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The Federal Reserve did exactly what everyone expected yesterday. They cut interest rates by 0.25%. And yet, markets ended the day looking confused and slightly disappointed.
Let me explain what happened and why it matters for your money.
The Numbers Game
First, let’s get the basics out of the way. The Fed lowered rates from 4.25%-4.5% to 4%-4.25%. World stocks hit record highs during trading with MSCI’s global index touching 979.61, an all-time peak. But by closing time the party was over.
The S&P 500 fell 0.10% to 6,600.35. The Nasdaq dropped 0.32% to 22,261.33. Only the Dow managed to stay positive, rising 0.57% to 46,018.32. Even European stocks closed slightly lower.
So what gives? Everyone got what they wanted, but nobody seemed happy about it.
The Fed’s Honest Confession
Here’s where things get interesting. The Fed basically admitted they’re stuck between a rock and a hard place. Their official statement was surprisingly blunt: “Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.”
Put simply: Both unemployment and inflation are moving in the wrong direction. That’s a nightmare scenario for a central bank with a dual mandate to keep both under control.
But Fed Chair Jerome Powell made it clear they’re more worried about jobs right now. Why? Because the job market is sending some scary signals.
Remember that August jobs report that showed only 22,000 new jobs? It gets worse. The government just revised down their employment estimates by 911,000 jobs for the year. That’s nearly a million jobs that they thought existed but actually don’t.
Powell’s key insight: This isn’t just about companies struggling to find workers anymore. Demand itself is weakening. People aren’t buying as much, so companies aren’t hiring as much.
Meet Stephen Miran: The Odd One Out
Here’s where the story gets juicy. Every Fed decision needs a dissenter, and this time it was Stephen Miran who literally got sworn into the Fed governor role on Tuesday. That’s two days before the meeting.
But Miran isn’t just any new guy. He’s on leave from his job running the White House’s economic advisory council. So he’s technically still a White House employee while voting on Fed policy. Talk about a conflict of interest.
While 11 other Fed officials voted for a 0.25% cut, Miran wanted a bigger 0.50% cut. His vote sticks out on the Fed’s famous “dot plot” like a sore thumb.
This raises uncomfortable questions about Fed independence. When Powell was asked about this, his answer was essentially: “One vote can’t control a 12-person committee.” But that’s not really reassuring when you consider that Trump tried to fire another Fed governor (Lisa Cook) just last month for alleged mortgage fraud, charges she denies and is fighting in court.
The Dot Plot Chaos
If you want to understand why markets were underwhelmed, look at the dot plot. This is where each Fed official anonymously reveals what they think interest rates should be.
The result? Complete chaos.
Seven out of 19 Fed officials think there should be NO more rate cuts this year. Two more think there should only be one more cut. The median suggests two more cuts, but that’s only because Miran (probably) thinks rates should fall by a massive 1.25 percentage points this year.
It’s like asking your family where to go for dinner and getting 19 completely different answers. How is the market supposed to plan for that?
The Housing Reality Check
While everyone was focused on rate cuts, the housing market delivered some sobering news. After a brief uptick last month, housing starts crashed back down to their depressing trend.
Housing permits dropped 11% compared to last year. And here’s the kicker: mortgage rates are still around 6.5% — a multi-decade high. The Fed can cut short-term rates all they want, but they can’t control long-term mortgage rates, which is what actually matters for home buyers.
The result? First-time buyers now make up just 25% of the housing market — the lowest on record. The median age of home buyers has risen to 56.
As one analyst put it: “Homes are now just a traded asset between older, richer households. It’s basically just a shuffling of the deck.”
The Trump Factor
Let’s address the elephant in the room. Trump has been pressuring the Fed to cut rates more aggressively to boost the economy. He even tried to fire Lisa Cook last month (she’s fighting it in court and won the right to stay for now).
The presence of Miran — a Trump ally who’s technically still on White House payroll — at the Fed table is unprecedented. When Powell was asked about Fed independence, his answers felt inadequate.
Interestingly, two other Trump appointees who previously wanted bigger cuts — Michelle Bowman and Christopher Waller — this time voted with Powell for the smaller 0.25% cut. Were they sending a message about independence? We’ll never know for sure, but Waller’s vote might have just cost him a spot on Trump’s shortlist to replace Powell in May.
The Tariff Wild Card
Powell’s press conference revealed another key assumption: that inflation from Trump’s tariffs will be a “one-time price increase” rather than an ongoing problem.
This is a big bet. Inflation has already jumped from 2.7% to 2.9%, and the Fed’s preferred measure is running at 2.6% — above their 2% target. If tariffs prove more disruptive than expected, the Fed could find itself in an impossible position.
What This Means for Different Investments
Stocks: Historically, rate cuts are good for stocks. Since 1982, the S&P 500 has gained an average of 11% within 12 months following the start of rate cut cycles. But there’s a catch. This only works if the economy doesn’t collapse. During 2001 and 2007, rate cuts coincided with recessions, and stocks fell hard.
Sectors: Lower rates could finally give neglected parts of the market their moment. Small-cap stocks, financials, materials, and industrials could benefit as money flows away from big tech. The small-cap Russell 2000 has already started outperforming this quarter.
Bonds: Treasury yields initially fell after the announcement, then rose as Powell spoke. The 10-year yield ended at 4.07%, suggesting bond investors aren’t fully convinced about the Fed’s dovish turn.
Dollar: Strengthened against major currencies, gaining 0.27% against the yen. Sometimes being the least bad option is enough.
Gold: Hit a fresh record high above $3,700 before pulling back. Gold loves uncertainty, and there’s plenty of that right now.
Oil: Fell despite rate cuts, with Brent crude down 0.76% to $68.22. Demand concerns trumped monetary stimulus.
The Bottom Line
The Fed delivered exactly what markets expected, but expectations and reality don’t always align neatly.
The real story isn’t that the Fed cut rates — it’s that they’re deeply divided about what comes next. With economic data pointing in different directions, political pressure mounting, and the committee split on future moves, we’re in for a bumpy ride.
Markets are realizing that getting what you want doesn’t guarantee you’ll be happy about it. The Fed cut rates to support jobs, but if the economy is already weakening faster than they think, these cuts might be too little, too late.
And if inflation from tariffs proves stickier than Powell expects? Then these rate cuts could look like a mistake in hindsight.
The key question isn’t whether the Fed will cut rates again — it’s whether they’ll be doing it to support growth or because something is breaking. Right now, even they don’t seem entirely sure which scenario we’re heading toward.
That uncertainty is why markets ended flat despite getting exactly what they asked for. Sometimes, getting your wish is the beginning of your problems, not the end of them.
Image Source – Gemini
