Lowered Interest Rate

Lowered Interest Rate: A Turning Point in U.S. Monetary Policy

Introduction

On September 17, 2025, the U.S. Federal Reserve made a noteworthy move: it cut its benchmark interest rate by 25 basis points, bringing the federal funds target range to 4.00%–4.25% from the previous 4.25%–4.50%. Investopedia+2Schwab Brokerage+2 This was the first rate cut of the year, driven by signs of a weakening labor market and concerns about softening economic growth, even as inflation remains above goal. Schwab Brokerage+2Investopedia+2

This blog post explores how long it has been since the Fed last eased, what has changed since then, and what possible impacts this rate cut could have—both near-term and longer-term—on markets, households, and the economy as a whole.

How Long Since the Last Rate Cut?

To gauge how significant this move is, it helps to see what the recent history has been:

• Prior to this September 2025 cut, the last time the Fed lowered its rates was in December 2024. Investopedia+2Fox Business+2
• Before that, there had been a period of relative stability in 2025, with multiple meetings in which rates were held steady rather than being cut. Fox Business+2Schwab Brokerage+2
• Going further back, in 2022 and 2023, the Fed had been in a hiking cycle—raising rates aggressively in an effort to bring down the high inflation that emerged after the pandemic. Investopedia+3Bankrate+3Wikipedia+3

So the September 2025 cut marks a shift from a period of tightening (or holding rates high) to a period where easing is expected, albeit cautiously. It’s the first cut in about nine months, and the first since winter of 2024. 6abc Philadelphia+2Investopedia+2

Why Now? Key Drivers

Understanding why the Fed chose to cut now helps forecast potential effects. The main factors include:

1. Labor Market Weakness: Job growth has been slowing, and signs are emerging that the job market is cooling. While unemployment is not yet high (relative to historical norms), the Fed has judged that downside risks to employment have increased. Schwab Brokerage+1
2. Inflation Still Elevated: Inflation remains above the Fed’s target (~2%), though it has eased from its worst peaks. The Fed is balancing inflation control with preserving employment. Schwab Brokerage+2Financial Times+2
3. Expectations & Forward Guidance: The cut was expected by markets, and the Fed has signaled more cuts may be coming—two more in 2025, and possibly one in 2026. Investopedia+2Investopedia+2
4. Economic Growth Concerns: Slowing growth in certain sectors, softer consumer spending, signs that higher rates are damping investment and housing activity. These have added pressure to ease. Schwab Brokerage+2Investopedia+2

What Effects Could This Have?

A rate cut is a lever, and its effects disperse unevenly across sectors. Below are some of the primary channels through which this cut is likely to influence the U.S. economy and markets, both soon and further out.

1. Borrowing Costs and Consumer Credit

• Mortgages: The rate cut gives some relief. Mortgage rates have already been coming down in reaction to the Fed’s move, with the average 30-year mortgage rate falling to around 6.26%, its lowest since early October 2023. AP News However, many homeowners still have locked-in rates far below current new-loan rates, so the impact will be mixed. AP News+1
• Home Equity Lines of Credit (HELOCs) and Adjustable-Rate Loans: These are more responsive to changes in the prime rate and thus more immediately affected by Fed moves. Borrowers with variable rate products should see relief relatively quickly. CBS News
• Credit Cards, Auto Loans, Other Consumer Debt: Similar to adjustable-rate tools, these borrowing costs may decline, though banks often lag in passing along rate cuts to consumers. Some categories may see minor improvements, others less so depending on existing terms.

2. Housing Market

• The drop in rates might stimulate some activity in housing, especially among prospective buyers who were previously shut out by high rates. Lower borrowing costs reduce monthly payment burdens.
• Refinancing becomes more appealing. As mortgage rates drop, homeowners with older, higher-interest mortgages may refinance, freeing up disposable income. AP News
• However, home sales may still be constrained by supply side issues (inventory), high prices, and hesitancy among buyers and sellers whose cost expectations are tilted by earlier higher rates.

3. Financial Markets (Stocks, Bonds, etc.)

• Equities: Stock markets often respond well to easing because cheaper capital improves profitability, especially for highly leveraged businesses and growth-oriented sectors (e.g., tech). Indeed, the recent cut helped boost stock indices, especially smaller-cap stocks, which are more sensitive to borrowing costs. The Wall Street Journal+2MarketWatch+2
• Bond Yields and Fixed Income: Short-term yields typically fall after rate cuts. The expectation of rates falling in the future tends to compress yield curves, possibly boosting demand for longer-term bonds. But inflation expectations and risk premia may limit how far yields fall.
• Risk Assets More Broadly: Lower rates reduce the discount rate used in valuing future cash flows, which tends to raise valuations (all else equal). This can be a tailwind for growth stocks, real estate investment trusts (REITs), and other interest rate-sensitive assets.

4. Inflation and Price Pressures

• A possible risk is that lowering rates too aggressively could reinvigorate inflation, especially if demand picks up but supply constraints persist.
• The Fed will need to monitor core inflation (especially services inflation) carefully. Some measures have shown inflation, particularly in non-goods sectors, remaining “sticky.” Financial Times
• There is also the risk of stagflation if growth remains sluggish while inflation stays high. Some commentators have raised that concern after the Fed’s recent cut. The Economic Times

5. Employment and Wages

• The aim of the Fed in cutting rates now is partly to support a labor market that’s cooling but not yet in recession. Lower rates help businesses by reducing financing costs, which may in turn encourage hiring and investment.
• But there is a lag: rate cuts do not immediately translate into hiring: projects needing capital or planning may take months to ramp up.
• Wage growth pressures might moderate slightly if cost of capital drops and labor demand softens—but also could be pushed up if labor supply tightness remains.

6. Broader Economic Growth

• A cut in interest rates tends to stimulate investment (capital expenditures by firms), consumer spending (especially on big-ticket items like homes, cars), and durable goods.
• On the flip side, if uncertainty remains high—due to persistent inflation, international risks, political instability—businesses and consumers may remain cautious, muting the stimulative effect.

Potential Risks & Constraints

While the rate cut is broadly positive for easing pressure on borrowers, several risks and constraints could limit its effectiveness:

• Lag in Transmission: It takes time—often many months—for monetary policy changes to filter through to all parts of the economy. Borrowers with fixed-rate debt won’t see change until maturity or refinance.
• Sticky Inflation: If inflation remains high or reaccelerates, the Fed may have to reverse course, which can unsettle markets.
• Geopolitical / Supply Chain Shocks: External shocks—e.g. energy price spikes, trade disruptions—can raise input costs and erode real income, counteracting benefits of lower rates.
• Financial Stability Concerns: Low rates over prolonged periods can encourage risk-taking, asset bubbles, or misallocation of capital.
• Creditor / Lender Responses: Banks and lenders may not immediately or fully pass rate cuts to consumers; margin pressures or regulatory requirements might delay or dilute impact.

What This Means for Different Stakeholders

Consumers

• Good news for those with variable rate debt or looking to finance a large purchase. Lower loan payments.
• Some relief on mortgages, especially for new buyers or for refinancing.
• Homebuyers may get a bit more affordability, though housing inventory and prices still pose constraints.

Investors

• Growth stocks, small caps, and real estate investments may see upside.
• Fixed income returns on new issues yield less; existing bond holders could see some capital appreciation if yields fall.
• Dividend-yielding assets or sectors that are sensitive to capital costs may outperform.

Businesses

• Lower interest expense for those with floating rate debt.
• Investment projects may become more feasible.
• Possibly improved cash flow, though demand side is still uncertain.

The Fed (and Policymakers)

• Needs to balance the dual mandate: inflation vs employment.
• Will be watching inflation data closely—especially core inflation and services inflation.
• Forward guidance and expectations management become very important. If markets expect more cuts but inflation doesn’t cooperate, credibility may be at stake.

Forecasts: Where Might We Be Headed

Based on public statements and recent projections:

• The Fed expects two more rate cuts in 2025, with possible additional easing in 2026. Investopedia+2Investopedia+2
• The target range for federal funds might fall below 3.50% by sometime in 2026, if economic conditions evolve as currently projected. Investopedia+1
• Inflation is projected to decelerate, but likely to remain above target for some time. The pace of that deceleration will influence how aggressive future cuts are.
• There is risk of economic slowdown, maybe even mild recession, if tightening effects from earlier rate hikes combine with weaker consumer demand and sluggish investment.

Comparison With Previous Rate Cutting Cycles

To put the current situation in historical context:

• The 2025 cut is modest (25 basis points), and follows a period of many rate hikes during 2022 and 2023. The peak of rate hikes in recent memory saw increases of 75 basis points at several meetings. Bankrate+2Wikipedia+2
• Previous easing cycles include post-pandemic cuts to near zero in early 2020, which were emergency moves in response to the COVID-19 shock. Bankrate+2Wikipedia+2
• The last time rates were held high for as long before easing may compare to periods in the early 2000s or during the build-up to the 2007-08 financial crisis. But current inflation dynamics, global interconnections, and monetary policy tools differ.

Conclusion

The September 2025 interest rate cut by the Fed is more than just a routine policy adjustment—it represents a shift in posture from “fight inflation at all costs” toward a more balanced emphasis on supporting employment and growth amid signs of economic cooling. It doesn’t erase the pressures of high inflation, but it does offer breathing room for borrowers and markets.

How significant the ripple effects will be depends on how inflation behaves, how strongly consumer and business confidence respond, and whether global or domestic shocks interfere. For borrowers and those in interest-sensitive sectors, this is likely welcome news. For savers, or for those holding fixed-rate debts from prior high-rate periods, the relief may be delayed or partial.

I’ll be watching upcoming inflation reports, labor market data, and how financial markets react—as they may tell us whether this cut is the start of a longer easing cycle, or just a small step in a cautious pivot.