Key takeaways

• The Federal Reserve lowered the federal funds rate by 25 basis points (bps) to 4.00% - 4.25% in September.

• This cut is delivered in a context of slower job gains, a slightly higher unemployment rate, and inflation that remains above target. 

• Markets largely took the decision in stride: the Dow finished higher, the S&P 500 was flat, and small- and mid-caps outperformed with the Russell 2000 rallying. 

• For Australian investors, the Fed policy shifts can influence the AUD/USD exchange rate, global bond yields, and key ASX sectors sensitive to interest rates – including property, infrastructure, and banks.

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The US Federal Reserve (Fed) delivered its first rate cut of 2025, cutting interest rates by 25 bps. Chair Jerome Powell described the move as a “risk-management cut”, citing slower job growth, a modest rise in unemployment, and inflation that remains above target but has eased from earlier highs. The decision highlights the challenge of balancing price stability with signs of cooling momentum in the US economy.

For investors, understanding what drove the decision provides useful context for assessing how it may affect global markets – and how the shift may flow through to the Australian market.

Why has the Fed cut now?

The September decision reflects several overlapping factors, each highlighting the trade-offs the Fed faces:

• Labour market cooling: Job creation has slowed, and the unemployment rate has edged higher. While still low by historical standards, the Fed acknowledged these shifts as a sign that demand for workers is easing. 

• Moderating inflation: Inflation remains above the Fed’s 2% target. Softer goods prices and easing supply chain pressures have allowed policymakers more space to adjust policy.

• Higher bond yields: U.S. Treasury yields moved higher in response to the cut, which suggests that markets are pricing in continued tightening pressures. This dynamic helps explain why the Fed might offset some of that pressure via policy easing.

• Global market considerations: The Fed’s move also comes against a backdrop of a softer US dollar, which reduces external pressures and allows more scope to adjust policy without destabilising capital flows. For Australian investors, these dynamics can influence the AUD/USD exchange rate and broader sentiment across global equities and bonds.

How united is the Fed?

The September meeting highlighted that not all policymakers are aligned on the pace of easing. Newly appointed Governor Stephen Miran pushed for a larger 50 bps cut, arguing that labour market softness warranted stronger support. Others opted for caution, emphasising that inflation remains above target.

The Fed’s Summary of Economic Projections also revealed a wide dispersion of views on how many further cuts may be appropriate in 2025 and beyond. This divergence underlines that policy will remain highly data-dependent, with outcomes shaped by incoming labour and inflation readings.

For investors, the key takeaway is that while the Fed has started to ease, the outlook remains uncertain – and market expectations could change quickly as incoming data and internal dynamics shape the path forward.

How did markets react?

The Fed’s rate cut was widely anticipated, so overall market moves were contained. The Dow rose modestly while the S&P 500 finished flat, but the standout was the Russell 2000, which gained as investors looked to smaller companies that could benefit more directly from lower financing costs. 

In bonds, long-term US Treasury yields moved higher, steepening the curve. 

Meanwhile, the US dollar eased and gold prices strengthened as investors adjusted to the shift in policy outlook.

Where could opportunities arise after the Fed’s cut?

ASX small- and mid-cap equities
Smaller companies are more sensitive to financing costs. In the US, the Russell 2000 rallied after the Fed’s move, highlighting this dynamic. Select ASX small- and mid-cap names could also benefit, though balance sheet strength remains key.

International and emerging markets
A softer US dollar can ease debt burdens and encourage investment flows into developing economies. The BIS notes that dollar moves are a major driver of capital flows. For Australian investors, this reinforces the value of diversification, as allocating part of a portfolio internationally can provide exposure to markets that respond differently to US policy shifts.

Bonds and income assets
Lower policy rates generally support bond prices. For Australian investors, global investment-grade bonds may offer a balance of yield and rate sensitivity, though currency hedging remains an important consideration.

Yield-sensitive ASX sectors
Interest rate changes directly affect funding costs and asset values in rate-sensitive sectors such as property and infrastructure. Their future performance will depend not only on domestic conditions and the RBA’s stance, but also on global policy shifts.

What this means for Australian investors

The Fed’s first cut of 2025 marks the start of a possible easing phase in US monetary policy, but it does not remove uncertainty. Inflation remains above target, US policymakers are divided on the pace of easing, and market reactions have been mixed. 

For investors, the decision is a reminder that moves by the Federal Reserve can ripple into local markets through the dollar, bond yields, and sector performance on the ASX. 

While opportunities may emerge in small- and mid-cap equities, global bonds, and yield-sensitive sectors, outcomes will depend on global conditions and the RBA’s path. In this context, considering diversification and paying attention to broader market and sector trends remains important.