Federal Reserve Cuts Interest Rates for First Time in 2025, Eyes Two More This Year
Key Points – Federal Reserve Cuts Interest Rates for First Time in 2025, Eyes Two More This Year
- A Rate-Cutting Cycle or Cut-and-Pause Process?
- FOMC Chairman Jerome Powell on the Fed’s Decision and Outlook
- Modern Wealth Director of Investments Stephen Tuckwood Shares His Thoughts in an Interview with Schwab Network
- 4-Minute Read
What to Make of the Federal Reserve’s Decision of a 25-Basis Point Cut
For the first time in 2025, the Federal Open Market Committee decided to cut the Fed funds rate by 25 basis points on Wednesday, September 17.1 The cut lowered the Fed funds rate target range to 4.0%-4.25%. Eleven of the 12 Fed governors voted in favor of the 25-point basis point reduction. Stephen Miran voted for an even larger cut of 50 basis points. FOMC Chairman Jerome Powell had this to say at the beginning of his opening statement during his press conference.2
“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. While the unemployment rate remains low, it has edged up, job gains have slowed, and downside risks to employment have risen. At the same time, inflation has risen recently and remains somewhat elevated.” – FOMC Chairman Jerome Powell
Will This Be the Beginning of a Rate-Cutting Cycle?
One day before the Fed’s decision, Modern Wealth Management’s Director of Investments Stephen Tuckwood, CFA®, did an interview with Schwab Network Host Sam Vadas to discuss the Fed’s decision.3 Tuck anticipated that there would be a 25-basis point reduction and is curious about the Fed’s approach for the remainder of the year.
“It’s really about the future cuts at the October and December meetings and signs that this is going to be more of a rate-cutting cycle rather than a cut-and-pause type of process for the Fed. It feels like the market in general and risky assets across the table are really pricing in a rate-cutting cycle to the extent where the Fed Chairman indicating some type of pause in October or December would be a negative signal.” – Stephen Tuckwood
How Far Could the Fed Go with Cutting Rates?
The FOMC’s dot plot signaled that the Fed may cut rates again in October and December.4 However, there’s some uncertainty about how many more cuts there will be and how big those cuts will be.
The dot plot is conducted anonymously and gauges the projections of 20 FOMC committee members. Wednesday’s dot plot showed that 10 members were in favor of two more cuts in 2025. There were nine members who believed there should be just one more, while the lone other member was not in favor of additional rate cuts before year’s end. Furthermore, one voter’s dot indicated that the Fed fund’s rate should be reduced by 125 basis points between the next two FOMC meetings rather than two more 25-point cuts.
What Can We Learn from the U.S. Treasury Curve?
Along with reviewing the FOMC’s dot plot, Tuck pointed out in his Schwab Network interview that the U.S. Treasury curve is a predictive market as well. He shared with Sam that people oftentimes think of the equity market as being the predictive market that forecasts future growth, but the U.S. Treasury curve reacts in a similar way.
“A lot of things do get priced in. We can see that with the 2-year (treasury) being a full percentage point lower than the Fed funds rate.” – Stephen Tuckwood
Making a Case for Municipal Bonds
Speaking of fixed income, Tuck also took some time to talk with Sam about why municipal bonds may be an attractive option for an individual’s portfolio. When looking across the various asset classes that investors can allocate to, many of them are at or close to all-time highs — for example: U.S. stocks, international stocks, gold, and bitcoin. Meanwhile, investment-grade and high-yield bonds on the fixed income side are trading at tight spreads.
Tuck shares that municipal bonds have been the laggard. As of market close on September 18, the aggregate bond index on the taxable side was up 6% year to date, while the equivalent index on the tax-exempt side (the municipal bond index) was only up 2.9% year to date.5, 6
“As we look now at yields and the municipal bond curve, there’s potential opportunity there to get some higher rates — particularly if you’re in a high-tax state and you’re a high earner. That tax equivalent yield without too much credit risk can get you in the 6% range. Those are very attractive yields for reasonable levels of credit quality.” – Stephen Tuckwood
Some investors might view municipal bonds as a boring sector of the market, but as Sam said to Tuck, “sometimes boring works.” With everything appearing to be fully priced in in other market sectors, Tuck wants to make sure that investors are aware that there is opportunity in municipal bonds.
Will the Outperformance of International Stocks Compared to U.S. Stocks Continue?
Tuck wrapped up his conversation with Sam by discussing how international stocks have outperformed U.S. stocks so far this year. He acknowledged that many U.S. investors tend to have a home bias and are overweight toward U.S. stocks compared to international stocks or the broad equity market index. U.S. stocks have outperformed international stocks in recent years, but that hasn’t been the case in 2025.7
That begs the question: will this trend continue? Tuck doesn’t believe so, but that it’s important to be globally diversified. He points out that international stocks were the beneficiaries of a declining dollar and some physical stimulus from the likes of Germany and other countries as well.
“I think a lot of that has been priced in at this point, so we’re comfortable maintaining our slight U.S. overweight versus international. We’re not ready to throw the towel in on the story of U.S. exceptionalism that some folks did earlier this year. We think it will come back around, as the U.S. just showcases its job’s market, resilience, and innovation.” – Stephen Tuckwood
Make Sure to Tune in for Our Q3 2025 Quarterly Market Update
As September winds down, that means we’re inching closer to Tuck and Neal Falkenberry, CFA® giving their Q3 2025 Quarterly Market Update on our Modern Wealth Management YouTube channel. If you have any questions about the future of interest rates, market performance, and how it may impact you going forward, start a conversation with our team below. We look forward to connecting with you and helping you prepare a plan that gives you confidence in your financial situation so that you can enjoy the money that you’ve worked so hard for.
Resources Mentioned in This Article
[1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20250917a.htm
[2] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20250917.pdf
[3] https://schwabnetwork.com/video/tuckwood-on-why-muni-bonds-belong-in-your-portfolio
[4] https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20250917.pdf
[5] https://www.spglobal.com/spdji/en/indices/fixed-income/sp-us-aggregate-bond-index/#overview
[6] https://www.spglobal.com/spdji/en/indices/fixed-income/sp-municipal-bond-index/#overview
[7] https://www.visualcapitalist.com/u-s-vs-international-stock-market-performance/
Investment advisory services offered through Modern Wealth Management, Inc., a Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management a Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.