The Federal Reserve lowered interest rates by 25 basis points at the September meeting, which marked the first rate cut of 2025. If we look back earlier in the year, Federal Reserve Chair Jerome Powell elected to take a “wait and see” approach, keeping the policy rate steady for the first eight months of the year. Based on the rate cut and post-meeting press conference, Powell has now seen enough, citing signals of a slowing labor market as the primary reason for taking action. That being said, the Fed’s dual-mandate of promoting both maximum employment and price stability continues to create friction as a softening labor market coincides with elevated inflation numbers and pricing uncertainty caused by tariffs. Given this dynamic, Powell made it clear that monetary policy is not on a “preset course.”
Looking ahead, we expect further reduction may occur in the federal funds rate this year, which is directionally consistent with the market’s expectation of two additional rate cuts in 2025. This means the days of money market funds (“cash”) yielding over 4% could be coming to an end, given that the Fed has projected a median federal funds rate of 3.6% by year-end.
The yield curve has steepened over the last twelve months, as short-term rates have fallen while long-term rates have risen. We expect this trend to continue in anticipation of 1) the Fed continuing to reduce short-term rates, and 2) long-term rates being propped up by persistent concerns surrounding inflation and the rising fiscal deficit. As a result, we continue to favor bonds that are maturing within a one-to-five year time horizon, which we believe offer attractive levels of income with the potential for price appreciation, as the Fed lowers short-term rates.
