The Fed Has Changed Course – Does It Matter?

October 12, 2025

By Robert Wiedemer

The Fed announced at its September meeting that it was reducing the overnight interest rate by 0.25%.  More importantly, it expects to reduce the overnight rate by 0.25% two more times this year.

This is a big course correction.  The Fed raised rates in 2022 and has held them firm since then.  The Fed is making the change to deal with a big slowdown in job growth and economic growth this year.  But will it actually make any difference for the economy?   I doubt it. 

As I have said many times before, the overnight rate is not that important to the economy.  It is a rate that is important mostly to banks.  The rate that impacts the economy is the long-term rate or the 10 year Treasury bond rate.  That rate actually went up from 4% to 4.15% after the Fed lowered the overnight rate.

No Immediate Help for the Economy, but Good for the Market

So, no immediate help to the economy.  However, like many things these days, the move may not help the economy, but it will likely help the stock market.  The market no longer has to worry about whether the Fed will lower rates.  It has lowered rates and will continue to do so for a while.  The excitement of two more rates cuts will likely help carry the market through a good fourth quarter.

Still Working Behind the Scenes to Keep Long Term Rates Low

Even though the recent cut in the overnight rate won’t make much difference to the economy, the Fed has been working behind the scenes to lower the long term rate.  As I mentioned in my August 2 update, the Fed is reducing its sales of bonds, which helps keep long term rates down.  The trend that started in July has continued. In fact, between August 27 and Sept 24 the Fed actually bought $5 billion in bonds with printed money. 

It has sold some bonds since then, but that’s a whole lot different from the $60 billion of bonds the Fed was selling at the beginning of the year.  This is the main reason we have seen the 10 year rate drop from 4.5% to 4.15% in the last couple months. 

In addition, the Treasury Department is helping keep rates low by funding its borrowing needs with money market funds instead of long term bonds which creates less upward pressure on long term interest rates.

Whack A Mole – Either Way, the Fed Will Be Printing Soon

The Treasury borrowing from money markets keeps long term rates down, but it can potentially spike up the overnight rate (for example, a quick jump from 4% to 10%).  That’s because its borrowing is helping reduce bank reserves, which is why banks are starting to borrow from the Fed (via its overnight repo facility) for their overnight cash needs.  So far, they are paying the money back the next day, but there will likely come a time soon when they won’t. 

Once the banks keep rolling over the overnight loans for weeks or months at a time, the Fed will have to print money to keep short term rates from spiking up like they did in September 2019. 

So, whether the government borrows money short term or long term, it is still borrowing money which forces up the demand for money.  That forces up the price of money (interest rates) until the Fed increases the supply by printing more money which, given what I am seeing, will likely be pretty soon.

Printing money to keep long term rates from rising, or even decreasing rates, is good news for the stock market. But once the Fed starts continuously printing money, inflation will follow eventually.