Market Update 9/17/25: Fed Resumes Rate Cutting Cycle — What Does This Mean for Markets and Investment Portfolios?

Market Update

In a widely anticipated move, the Fed cut interest rates by 0.25% at its September Federal Open Market Committee (FOMC) meeting, bringing the target for the fed funds rate to 4.00-4.25%. Notably, the Fed’s guidance for the balance of 2025 indicates two additional rate cuts are likely (0.75% of total rate cuts, including today’s announced cut).

Investment Implications

If history is a guide, a resumption of a Fed rate cut cycle (recall the last rate cut was in December 2024) may be positive for both stocks and bonds. That said, we remain cautious given elevated stock market valuations and historically high market concentration. As such, we anticipate forward-looking returns over the next decade to moderate towards the high single-digit range. Bond yields are relatively attractive, with many of our preferred bond funds yielding mid-single digits. Bond prices may be supported as the Fed cuts rates, and with a still-uncertain economic backdrop. Moving forward, we believe alternative asset classes may offer compelling risk-adjusted return potential, with limited correlation to the broad public markets. Ultimately, we believe our well-diversified portfolios will continue to meet the long-term financial goals of our clients.

Key Takeaways

• A resumption of a Fed rate cut cycle may help underpin both stocks and bonds, though we are cautious about current stock market valuations and concentration. We believe maintaining broad investment diversification will be important in the years ahead.
• The Fed appears to currently be more focused on its employment mandate in the face of a weakening labor market than it is on inflation, given its view that the inflationary impact of tariffs may be short-lived.
• Based on the current economic backdrop, the Fed now anticipates three 0.25% rate cuts (0.75% of total rate cuts inclusive of today’s rate cut) through the balance of 2025, though it should be noted there was some disparity in FOMC participants’ views of appropriate monetary policy.
• With inflation still above the Fed’s 2% target, we believe the Fed will be measured in its approach to future rate cuts and – as always – remain data dependent with respect to monetary policy.
• While recent headlines have focused on the threat to Fed independence, we believe the independence of the Fed will ultimately be maintained.

Fed More Focused on Employment than Inflation

The Fed’s decision to cut rates by 0.25% was broadly telegraphed ahead of time; leading into the decision, Fed officials emphasized a weakening labor market and the downside risks to the economy, while indicating the inflationary impact of tariff policy was likely to be short-lived. Today’s FOMC statement noted that economic growth has moderated recently, job gains have slowed, and the unemployment rate has edged up but remains low. Notably, the Fed stated that “uncertainty about the economic outlook remains elevated” and the Fed judges that “downside risks to employment have risen.” Said another way, the Fed appears to currently be more focused on its employment mandate in the face of a weakening labor market than it is on inflation.

At the subsequent press conference, Fed Chair Powell underscored this view, indicating that a reasonable base case was that tariffs result in a relatively short-lived, one-time impact on inflation. He also indicated that longer-term measures of inflation remain consistent with the Fed’s inflation goal of 2%, and in the Fed’s view, the risks to higher and persistent inflation have reduced. On the other hand, Powell noted that downside risks to the labor market have increased and that needed to be accounted for in the Fed’s monetary policy.

Dot Plot Indicates 0.75% of Total Rate Cuts in 2025

Of great focus was the Fed’s Summary of Economic Projections report, aka the “dot plot” forecasts, which indicate the likely future path for monetary policy. Based on these updated projections, the Fed now anticipates three 0.25% rate cuts (0.75% of total rate cuts inclusive of today’s rate cut) through the balance of 2025. The Fed’s previous forecast in June indicated 0.50% of total rate cuts would be appropriate through the balance of the year.

There was some disparity in FOMC participants’ assessments of appropriate monetary policy: of the 19 officials, 10 believe two or more additional cuts are warranted, two believe one additional cut is needed, six see no further cuts as necessary, and one curiously believes an interest rate increase would be appropriate. 

Fed to Take a Measured Approach

Should the Fed’s median projection come to pass, the target for the fed funds rate would be 3.50%-3.75% by the end of the year, with an additional rate cut likely in 2026. With that said, inflation is likely to remain on the mind of Fed officials. With inflation still above the Fed’s 2% target, we believe the Fed will be measured in its approach to future rate cuts and – as always – remain data dependent with respect to monetary policy. At his press conference, Powell indicated that based on incoming economic data, it was appropriate for the Fed to take a more neutral stance on monetary policy, inferring the Fed believes today’s interest rate policy – even after today’s rate cut – remains restrictive and that policy may move towards the longer run neutral rate of 3.00% over time.  

Fed Independence

While recent headlines have focused on the threat to Fed independence, we believe the independence of the Fed will be preserved. Fed Chair Powell is likely to serve out his full term through May 2026 before a replacement is sworn in. Powell indicated there is no threat to the Fed’s independence, stating, “I don’t believe we would ever get to a place” where the Fed’s independence is threatened. He reiterated the view that the Fed remains strongly committed to maintaining its independence, which is rooted deep in the Fed’s culture, and that nothing has changed with respect to Fed independence despite recent headlines. We have seen similar headlines in the past, but ultimately, we believe the independence of the Fed will be maintained.