Why Did the Fed Lower Rates?

The Fed has restarted its easing strategy to bring short-term rates down. To understand the potential market reactions, we have to determine why the Fed is taking action.

Is it a recalibration, or is it a response to heightened recession risks?

History shows both playbooks. Since 1981, we've seen nine rate cut cycles. Four times the Fed eased from a position of strength and kept growth going. Five times it was forced into action by recession.

Bonds tend to rally either way, but while stocks have historically reacted positively to interest rate adjustments, the lower borrowing costs are not enough to overcome a broader recession environment.

Right now, we still believe that the data leans toward the recalibration scenario.

Growth has cooled, but GDP is still positive. Inflation has dropped closer to target, the labor market is softer, but unemployment is still historically low. That's a far cry from collapse.

And yes, the yield curve has steepened. Don't overthink that. That's normal in easing cycles. Long rates stick, short rates fall, the curve steepens. It's not a red flag; it's what happens when the Fed recalibrates.

So, what does this mean for investors? 

Expect some volatility. Data will swing between too hot and too cold, and politics will add a bit to the noise. But the bigger picture is constructive. Bonds still provide ballast. Broader equity markets—U.S. and abroad, large and small—have historically done well when the Fed cuts for the right reasons.

The bottom line is, we don't believe that this is about the Fed rushing to the rescue of markets.

It's about moving from restrictive to neutral, and that shift can create opportunity for diversified, balanced portfolios.

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