The U.S. Federal Reserve System operates under a dual mandate: to support maximum employment and stable prices. Federal Reserve Chair Jerome Powell walks a tightrope of uncertainty, balancing tariffs and inflation while supporting the job market. On September 17, recent economic data — particularly a weaker-than-expected job creation report — triggered a 0.25% Fed rate cut. What will this mean for the U.S. economy, investors and consumers?
RATE CUTS AND THE ECONOMY
Lower interest rates tend to stimulate the economy by making borrowing less expensive. They make it cheaper for businesses to invest in new initiatives or to hire more employees. With consumer spending accounting for approximately 68% of U.S. GDP, lower rates could lower consumer borrowing costs — and thus increase spending.
The relationship between Fed credibility and market confidence should not be overlooked. While the Fed sets short-term rates, longer-term interest rates that affect mortgages and corporate borrowing are determined by the reaction of bond market investors. This means Fed policy works best when investors are confident in the Fed’s ability to achieve its goals through both rate setting and guidance.
The 1970s are an example of a time when low confidence in the Fed drove up interest rates. By allowing inflation to sharply surge, the Fed lost credibility. Thus, bond market investors demanded higher yields to offset inflation risk—increased interest rates. In contrast, in the post-2008 period during the great financial crisis, Fed credibility helped stabilize long-term inflation expectations. While the Fed was arguably slow to react to inflation after the COVID-19 pandemic, its swift rate hikes and strong statements helped restore lower inflation expectations.
RATE CUTS AND INVESTORS
From an investment perspective, declining interest rates can be positive or negative, depending on whether you are the lender or borrower. Lower interest rates mean that U.S. corporate borrowing is cheaper for the companies selling bonds (basically an IOU to the investor). At the same time, bond investors could see higher prices for the bonds they currently own but will receive lower payments from future bonds they purchase.
Today’s bond market environment suggests confidence remains strong. Credit yields and spreads have reached their lowest levels in years. But concerns remain that these valuations mean corporate bonds may offer limited additional return potential and could face challenges if conditions deteriorate.
While stocks are most affected by their company earnings and investor confidence, they are also impacted by interest rates. Despite a short-lived swoon in early 2025, economic strength, lower inflation and the expectations for lower interest rates have driven U.S. stock market indices to all-time highs. Conversely, at today’s price levels, the S&P 500 Index yields a relatively low 1.25%. When bond interest rates are falling, stocks — with their potential to provide both growth and income — may become more attractive to investors.
RATE CUTS AND CONSUMERS
Consumers may expect that the Fed’s cutting of interest rates will lower the rate on mortgages. Unfortunately, this is not necessarily the case, as the Fed controls only short-term interest rates. Generally, mortgage rates tend to follow the 10-year U.S. Treasury yield — which is controlled by bond market trading. If mortgage rates decline meaningfully, we could see higher real estate prices and increased sales activity.
Unfortunately, those holding consumer debt should not expect their borrowing rates to sharply decline. While credit card rates may decline slightly, these reductions are historically slow and small.
The Fed’s decision to either raise or lower interest rates impacts the broad economy, U.S. businesses, and individuals in different and often conflicting ways — depending on if you are a lender or borrower, investor or consumer. Understanding how interest rates are set and how the bond market affects borrowing rates is important to your personal financial well-being. Seeking the counsel of an experienced banker or investment advisor is the first step to ensure that interest rate changes work for you.
Dickson Griswold is a senior wealth advisor and CERTIFIED FINANCIAL PLANNER™ with CAPTRUST. He may be reached via email at dickson.griswold@captrust.com.
