Last fall, the Federal Reserve lowered interest rates from multi-decade highs. After holding steady through 2025, policymakers appear ready to move again at the September 17 meeting. Here is what to watch and what it means for investors.

Background

The Federal Reserve has a dual mandate: support maximum employment and maintain stable prices. These objectives can sometimes conflict. Actions that stimulate the labor market can be inflationary, while tempering price pressures can cool hiring.

If you watch Federal Reserve Chair Jerome Powell, you will almost certainly hear him refer to the “balance of risks.” The phrase highlights how the Fed approaches policy. When both sides of the mandate are in a good place, the Fed aims to hold rates at a level it views as neither stimulative nor restrictive. If risks start to tilt toward inflation or the labor market, it will adjust interest rates to restore balance.

How We Got Here

Since 2022, inflation risk has dominated, and the Fed has kept policy restrictive. As inflation eased last year, the Fed began to cut, lowering its benchmark rate by a cumulative 1.0% across three meetings starting in September 2024. Entering 2025, it paused as inflation progress stalled and the labor market stayed resilient. As the year progressed, added uncertainty from tariffs, immigration and deportations, and government job cuts kept the Fed in wait-and-see mode.

Recent data show the labor market is slowing. This appears to have tipped the balance of risks toward emphasizing employment when setting policy. Powell used his August remarks at the Jackson Hole Economic Symposium to signal that a policy recalibration may be on the way.

What to Expect

With jobs softening even further since Jackson Hole and only two mid-month inflation reports left, the base case for September 17 is a rate cut, barring a major upside inflation surprise.

The more important question may actually be the pace of cuts moving forward. To gauge the path, watch:

1. The Summary of Economic Projections, especially the “dot plot” of policymakers’ rate projections, and
2. Powell’s post-meeting remarks on what would make them pause or accelerate the easing path.
 
What This Means for Investors

Falling policy rates create reinvestment risk for investors sitting in cash, as cash yields tend to quickly follow the Fed lower. Bonds are different, as they lock rates in for a longer period. If yields decline, prices can rise, which adds to total return. That is why high-quality bonds historically diversify stock risk better than cash over full market cycles.

Trying to “time the jump” from cash to bonds around an announcement is hard. Markets are forward-looking, and prices often move on expectations before the actual event. We have already seen large yield moves ahead of the meeting, with 2-Year Treasury yields falling from nearly 4.0% at the end of July to  at the time of this writing⁽¹⁾. Year-to-date, bonds have handily outperformed cash (6.4% vs 3.0%)⁽²⁾, and it’s about to get even harder for cash to keep up.

Rather than trying to time the market, a better approach is to maintain exposure to bonds over time. It is the most reliable way to ensure you own them when you need them.

Bottom Line

The Fed appears ready to lean a bit more toward the employment side of the mandate as the data continue to soften. For portfolios, the practical takeaway is simple. As cash yields fade, the steady role of high-quality bonds becomes more valuable.

(1) Mid-day 9/9/2025
(2) Based on Total Returns from 1/1/2025 – 9/9/2025. Bond market is represented by the Bloomberg US Aggregate Bond Index, while cash is based on the Bloomberg US Treasury Bill 1-3 month Index.

Source: MarketWatch

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