Federal Reserve finally lowers interest rates, but is it enough?

Created by Congress in 1913, the U.S. Federal Reserve (the Fed) is America's central bank. It is the most powerful and influential central bank in the entire world. As part of its mandate, the Fed guides our nation's monetary policy. By manipulating the cost and availability of credit, the Fed seeks to influence spending, employment, inflation and investment to promote the health of our economy.

One of its main tools in this endeavor is to adjust the benchmark fed funds rate, which serves as a basis for many types of consumer debt. As the fed funds rate is either raised or lowered, so typically do interest rates on credit cards, bank loans, auto loans and even home mortgages.

Between March 2022 and July 2023, the Fed raised the fed funds rate from near-0% to a level between 5.25%-5.5%, a 17-year high. The Fed's goal was to help reduce inflation, which had soared to a 41-year high of 9% in July 2022. By raising interest rates, the Fed hoped to reduce spending by making it more expensive to buy goods and services on credit. As spending falls, inflationary pressures should likely ease.

But as inflation started to decline, the Fed's new task was to gradually start lowering the fed funds rate. In 2024, the Fed enacted three cuts to the fed funds rate which brought it down 100 basis points to a level between 4.25%-4.5%. Until Wednesday, that's where it had stayed for all of 2025.

On Wednesday, the Fed enacted its first rate cut of the year by lowering the fed funds rate by 25 basis points to its new level between 4.00%-4.25%. The decision was widely expected by Wall Street, many of whom have been arguing that interest rates are way too high. The Fed also announced its projections to lower the fed funds rate by an additional 25 basis points at each of its upcoming meetings in October and December.

Wednesday's announcement added fuel to the ongoing stock market rally. It had been nine long months since the Fed had last lowered interest rates in December 2024. On Thursday, the major stock market indexes surged to new record highs. So far this year, the S&P 500 has gained 12.8%, the tech-heavy NASDAQ has risen 16.4% while the Dow Jones Industrial Average has increased 8.5%.

With two more rate cuts penciled in by the end of this year, Wall Street now turns its focus to 2026. But here the interest rate outlook becomes much cloudier. Currently, the Fed projects just one more 25 basis point cut to the fed funds rate for all of next year. That would further lower the fed funds rate to a level between 3.25%-3.5%. But for many on Wall Street, that's still too high.

According to the Fed's preferred measure of inflation, the national rate of inflation currently stands at 2.9%. By the end of 2026, the Fed expects inflation to fall to 2.6%. With inflation expected to fall closer to its target rate of just 2%, many argue the Fed could easily allow additional rate cuts over the course of next year.

High interest rates act as a tremendous weight on consumers, business and the broader economy. By keeping interest rates too high, the Fed risks stalling economic growth as the high cost of borrowing money acts as a deterrent on spending. Any potential slowdown in the economy would also negatively impact the labor market.

In recent years, the Fed has had a fairly dismal record in its economic projections. While inflation rose for 16 consecutive months to reach a 41-year high of 9% in 2022, the Fed was trying to convince the world that inflation would only be short-term and mild. In fact, their favorite word at the time to describe inflation was "transitory." This time, let's hope the Fed finally gets it right.