After months of discussion over interest rates throughout 2025, the “great rate debate” reached a pivot point this week as the Federal Reserve cut the Fed Funds rate by 0.25% (the first such cut in 2025). This takes the Fed’s target rate range to 4% – 4.25%.

As a reminder, the Federal Reserve has been given a dual mandate by Congress – stable prices (ie: control inflation) and full employment (ie: keep labor market functioning). During 2025, the Fed’s focus has remained on inflation as concerns over further price hikes from tariffs took center stage. During this week’s meeting, it was clear the Fed is increasingly concerned with the labor market.

Fed Chair Jerome Powell emphasized that the change in the labor market since the last meeting was the catalyst for the Fed to cut rates despite inflation remaining elevated. The cut was described as “risk management” which stands in stark contrast to the “recalibration of policy” message provided with the last rate cut in December 2024.

The Fed also updated its Summary of Economic Projections (“SEP”), where it shares what Fed members anticipate for key metrics moving forward. The median estimate in the SEP suggests only a modest rise in the unemployment rate from its current level of 4.3% and then a decline in 2026 and beyond. The inflation projections demonstrate that the Fed won’t hit its 2% target until 2028. And lastly, expectations for economic growth, measured by GDP, were revised slightly higher. These revisions in the SEP appear to indicate that the Fed feels rate cuts will spur job growth and economic growth, at the cost of potentially delaying the moderation of inflation.

The dot plot was also updated (which shows the path of rates that each Fed member anticipates moving forward). The dot plot was rather scattered this meeting – seven of the nineteen participants penciled in no further cuts this year, two saw one more cut, nine projected two more cuts, and one even anticipated five additional cuts. This dispersion underscores just how contentious the next few meetings could be.

Despite the rate cut, it is rather hard for markets and investors to draw a clear signal of the future path for rates from the meeting, which may explain the market reaction (equities were flat and bond yields fell before rising slightly). The data in the SEP was mixed and the views from the members of the Fed varied widely. One message was clear however – the Fed is concerned about labor market weakness.

What does this mean for your investments? We wrote this week about things to consider regarding cash as rates begin to fall. For fixed income holdings, depending on your specific situation, it likely makes sense to maintain average duration (5-10 year part of curve) as very short-term investments (that are not earmarked for a known cash need) have a high degree of reinvestment risk and very long-term bonds have a untenable degree of interest rate volatility. For equity portfolios, it’s possible that markets are pricing in more cuts than will materialize given the Fed’s remaining concerns regarding growth and inflation. If reality doesn’t live up to those expectations, equities may encounter heightened volatility. As is always the case, it remains advisable to monitor concentrations, adjust target allocations, and avoid becoming complacent.

Onward we go,