BREAKING: Fed cuts rates again, stocks jump as debate over easing path heats up
The Federal Reserve just cut interest rates by a quarter point, taking the federal funds target to 3.50% to 3.75%. It is the third straight cut, and the lowest policy rate in almost three years. I confirmed the move along with a plan to buy about 40 billion dollars of short term Treasury bills to steady year end liquidity. Markets cheered. The deeper story is more complex.
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What the Fed did, and why it matters
The rate cut was expected by many, but the tone was not. Policymakers paired easier policy with bill purchases to keep money markets smooth into December. Officials framed the bill buying as a technical step, not a restart of broad bond buying. The central bank also ended balance sheet runoff on December 1, which had slowly shrunk its holdings.
This was not a unanimous call. Three officials dissented, which is rare. They flagged risks to financial stability if easing runs too far while inflation still sits above 2 percent. Others pointed to softer hiring, slower wage gains, and cooling demand. The Fed is balancing both, growth support and inflation control, in real time.
The policy rate now sits at 3.50% to 3.75%, the third consecutive 25 basis point cut.
Officials also face an information gap. A 43 day federal shutdown delayed key reports, which makes judging momentum harder. Chair Jerome Powell signaled a data driven stance. He offered no promise of further cuts.
Markets move fast, then look ahead
Stocks ripped higher into the close. The S&P 500 gained about 0.7 percent. The Dow climbed nearly 500 points. Rate sensitive groups led, including homebuilders and small caps. Bond prices rose, most in shorter maturities, as traders priced a gentler path for policy.
The dollar eased on the headlines, which gave commodities a lift. Credit markets opened wider for new deals. Financials traded mixed, since lower rates can squeeze net interest margins, yet easier policy can cut credit losses.
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The curve and liquidity
The yield curve flattened, then partially steepened as investors weighed 2026. The 40 billion dollar bill purchases should keep repo markets calm into year end. I will watch reserve balances and the take up at the Fed’s standing facilities this week.
Do not confuse bill buying with quantitative easing. This is reserve management, not a broad stimulus tool.
Tactical cut, or the start of a cycle
Here is the core question. Is this a one quarter insurance push, or the opening of a long easing run
There are two strong forces at work. The labor market is losing some steam, which supports cuts. Inflation is still sticky in parts of services, which argues for patience. Three dissents show that the room is split. Political pressure is rising too, which the Fed will resist, but it raises the temperature.
The balance sheet pivot adds another layer. Ending runoff and buying bills keep plumbing healthy. It does not signal fear. It tells me the Fed wants control of overnight rates while it trims the policy rate.
What it means for businesses and investors
Lower policy rates ease borrowing costs. They help housing, autos, and small firms first. They can also reignite risk taking, which is a feature and a bug.
- Equities, leadership may broaden beyond mega cap tech if rates grind lower.
- Bonds, extend some duration in high quality, but scale in. Front end yields can still move.
- Financials, prefer fee heavy firms over balance sheet spread lenders.
- Dollar, a softer path supports gold, copper, and select emerging markets.
Keep dry powder for volatility. Use pullbacks to add quality duration and up the credit stack.
For portfolios, I favor barbell risk. Own resilient growth and cyclicals tied to housing and services. Pair that with investment grade bonds at 3 to 7 year maturities. Avoid the weakest high yield issues until default trends stabilize. For cash, tier maturities. Bill yields can slip as the Fed trims, so lock some now and leave room for flexibility.
For companies, refinance windows just opened wider. Issuers with 2026 and 2027 maturities should engage banks now. Watch covenants and call protection, spreads can reprice fast if the Fed pauses.
Risks to watch
Financial stability is the sleeper risk. Easy money can inflate pockets of leverage. Private credit, leveraged loans, and some commercial real estate deserve close tracking. If inflation stalls above target, the Fed may have to slow or stop cuts, which could whipsaw markets.
I am also watching revisions to jobs and inflation data as agencies catch up after the shutdown. Fresh numbers can shift the rate path fast.
Frequently Asked Questions
Q: Did the Fed start quantitative easing again
A: No. The bill purchases are for liquidity management. The Fed is not buying longer term bonds.
Q: Will the Fed cut again at the next meeting
A: There is no promise. Future moves depend on inflation, jobs, and financial conditions.
Q: Why did stocks rally on the cut
A: Lower rates boost earnings and valuations. Liquidity support reduced year end stress fears.
Q: Is inflation no longer a problem
A: Inflation has eased from its peak, but it is still above 2 percent in key areas.
Q: What should bond investors do now
A: Consider adding quality duration in steps. Keep some cash flexible for swings.
The bottom line
The Fed delivered a clean quarter point cut, plus a precise liquidity move. Markets loved it, for now. The split vote, sticky inflation, and a softening job market keep the next steps uncertain. This looks tactical today. It can become a cycle if growth fades more. I will be watching the data, the tone from officials, and the plumbing. Stay nimble. 📈
