Money Matters - Interest Rate Changes

 As we round out 2025, Americans are trying to decide how to pay off debt, whether to refinance, and how to invest.

The Federal Reserve cut rates by a quarter-point last week, its first reduction in 2025. "Fed Chair Jerome Powell has stuck to his disciplined approach to rates, but maybe a little too much," says James Taylor Davis, fiduciary advisor at Meridian Wealth Management. “Up until now, his approach has seemed a bit reactive rather than proactive.”

1. Why hasn’t there been a significant rate reduction in several years?
Because the Fed has been like that cautious friend who won’t drive over 65 mph even on an empty highway. They’ve been fighting inflation, which, to them, is like a kitchen grease fire. You don’t just throw more fuel (cheap money) on it until you’re sure the flames are out. The Fed has kept rates higher to cool the economy, slow down spending, and avoid prices spiraling like a toddler in a candy aisle.

2. How does a rate cut affect borrowing costs?
Think of it like refinancing your Netflix subscription. One day you’re paying $19.99 a month, and the next they drop it to $14.99. Same show, less cost. A rate cut makes it cheaper for businesses and families to borrow for houses, cars, or expansion, lowering monthly payments the way a discount lowers your dinner bill.

3. What are some ways that people can reduce the amount of money they’re borrowing?
-Live within your means: It’s the financial version of skipping dessert when you’re already full.
-Refinance smartly: Trade in that old clunky loan for a shinier one with better terms, like upgrading your flip phone to a smartphone.
-Pay down debt faster: Even small extra payments chip away at principal like termites on a log (except in this case, that’s a good thing).
-Borrow only for appreciating assets: A home or a business? Okay. A jet ski you’ll use three times? Maybe not.

4. How does a rate reduction affect investments?
Rate cuts are like turning on the sprinklers in your backyard: suddenly, money starts flowing everywhere. Stocks tend to love it because businesses can borrow cheaply and grow faster. Bonds, on the other hand, can get cranky, existing bonds paying higher interest become more valuable, but new bonds don’t pay as much. Real estate often throws a party, since mortgages get cheaper. Overall, it’s like giving the economy an espresso shot, everything gets a little more energetic.

James Taylor Davis is a fiduciary advisor at Meridian Wealth Management. Growing up in his parent’s business, Davis learned the value of hard work, creating jobs, and taking risks. He has been in the financial services industry since 2012 and became the youngest advisor to reach a Fortune 100 company’s Top 20 ranking. Davis and his team specialize in comprehensive financial planning and focus on concentrated stock management, retirement income planning, estate planning, tax planning, risk management, insurance planning, education planning, wealth transfer planning, and small business advisory.