Caution Over Interest Rate Cuts

Summary:

• The Fed cut interest rates by 0.25%, lowering the benchmark to 3.50–3.75%.
• Markets reacted broadly, with the US dollar weakening, bond yields falling, and US stocks rising on expectations of lower borrowing costs
• Global markets saw modest gains, silver hit record highs, and the pound slipped amid weaker UK economic data and expectations of a Bank of England rate cut.

This week the main focus in markets was the Federal Reserve’s (The Fed) interest rate decision. The US Central Bank cut interest rates for the third time this year, by 0.25%, taking its benchmark rate down to 3.50–3.75%.

In layman’s terms, a rate cut means a central bank is reducing the cost of borrowing. This simple move sends ripples through almost every corner of the financial system, which is why markets care so much:

• Currency markets: the dollar weakened by 0.5% this week according to the dollar index (which measures the US currency against a basket of peers). When interest rates drop, investors earn less interest on US assets, so holding dollars has a less attractive return, causing the currency to weaken.

• Fixed income markets: Bond yields (which move inversely to prices) fell after the rate cut, with the 10-year Treasury yield dropping about 0.05% to 4.16%. When the central bank lowers interest rates, new bonds are issued at lower rates, making existing bonds with higher interest payments more valuable. Investors are willing to pay more for these bonds which pushes their price up.

• Equity markets: US stocks moved higher after the Fed’s decision, rising 0.7% on the day of the announcement. When rates are cut, companies often face lower borrowing costs and investors expect stronger future profits, which tends to lift share prices.

The Fed’s message around this rate cut was cautious. While it cut rates to support the economy, officials signalled that further reductions aren’t guaranteed and will depend on inflation and growth data. This cautious tone, rather than the cut itself, may be one of the biggest takeaways for markets as we head into 2026.

The Noise

• In equity markets, additionally to US stocks ticking up, European markets have shown modest gains, also driven by the Fed’s rate cut and optimism over global growth. Overall global markets were flat at 0% this week according to the MSCI All Country World Index (ACWI).
• In commodity markets this week, silver shone brightly. The precious metal reached fresh all time highs, trading aroundUS$63–US$64 per ounce, driven by strong industrial demand, tight supply and ongoing investor interest. Silver has more than doubled in price this year, reflecting structural shortages and rising use in solar panels, electronics and green technologies.
• In currency markets, beyond the US dollar weakening after the Fed’s rate cut, the Pound Sterling slipped after data showed the UK economy unexpectedly contracted, even though it still posted weekly gains against the US dollar as markets price in a likely Bank of England rate cut next week.