“When our goals are in tension like this our framework calls for us to balance both sides of our dual mandate.”
—Jerome Powell
The U.S. Federal Reserve (“Fed”) has, for the first time since December 2024, eased monetary policy. Markets largely anticipated a 25-basis-point (“bps”) reduction on September 17th, but reactions across asset classes have been mixed. Investors are also seemingly coming to terms with the fact that the competing factors are complex—and, in many ways, unresolved.
What stands out in this cycle is not the cut itself, but the context in which it arrives. Lower than the peaks of 2022 and 2023, inflation remains above the Fed’s 2% target as progress flickers. The central bank’s other mandate is to promote maximum employment—but labor markets are cooling, job creation is tepid, and wage pressures are subsiding. In light of this, growth momentum is slowing.
Regardless of the obstacles, the Fed has shifted toward accommodation. As investors reconciled competing forces—immediate policy action and cautious forward messaging—major American equity indices reached new heights. Some may have hoped for more substantial policy moves, but the absence of a surprise 50 bps cut may have inspired greater confidence in Fed independence and less reason for concern over economic deterioration. The broad market rally has helped domestic stocks narrow the YTD performance gap with international equities—still, diversification is prudent.
The reaction from fixed income securities has been somewhat less reassuring. Context may be helpful here. The Federal Reserve has significant influence over short-dated U.S. Treasuries, but long-term yields are shaped by structural forces, such as government debt and future interest rate projections as a function of sticky inflation. Both factors have led to investors demanding higher term premiums to hold longer-duration bonds. As such, there’s reason to believe the “belly” of the curve (i.e., the 3- to 7-year duration range) may offer greater resilience and flexibility on a risk-adjusted basis.
Where we stand now isn’t all that different from a week ago. Most investors tend to price in these decisions ahead of time, but successful ones often think of what comes next. Given the circumstances, we encourage looking past short-term theatrics in favor of structural forces reshaping returns.
History is not guaranteed to repeat itself, yet it remains a useful data point—rate-cutting cycles rarely unfold in a straight line. As new uncertainties emerge and others fade away, markets can swiftly pivot from optimism to doubtfulness and back again. For now, the Fed’s path forward remains cautious and conditional, rather than an open-ended commitment to stimulating the economy.
It’s unlikely we’ll return to near-zero rates anytime soon, but by the same token, we are stepping away from an overly restrictive borrowing environment. Powell himself has described this as a “step toward a more neutral policy stance.” Perhaps this is for the best. Quality businesses with strong balance sheets, sustainable cash flows, and proven track records shouldn’t find “neutral” overly difficult.
And those companies aren’t exclusively located in America. As always, discipline and global diversification should yield more reliable portfolios capable of capturing opportunity and mitigating localized risk. The Fed has made its move, but the real adjustment—for markets and investors alike—will account for structural trends built to outlast individual cycles.
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