The Fed Just Cut Interest Rates for the First Time Since December 2024, and Here's What It Means for the Stock Market
News Summary
The U.S. Federal Reserve cut the federal funds rate by 25 basis points on September 17, 2025, marking the first rate reduction since December 2024. This action aims to stimulate a sputtering jobs market, as recent non-farm payroll reports indicated job creation well below expectations and the unemployment rate rose to a four-year high of 4.3%. While inflation (CPI) held steady at 2.9% in 2024 and 2025, still above the Fed's 2% target, the deteriorating jobs market prompted the Fed's move. Both the Federal Open Market Committee (FOMC) and Wall Street, via the CME Group's FedWatch tool, anticipate two more rate cuts before the end of 2025. Historically, lower interest rates are generally beneficial for the stock market in the long run, as they reduce corporate borrowing costs, boost earnings, and encourage investors to move from cash to equities. However, past data suggests that the beginning of major rate-cutting cycles often triggers short-term market volatility or corrections, primarily due to underlying economic shocks rather than the rate cuts themselves.
Background
The Federal Reserve operates under a dual mandate: to maintain price stability (targeting around 2% annual inflation) and achieve maximum employment. In 2022, fueled by pandemic-related stimulus and supply chain disruptions, the U.S. Consumer Price Index (CPI) surged to a 40-year high of 8%, compelling the Fed to aggressively raise the federal funds rate from near-zero to 5.3% within 18 months. As inflation subsided to 4.1% in 2023 and 2.9% in 2024, the Fed initiated three rate cuts between September and December of 2024. However, in 2025, with inflation stalling at 2.9% and the jobs market significantly weakening, the Fed has shifted its easing policy focus towards its employment mandate.
In-Depth AI Insights
What are the true strategic intentions behind the Fed's current rate cut? - Ostensibly, the Fed is cutting rates to address a sputtering jobs market and fulfill its full employment mandate. However, deeper considerations likely include pre-empting a potential economic downturn. - Given that 2025 inflation remains above the 2% target, the Fed's decision to cut rates suggests its concern over downside economic risks now outweighs its tolerance for short-term inflation levels. - The Trump administration may also be exerting implicit pressure to maintain economic momentum, especially as weak job data could raise public doubts about the economy's health. History suggests market volatility at the start of rate-cutting cycles; will this cycle be different? - Over the last 25 years, major rate-cutting cycles have coincided with short-term market corrections, but these were typically triggered by deeper economic shocks (e.g., dot-com bust 2000, GFC 2008, pandemic 2020), not the cuts themselves. - This current rate cut occurs against a backdrop of sticky inflation but significant jobs market deterioration, distinguishing it from past