• Author
• Recent Posts

Follow Me

Wanderer

The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.

Follow Me

Latest posts by Wanderer (see all)

• Reader Case: From Cancer Survivor to FIRE - September 1, 2026
• The FIRE Guide to America’s Health Care System (2026) - July 7, 2026
• Planting Your Money Trees - February 23, 2026

Last week the economic world got rocked in the most nerdiest of ways possible: An interest rate cut.

The Federal Reserve announced its first interest rate cut in four years Wednesday, one of its most consequential decisions in recent memory

How Will Interest Rate Cut Impact Election? Here’s What To Know As Fed Makes First Cut Since 2020, Forbes.com

Not only that, the Federal Reserve made a pre-emptive move to cut rates by an outsized 50 bps, rather than the 25 bps most market observers were expecting. This means that the short-term borrowing rate went down from 5.25%-5.5% to 4.75%-5%.

Interest rate moves by the world largest and most important central bank have a tendency of rippling through the world economy in weird and unexpected ways. So, what effects can we expect, and how will it change our readers’ journeys to FI?

Borrowing Gets Cheaper

The first effect is that borrowing gets cheaper.

This affects everything from credit cards, personal lines of credit, margin loans, and, crucially, mortgage rates. That last one is going to have the biggest impact, since a 0.5% difference has a relatively larger effect on mortgages with interest rates in the 5%-6% range, while you won’t really notice such a change on credit card with interest rates above 20%. The US housing market will likely start to heat up again, as cheaper mortgages mean that borrowers can finance more debt with the same level of income.

We can also expect this action from the US central bank to encourage other countries to follow suit. Canada’s central bank is under enormous pressure to lower our interest rates to help out all the over-indebted homeowners who are seeing their mortgage renew at much higher rates.

Canada’s central bank is also wary of diverging too much from the US central bank’s interest rate, since that would affect the US-CAD exchange rate, which has all sorts of other knock-on effects to our economy. However, now that the Federal Reserve has signaled they are ready to start cutting, and faster than anticipated, this will encourage Canada’s central bank that they can do something similar.

Unfortunately, this will simply pour more gasoline on Canada’s housing crisis. Despite lower interest rates supposedly making the cost of ownership cheaper, I know my fellow Canadians. This will just give them an excuse to go back into bidding wars and drive prices higher again, which will just put more people into debt for longer.

Equity Markets Will Heat Up

However, the more interest effect for FIRE folks like us is that lower interest rates also mean that corporations can borrow money for cheaper. This will have the effect of fueling more leveraged expansion.

There’s also a big psychological effect this move makes as well. For the past 2 years, battling inflation has been at the forefront of the Federal Reserve’s agenda, and keeping interest rates high was their primary weapon in that battle.

Now, by shifting to lower rates, the Federal Reserve has signaled that they consider the battle against inflation over. Jerome Powell, the Federal Reserve chairman, was smart enough not to roll out a big blue “Mission Accomplished” banner, but that’s basically what he’s thinking.

Now, the Fed’s efforts can shift from battling inflation to maximizing employment. And just in time too! Unemployment numbers, while still historically low, has been ticking up these past few months, crossing 4% recently. An unemployment rate below 5% is considered “full employment”, so it’s still very healthy, but now that inflation has been brought to heel, the Fed can focus on stimulating the economy so that it doesn’t end up entering a recession as everyone feared it would.

So, did they manage to stick that “Soft Landing” everyone wanted? Not quite, but almost. Something unexpected can always happen, but I’d say the hard part is over. If the economy were a jumbo jet coming in for a landing, this is like the wheels touching down on the runway and the pilot applying the brakes. The plane hasn’t exactly come to a complete stop yet, but at least the tricky part is in the rear-view mirror.

In response, stock markets jumped up this week.

Will it Affect The Election?

It might.

Donald Trump is running as a change candidate, which works best when the incumbent is presiding over a crumbling economy. If the economy is in relatively good shape, voters are more reluctant to vote for someone who might mess things up. He did his best to try to spin this, in his usual bombastic, hyperbolic way.

“Most people thought it was going to be half of that number, which probably would have been the right thing to do,” Trump added. “So it’s a political move to try and keep somebody in office, but it’s not going to work because the inflation has been so bad.”

“I guess it shows the economy is very bad to cut it by that much assuming that they are not just playing politics.”

Trump keeps hammering Fed over rate cut: ‘It was a political move’

He’s trying his best to paint this as a bad thing, and while it’s true that rapidly lowering interest rates usually happens in the middle of a recession, this time it’s not true. The Federal Reserve is lowering interest rates to proactively prevent a recession, not react to one that’s already started. And the argument that this was a politicized move by a politicized Fed doesn’t hold water either, since Jerome Powell was appointed to his position by then-President Trump in 2018.

In short, he’s unhappy that the economy is doing well, because this takes away a reason to vote for him. Nobody can predict which way the US election in November is going to go, but this definitely adds to the tailwind currently being enjoyed by Team Harris and the Democrats.

Yet the Bond Yield Curve is Still Inverted

I’ve written about this before, but the bond yield curve in both the US and Canada hasn’t been making sense for some time.

As of today, this is what the US bond yield curve looks like…

And this is Canada’s…

Both have been deeply inverted for some time, which is usually seen as a strong indicator of an imminent recession.

Except now, the threat of a recession appears to be diminishing, yet…the bond yield curve is still inverted. What gives?

Usually, this is where I go “Well, clearly this must be because of this factor, or that factor.” This time, however, I’m just as confused as everyone else. All the economic indicators like GDP, unemployment, and the Federal Reserve are all indicating that we aren’t heading into a recession, yet the bond yield curve stands alone as the only thing still predicting one. What gives?

This is the reason I haven’t been invested in bonds this year. Something’s not right with the bond market. In fact, typically when interest rates drop, bond prices are supposed to go up. But instead this happened.

They went down instead!

Money market, which is risk-free, is still paying more interest than the rest of the bond market, so from a yield perspective, the bond market is crap value. The only reason to invest in it is to get some capital gains if the central bank lowers interest rates, which they just did. And yet…no capital gains! So what’s the bloody point?

Inverted yield curves can’t last forever, so at some point this is going to correct itself, but when and how fast, I have no idea. It should have happened already, quite frankly. So, for now, the only fixed income strategies that make sense to me are:

1. Stick with ultra-short or money market funds, which are risk-free and still paying a good yield or…
2. Go up the risk scale with alternative assets, like Preferred Shares, REITs, etc. that I wrote about in our Yield Shield series. These are riskier than bonds, but at least you get paid to take that risk. In the bond market right now, you’re taking a risk and getting hosed on the yield for your trouble. No bueno.

Conclusion

The Federal Reserve dropping interest rates by half a percentage point surprised even seasoned market watchers, myself included. And while there are many talking heads on the news right now trying to dissect why the central bank did it, the most likely reason is simple: The fight over inflation is now largely over, and the central bank is shifting their focus to lowering unemployment instead.

This is good news for all of us, and those of us who have our money invested in the stock market can expect our portfolios to look a little more buoyant these days. Of course, anything can happen in November, but for now, the skies are looking a little bluer than before.

Why do you think the Fed cut interest rates? Do you agree or disagree with their decision? Let’s hear it in the comments below!

---

Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)

Build a Portfolio Like Ours: Check out our FREE Investment Workshop!

Travel the World: Get flexible worldwide coverage for only $45.08 USD/month with SafetyWing Nomad Insurance

Multi-currency Travel Card: Get a multi-currency debit card when travelling to minimize forex fees! Read our review here, or Click here to get started!

Travel for Free with Home Exchange: Read Our Review or Click here to get started. Please use sponsor code kristy-d61e2 to get 250 bonus points (100 on completing home profile + 150 after first stay)!