Well, it finally happened. After months of will-they-or-won’t-they speculation, the Federal Reserve cut interest rates in September. And it was a relatively big one: The half-percentage-point decrease was the biggest the Fed has made since its emergency rate reductions in March 2020 at the onset of the pandemic. Before that, the country hadn’t seen a half a point decrease since the global financial crisis in 2008. 

The good news: With these cuts, policymakers acknowledged the progress they’ve made in wrangling inflation, which peaked at 9.1% in June 2022 and hit 2.5% this August, nearing the Fed’s traditional 2% target rate. The Fed fell short of declaring all-out victory, but came close: “We know it is time to recalibrate our [interest rate] policy to something that’s more appropriate given the progress on inflation,” Fed Chair Jerome Powell said. “We’re not saying, ‘mission accomplished’…but I have to say, though, we’re encouraged by the progress that we have made.”

Now the less-good news: If you’re wondering what the big rate cut actually means for you and your money, you may get wildly different—and in some cases wildly misleading—answers depending on whom you ask. Especially if you follow financial “influencers” who really need your views and clicks. (Spoiler alert: Whatever you hear is not enough to risk disrupting your long-term investment plan.)

One group of talking heads declares that lower rates will juice the economy. After all, lower policy rates make it less expensive for banks to borrow, so they might charge lower interest on mortgages, auto loans, and credit cards. Theoretically, that could leave consumers with more money to spend, bumping up economic activity. 

On the other hand, some economists are arguing that high interest rates since 2022 have actually boosted the economy by putting more money in bond investors’ pockets, so lowering rates could actually cause growth to soften. Others point out that the Fed historically has made big rate cuts when it thinks the economy is in trouble. “We don’t have a lot of examples of cutting in a healthy economy, in one that’s not showing serious signs of distress,” said Jon Faust, former senior special adviser to Fed Chair Jerome Powell.  

And what about the stock market? Some say lower rates will help stocks, since it’s cheaper for companies to borrow…except that historically, higher interest rates tend to be associated with higher stock prices. That tracks with recent history: The S&P 500 has been up about 30% since the Fed started raising rates in March 2022. In the weeks following we hit new all-time highs in the US markets. 

Noticing a pattern? Does your head hurt yet? There’s a bit of a bipolar nature to the commentary surrounding rate cuts. Fact is, it’s hard to know what will happen after the Fed cuts, in part because outcomes have varied in the past. It’s especially unclear what will happen given the extraordinary circumstances of the last few years. 

Amid this uncertainty, investors may take comfort in remembering that the market is an incredibly sensitive pricing mechanism. These aren’t surprises to us. By the time a cut is made, that information has already been included in all manner of financial instruments, from stocks to bank loans. So if you have the impulse to make moves to take advantage of—or protect yourself from—whatever might come, you’re probably too late. 

That’s not a bad thing. After all, your best course of action in response to any market development is to stick with your long-term investment plan. Your portfolio is built to work across economic and interest-rate cycles—during which rates may rise and fall several times. 

These rate cuts may offer a good opportunity in the coming months to make some smart money moves, including refinancing debts like mortgages, auto loans, or student debt. But when it comes to your long-term investments the time to make changes isn’t during market disruptions (when is there not one, anyway?), it’s only when your own circumstances warrant a change to your existing plans.  

If you ever have any questions about how rate cuts affect your portfolio, or anything else, please let us know how we can support you. 

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The commentary in this post (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of Angela Wright, an Investment Adviser Representative of Gemmer Asset Management LLC (“GAM”) and should not be regarded as the views of GAM, or a description of advisory services provided by GAM or performance returns of any GAM client.  References to securities or market-related performance data are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.  The information presented herein may contain links to third-party websites with which we have no affiliation. A link to any third-party website does not mean that we endorse it, or the quality or accuracy of the information presented on it.