After nine months on hold, the Federal Reserve delivered its first interest rate reduction of 2025. Fed Chair Jerome Powell characterized it as a “risk management cut,” aimed at guarding against a cooling economy and labor market.[i]

Recent data shows U.S. economic growth moderating and job gains slowing, with unemployment edging up from historic lows.[ii] By trimming its benchmark rate to a 4.00–4.25% target range, the Fed acknowledged rising risks to employment and signaled a shift toward easier monetary policy. For investors, this pivot carries far-reaching implications.

Why the Fed Cut Rates

The Fed’s statement noted that economic activity has moderated and job gains have slowed. Powell highlighted signs of weakness (rising joblessness for some groups and shorter workweeks) as evidence the labor market needs support.[iii] Inflation remains above the 2% target, but recent price pressures have eased somewhat. The Fed chose to prioritize employment in this decision, effectively weighting the risks of a jobs slowdown more heavily than the risk of inflation running too hot.

By cutting rates now (the first cut since last December), the Fed is taking out insurance against a deeper slowdown. Officials have signaled they may cut further if needed but will proceed “meeting by meeting” based on incoming data. For investors, this likely marks the start of a new easing cycle aimed at extending the expansion.

Portfolio Moves for Investors

As we recently reported, this policy shift is a prompt to review your asset allocation. Consider these steps in a lower-rate environment:

• Reallocate Some Cash: As short-term yields decline, large cash positions become less rewarding. Consider moving some idle cash into short- to intermediate-term bonds or bond funds, which still offer relatively higher yields and potential price gains.[iv]
• Adjust Equity Exposure: Growth-oriented and interest-sensitive stocks may benefit from lower borrowing costs. Stay mindful of valuations and emphasize companies with strong fundamentals, pricing power, and durable growth themes. Position for upside but within the bounds of your long-term risk strategy.
• Incorporate Alternatives and Inflation Hedges: Lower rates create opportunities to diversify through hedge funds, private credit, real estate partnerships, or commodities. Alternatives can provide returns less tied to traditional stock and bond markets and help manage volatility if inflation lingers.
• Review Debt and Liquidity Needs: An easing cycle is a good time to evaluate borrowing costs and financing strategies. Refinancing loans or locking in favorable credit terms may strengthen your balance sheet. Coordinate with your advisor to ensure cash and credit are deployed effectively.

The bottom line: strategies that worked during a rising-rate, high-inflation period may not be ideal going forward. Now is the time to be intentional, nimble, and well-diversified.

Economic Outlook: Easing Ahead, Risks Remain

Fed projections suggest two more quarter-point cuts by year-end 2025, which would bring the federal funds rate into the mid-3% range. Policymakers want to support employment without fueling runaway inflation.

While inflation is expected to gradually decline, core inflation may remain near 3% in 2025, with the Fed not projecting a return to 2% until 2028.[v] This mix of slower growth and persistent inflation has sparked talk of stagflation. For now, the U.S. is far from a 1970s scenario, but the risks are real.

Markets may see volatility as Fed officials debate the pace of cuts and investors interpret each data release. If inflation continues easing, the Fed will have room to cut further. If not, it may pause, potentially surprising markets. Flexibility and vigilance are essential.

The Time to Act is Now: Consult Your Advisor

The Fed’s quarter-point cut marks a turning point for markets and portfolios. Now is the time to talk with your financial advisor about ensuring your allocation, risk exposure, and opportunities align with your long-term objectives.

At Larson Financial Group, we help clients navigate these shifts with clarity and confidence. Whether repositioning toward sectors poised to benefit, bolstering income strategies, or adding diversification, a proactive approach today can set you up for success tomorrow.

Monetary policy changes create both opportunities and risks. With the right strategy, you can thrive through uncertainty. Reach out to your advisor to review your plan. Now is the perfect moment to make sure your wealth is positioned to flourish in the new rate environment.

[i] https://www.nahb.org/blog/2025/09/fed-cuts-rates

[ii] https://www.federalreserve.gov/newsevents/pressreleases/monetary20250917a.htm

[iii] https://www.reuters.com/business/fed-lowers-interest-rates-signals-more-cuts-ahead-miran-dissents-2025-09-17/

[iv] https://www.blackrock.com/us/financial-professionals/insights/fed-rate-cuts-and-potential-portfolio-implications

[v] https://www.ainvest.com/news/assessing-timing-impact-fed-rate-cuts-2025-strategic-positioning-equity-bond-markets-2509/