Chart in Focus: Fed rate cuts resume — What’s next for investors?

After a strategic pause through much of 2025, the US Federal Reserve (Fed) has resumed rate cuts, lowering its benchmark interest rate by 25 basis points on September 17 — the first reduction since December 2024. While tariffs have complicated the inflation and growth outlook, the Fed has signaled that preserving growth remains its top priority. Although most developed market central banks are also in easing mode, albeit at varying speeds, the Fed’s return to rate cuts injects fresh momentum into the global rate-cutting cycle.

Historically, equities tend to rally in the months following the initial Fed cut during periods of economic stability, and they did so after last year’s rate cuts. However, tariffs disrupted the rate-cutting cycle, triggering heightened volatility across risk assets. Preserving growth has become the near-term priority for central banks, even as inflation risks linger. For investors, the key question is how much the macroeconomic backdrop has shifted since rate cuts resumed, as the context surrounding monetary easing remains critical for risk assets.

In hindsight, central banks were relatively aligned in their objectives for some time, hiking rates post-COVID to curb elevated inflationary pressures and then easing as price pressures subsided. With an uncertain outlook for growth and inflation and as central banks face challenges in maintaining policy equilibrium, global policy could increasingly diverge, potentially leading to disparate outcomes for risk assets across different markets.

Investment implications

• The Fed’s 2024 rate cuts sought to normalize policy, but fresh cuts after a long pause don’t necessarily signal a return to business as usual. Equities tend to benefit from lower rates via discounted cash flows, but again, it’s the context that matters: If growth and earnings hold up, rate cuts should support equities; if not, such cuts may be interpreted as a response to deteriorating economic conditions, potentially signaling deeper concerns about the health of the economy. Although tariffs have likely stymied some growth, overall economic and corporate data continues to look resilient, and we believe that as rates fall, there could be room for equities to extend their gains.
• Central bank policy paths are diverging, potentially leading to more differentiated regional outcomes for risk assets. The European Central Bank and Bank of England continued to cut rates during the Fed’s pause, but unprecedented fiscal stimulus and potential inflation could mean gentler cutting paths moving forward. Japan’s rate hikes represent a regime shift that has pressured equities but also reflect confidence in domestic demand and the persistence of stable inflation.
• Fixed income still offers attractive entry-point yields. Even as Fed cuts continue, rates are likely to remain elevated relative to historical levels, offering opportunities for both income and potential diversification in the event that a weaker economic outlook impacts equities.

What we’re watching

• Changes in the growth and inflation equilibrium across regions: In the US, inflation has remained steady and has enabled the Fed to focus on growth. Tariffs and fiscal boosts like US infrastructure spending initiatives and EU stimulus may stoke reinflation and create challenges in deciding whether to prioritize growth or inflation control if the economy weakens.
• Final tariff policy: While trade uncertainty has eased, tariff rates for major US trade partners — Mexico, China, and Canada — are still unresolved. And a federal court’s ruling that US President Donald Trump’s use of emergency declarations to impose tariffs was illegal adds legal complexity and could limit future executive action on trade.
• Corporate earnings: Macro indicators like purchasing managers’ indices and consumer sentiment have softened but corporate earnings have yet to show a material deterioration. Although tariffs are still likely to weigh on earnings, rate cuts could provide some relief by easing financial conditions.