Federal Reserve cuts interest rates: what does this mean for you?

Why cut rates?

On September 17th, Jerome Powell announced that the Federal Reserve would be cutting interest rates a quarter of a percentage point for the first time since the inauguration of Donald J. Trump into office. This has raised questions nationally about what this meant for the future of the American economy. The role of the Federal Reserve, or the Fed, is to keep the American economy healthy in two ways: maximizing employment and stabilizing inflation. Historically, as the economy shows signs of weakness, the Fed has responded by cutting interest rates. This is because lower interest rates are known to stimulate economic growth because they incentivize people or businesses to take out loans because of the fact they they cost less. As a result of cut rates, banks also traditionally offer lower rates on savings accounts, leading to individuals or businesses wanting to spend on things like housing and new projects or invest in stocks or bonds. The primary goal is to create an environment where the economy experiences growth, creates jobs, and maintains healthy inflation levels.

Jeremy Powell announces rate cuts

What does it mean for the market and your investments?

It will likely be some time before the American economy fully feels the impact of the interest rate cut. Historically, the stock market responds positively directly after announcements cutting interest rates, as in the S&P 500, the fund has performed positively 86 percent of the time following rate cuts. This can happen as a result of economic recovery or further incentivization for companies to borrow money because it is cheaper, leading to further economic efficiency within those companies. For the future of your investments, lower interest rates do not always mean a high-performing market. If we see further economic weakness through things like higher unemployment and lack of new jobs, or higher inflation, and the American economy tips towards a recession, we could very likely see a bad year for the stock market across most investments. Unemployment in the United States has risen 1% since April 2023, and if we see this continue to rise in the following months, we could be looking at a bad beginning in 2026, but a bad economy doesn't directly correlate to the market, and many times in a faltering economy, the stock market continues to prosper. So, truly, there is no definitive answer for whether to be conservative in this time of fright in the American population, or time to further invest in prospering stocks like Nvidia, but only time will tell.