario. Quality U.S. bonds have also outperformed cash after previous rate cuts, making it a good time for investors to lock in attractive yields.

What does it mean for borrowers?

Borrowers, like investors, stand to benefit from the Fed’s decision to lower rates. Lower borrowing costs mean cheaper access to credit for individuals and businesses. This could be the ideal moment for homeowners to refinance their mortgages or for businesses to invest in expansion while the cost of debt is more affordable.

Broader economic considerations

While the Fed’s rate cut aims to bolster economic growth, some concerns remain about its long-term impact. The cut signals potential challenges ahead for the U.S. economy, even if the Fed maintains a cautiously optimistic outlook. Economic growth projections have been modest, with unemployment rates expected to rise to 4.4% by 2025 .

One critical factor to watch is how these rate cuts will influence inflation in the long run. While inflation has eased, any unexpected spike could force the Fed to reverse its easing policy, leading to market volatility. Investors should stay informed about how inflation data evolves in the coming months.

Impact on emerging markets and global outlook

Emerging markets could see a resurgence as U.S. interest rates fall. Lower U.S. rates typically drive capital into higher-yielding emerging markets, boosting growth and investment opportunities. However, emerging markets also carry risks, particularly in regions facing geopolitical instability or economic uncertainty.

At the global level, several risk factors should be considered. Geopolitical tensions, inflation volatility, and changes in trade relations could all impact economic stability. Investors looking at emerging markets should consider the broader geopolitical landscape and maintain a well-diversified portfolio to mitigate risks.

What should investors do now?

Given the opportunities and risks associated with the Fed’s rate cuts, it’s an important time for investors to revisit their financial strategies. A diversified portfolio that balances equity growth with the stability of bonds can provide a solid foundation in this environment. It’s also wise to keep an eye on future rate decisions from both the Fed and other central banks, as further cuts may create additional investment opportunities.

Conclusion

The Fed’s recent rate cut is shaping up to be a pivotal moment for the U.S. economy and global markets. Investors and borrowers alike can benefit from this move, but it’s essential to remain cautious and informed. As central banks continue to adjust their policies, staying proactive and reviewing financial strategies will be key to making the most of the current economic climate.

Get in touch

Contact GSB today if you would like to discuss any of these matters with our in-house team.

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*All figures are indicative only and not intended to act as financial or investment advice. Nothing in this communication constitutes investment, legal, accounting, tax advice, or a representation that any investment strategy is suitable or appropriate to your circumstances.