By Robert E. Quittner, Jr. CFP® & CMFC™
Investment Advisor Representative
[email protected]
There was some big news out of the Federal Reserve yesterday—but first, let’s set the stage.
Federal Reserve Chairman Jerome Powell is in a tricky spot. His primary job is to keep inflation under control while supporting steady economic growth. His main tool is the federal funds rate—the short-term interest rate that influences everything from mortgage rates to bond yields.
Here’s the challenge:
- Raising rates helps cool inflation but risks slowing the economy.
- Cutting rates encourages growth but risks letting inflation rise.
The Fed’s goal has been to lower inflation to 2%. With inflation currently at 2.9%, Powell has been holding rates steady. On the other side, job growth is slowing, and unemployment is creeping up. Below are the numbers from the U.S. Bureau of Labor Statistics (9/5/25).
- June: Economy shed 13,000 jobs, first monthly decline since December 2020. Unemployment was 4.1% (slightly down from 4.2% in May).
- July: Added 73,000 jobs, below expectations. Unemployment ticked up to 4.2%.
- August: Only 22,000 jobs added. Unemployment rose to 4.3%, the highest since 2021.
Job growth has decelerated significantly from earlier in the year when the economy was adding over 100,000 jobs per month.
Adding to the pressure, the White House has been vocal about wanting lower interest rates to stimulate the economy. Powell must balance the economic data with political pressure—a delicate act for the Fed, which is designed to operate independently.
Think of it like driving a car downhill:
- Inflation is the car’s speed.
- Interest rates are the brake pedal.
- Press the brake too hard, and the car jerks to a stop—hurting growth.
- Don’t brake enough, and the car races out of control—inflation surges.
- Meanwhile, passengers in the backseat (the White House) are urging the driver to go faster.
The Big News: The Fed lowered the federal funds rate this past Wednesday by a quarter point and signaled more cuts may come this year.
How Could This Affect You?
- Borrowing Gets Cheaper: Mortgages, car loans, and business financing could see lower rates, making it easier to spend or invest.
- Savers Feel the Pinch: Cash accounts, CDs, and money markets may earn less interest—something retirees relying on income should watch. Rates have already been dropping this past year.
- Stocks Could Benefit: Lower rates often lift equities, as investors seek growth beyond bonds and cash.
Historical Perspective on Rate Cuts and the S&P 500
- A Northern Trust study of cycles since 1980 shows the S&P 500 returned 14.1% on average over the 12 months following the first rate cut in a cycle.
- When the economy avoids a recession, returns are stronger—about 20.6% over 12 months after the first cut.
- If recession signals are present, returns are mixed but often still positive.
While the Northern Trust study appears encouraging, it’s prudent to temper our expectations. Markets often price in cuts ahead of time, so any post-cut boost in stocks is uncertain and may already be reflected in current prices. Time will tell.
The Birds are at home this week facing the Rams. Both teams are 2-0 and will be a tough rematch from last year’s playoff game. GO BIRDS!!
Rob