As widely expected, the Federal Reserve lowered rates by 25 basis points yesterday, Sept. 17. It was the first rate cut by the U.S. central bank in 2025, and the so-called dot plot calls for another 50-basis-point rate cut this year.
Notably, the rate cut came at a time when inflation is still running above the Fed’s 2% target. The Fed maintained its 2025 core Personal Consumption Expenditures (PCE) inflation projection at 3.1% while raising the 2026 forecast from 2.4% to 2.6%. The Fed also raised its 2027 inflation projection and does not expect its preferred PCE metric to fall to 2% that year either.
On the positive side, it also raised its growth forecast and now expects the U.S. economy to expand by 1.6% in 2025 and 1.8% in 2026, both of which are 20 basis points higher than the previous forecast.
That said, the Fed is now increasingly worried about the economy and labor market conditions, and its statement read, “The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.” Powell termed the rate cut a “risk-management cut” while adding, “What’s different now is that you see a very different picture of the risks to the labor market.”
Notably, the Fed is currently grappling with a central bank’s worst dilemma, having to address a weakening labor market at a time when inflation remains quite sticky. Both these are conflicting demands, as while the rate cut should help support the economy, it might spur inflation.
Rate cuts are a positive for most industries. For instance, interest-sensitive sectors like automotive and housing stand to gain, as lower interest rates can help buoy demand. However, the housing market is currently challenged, and the Fed rate cut won’t move the needle much as it was already priced in. As for the auto sector, there is still a lot of uncertainty over tariffs, which will keep a lid on any upside in names like Ford (F) and General Motors (GM).
Rate cuts are also positive for consumer discretionary companies, retailers, and e-commerce companies like Amazon (AMZN), as they can spur buying. Companies with a significant debt burden also stand to benefit from lower rates, as their interest expenses decrease, thereby boosting profitability. Lower rates are also positive for buy-now-pay-later (BNPL) companies like Affirm (AFRM), as it lowers their borrowing costs. Growth stocks whose future cash flows become more valuable in today’s dollar terms with rate cuts are also a play on Fed rate cuts.
