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The Fed Continues Its Easing, But Patience Still Matters
Hoxton Blog • The Fed Continues Its Easing, But Patience Still Matters
The final Federal Reserve meeting of 2025 brought another step in the long-awaited shift towards lower interest rates in the U.S.
Policymakers announced a small 0.25% cut, bringing the federal funds rate down to between 3.5% and 3.75%, the lowest level in three years. It’s a positive move and another sign that inflation is coming under control.
This is the Fed’s third rate cut of the year, continuing its careful move away from the very high rates introduced to tackle inflation after the Covid pandemic.
The decision shows balance. The Fed wants to support growth, but it also wants to avoid easing too fast and reigniting inflation.
For investors, this is encouraging news. Inflation is cooling, the economy is holding up well, and borrowing costs are easing.
But as optimism builds, it’s important to think about what this means for markets and investment strategies in the months ahead.
A Measured Shift in Policy
Fed Chair Jerome Powell said the decision to cut rates again was based on continued progress towards the Fed’s 2% inflation goal. Prices have been slowing across most areas this year, helped by lower energy costs and fewer supply chain issues.
The job market has softened a little but remains healthy, and consumer spending is still steady.
Powell described the Fed’s approach as careful and data driven. Inflation is improving, but policymakers don’t want to move too quickly and risk undoing that progress. In short, they’re adjusting policy, not racing to stimulate growth.
The December cut was widely expected, but it reinforced confidence that inflation is under control enough to allow gradual easing. It also showed faith that the economy can keep growing without overheating.
Market Reaction, Valuations, and Expectations
Markets reacted positively. The S&P 500 extended its rally and ended the week near record highs.
Growth-focused sectors like technology, real estate, and consumer spending led the way, helped by expectations of lower borrowing costs.
However, much of this optimism was already built into prices. Stocks have had a strong run since the first rate cut in September, supported by easing inflation and hopes of continued Fed support.
When markets rise quickly, expectations can rise just as fast. In some areas, valuations now look quite high, which means future returns may depend more on company earnings than on more rate cuts.
We’ve seen this recently in some big technology names. For example, Oracle’s share price dropped sharply last week after its latest results didn’t fully match investor expectations.
It’s a reminder that even in fast-growing areas like artificial intelligence, prices can move sharply when excitement gets ahead of results.
That doesn’t mean the long-term opportunity has disappeared. It simply shows how sensitive “hot” parts of the market can be when sentiment shifts, especially after strong rallies.
For long-term investors, that’s normal. Even good businesses can experience short-term swings.
In bond markets, longer-term Treasury yields have continued to fall, pushing bond prices higher. After two difficult years, this is welcome news for fixed income investors. Bonds are once again offering stability and diversification in portfolios.
The U.S. dollar has weakened slightly against other major currencies, which can support international equities and commodities for UK-based investors when translated back into sterling.
Why Diversification Still Matters
Recent moves in the technology sector underline why diversification remains essential.
Spreading investments across different companies, sectors, and regions helps ensure that no single stock or theme dominates a portfolio. If one area falls, others can help balance it out.
Put simply, diversification means not putting all your eggs in one basket. It allows investors to benefit from long-term themes like artificial intelligence, healthcare, or clean energy, without depending on any one company.
For most investors, broad-based funds are the simplest way to achieve this balance, spreading risk across hundreds of companies.
Keeping Perspective
Artificial intelligence and other innovations will remain key drivers of growth for years to come. But even strong trends can see phases of excitement and adjustment as prices catch up with reality.
Rather than trying to pick individual winners, a measured approach is to hold diversified investments that include a range of technology and AI-related companies.
The same logic applies more broadly today. Lower interest rates are supportive, but they don’t remove risk. Sentiment can still shift quickly if inflation stalls or growth slows.
The Fed’s Balancing Act
The Fed is now in a delicate phase. It wants to support growth and employment while ensuring inflation keeps easing.
By cutting rates gradually, policymakers are keeping flexibility to pause or adjust if needed.
So far, that approach is working. The economy has avoided a sharp slowdown, inflation is trending lower, and a soft landing remains the most likely outcome.
For investors, that’s a constructive backdrop, supporting both stocks and bonds.
What This Means for Investors
It’s easy to see rate cuts as a green light for more risk-taking, but experience shows that discipline matters most.
At Hoxton Wealth, our message remains the same: focus on what you can control. A diversified portfolio aligned with your long-term goals and risk tolerance is still the best way to navigate changing conditions.
Lower rates and stable growth are positive signs, but they don’t guarantee smooth performance.
Those who stayed patient through the high-rate period are now seeing the rewards. Bonds have stabilised, equities are stronger, and opportunities are reappearing in areas that struggled when borrowing costs were high.
The key is to take part in the recovery without getting carried away by short-term swings.
The Bottom Line
The Fed’s third rate cut of 2025 shows confidence that inflation is under control and that the economy can handle a gradual easing in policy.
Markets have welcomed the news, though much of the optimism is already priced in.
Recent moves in popular growth stocks are a reminder that even in a supportive environment, markets don’t move in straight lines.
For investors, the takeaway is simple: this is a time for balance, not speculation. Lower rates help, but patience and discipline deliver long-term results.
If you’d like to discuss how these developments may affect your financial plan or portfolio, please contact your Hoxton Wealth adviser.
You can also reach our client services team at client.services@hoxtonwealth.com or via WhatsApp on +44 7384 100200.
Staying informed helps, but staying invested delivers results.
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