BYLINE: Jacob Levin

Investors need to look beyond the numbers when the Federal Open Market Committee decides whether and how much to cut interest rates on Sept. 16-17 says Brad Paye, associate professor in the department of Finance, Insurance, and Business Law.

“A single surprising comment in the post-meeting press conference can move markets more than the rate decision itself. The Fed only closely controls short-term rates, but what really matters for mortgages, car loans, and markets are longer-term rates, and those rates are sensitive to expectations of future monetary policy,” Paye says. “That’s why investors need to read between the lines. It’s not just what the Fed does today – it’s often what they signal about future policy that moves markets.”

A leading researcher in asset pricing and interactions between financial markets and macroeconomic conditions, Paye can speak to the implications that each of the decisions in next week’s Fed meeting may have on prices, market volatility, and portfolio strategies for everyday investors and retirement accounts.   

“Markets don’t react to what they already know,” says Paye. “They react when the Fed surprises them, and surprises can include information beyond the announced rate target. When the FOMC or Fed Chair communicates that future monetary policy is likely to follow a different path than currently expected, mortgage rates and bond yields can change quickly in response, and stock valuations can change, impacting everyday investors and households.”

This meeting comes as the Fed balances cooling inflation against potential economic headwinds, with global markets watching closely for signs of further rate cuts before the end of the year. Paye explains that it is widely expected that the federal funds target range will be reduced from the current range of 4.25-4.5% maintained since December 2024. But there is uncertainty about whether the range will be reduced by one quarter of a percent, or alternatively by a “super-sized” half a percent. Investors will need to not just follow the rate move itself, but the Fed’s language about the path ahead. Paye notes that markets will watch carefully for hints in the Fed’s language.  

“The Fed’s communications about future policy are important because they provide signals that influence longer-term rates. For example, if the Fed commits to four anticipated rate reductions over the coming year, what that’s basically doing is trying to nudge market participants to believe that long-term rates should be lower,” he said.

About Paye
Brad Paye is an associate professor in the department of Finance, Insurance, and Business Law in the Pamplin College of Business. His research interests center on asset pricing and interactions between financial markets and macroeconomic conditions. His broader academic interests include volatility modeling, forecasting, econometrics, and the interdisciplinary field of neurofinance.

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