Fed Rate Cuts: Why Long-Term Investors Can Ignore the Noise

The past week has been wall-to-wall Fed. It's impossible to escape... millions of headlines, thumbnails, and retweets, all breathlessly speculating what's coming today. All eyes are on Federal Reserve Chair Jerome Powell.

Given the constant drumbeat of Fed mania, casual observers will be forgiven for being swept into a sense that something critically important is happening. But really... it's mostly just noise.

Now look, I don't mean to denigrate the Fed or its role in guiding our country's monetary policy. Several times per year, the Federal Open Market Committee, or "FOMC", a group that includes Powell, the regional Fed bank presidents, and the Fed governors – gathers in Washington to set rates, issue economic projections, and signal their outlook on inflation, employment, and growth.

This is all important information... especially the interest rates.

How the Fed's Rate Impacts the Economy

Speaking of that, when all those headlines talk about "interest rates," they're really referring to the federal-funds rate – the short-term interest rate at which banks lend money to each other overnight.

The Fed has direct control over the fed-funds rate. And it's used to set the baseline for borrowing costs across the economy... from mortgages and credit cards to business loans and Treasury bonds. When the Fed raises or lowers this rate, the ripple effects touch almost every corner of the market.

But as it relates to your stock portfolio, not every Fed meeting is a turning point, and not every tweet warrants a portfolio shift.

Over the past couple of decades, an entire cottage industry has sprung up on Wall Street devoted to parsing every speech, interview, and eyebrow raise from members of the FOMC.

Their goal?

To predict what policy moves will come out of the Fed's next meeting, often down to the exact basis point. And this group of prognosticators is pretty darn good at their job. They can often anticipate both when a rate change is coming and often how big that change will be.

In the weeks leading up to any Fed meeting, legions of traders build positions in interest rate futures, Treasury markets, swaps, and options – all expressing their views on the path of monetary policy.

Groups like the CME Group – the world's largest derivatives exchange – track this trading activity in real time. Its FedWatch Tool compiles futures pricing data to show the market-implied probability of different policy outcomes, providing a snapshot of consensus expectations for rate hikes, cuts, or pauses.

Heading into today's announcement, traders are pricing the odds of a 25 basis point rate cut at somewhere between 85% and 95%. The FedWatch tool is also signaling a slim chance for a 50-basis-point cut – about 6% as I write.

But what's most important is this – the market is essentially unanimous that the Fed will cut.

What does all this mean to long term investors who maintain portfolios of mostly stocks and mutual funds? Almost nothing.

How the Fed's Next Move Will Impact Sectors

At a very high level, the Fed lowering its key rate is typically bullish for stocks, all else equal. That's because, as the Fed lowers, yields on Treasurys should fall with it. And since future earnings from public companies are always measured against the "risk-free rate of return," it makes equities look more attractive.

That's just a rule of thumb, and there is some nuance. For instance, falling rates impact sectors differently.

Since the market is expecting a cut, we looked back at the past 12 Fed meetings and tabulated, by sector, the impact of a rate cut.

In the day following the past five rate cuts, every major sector in the S&P 500 Index finished the day in the red.

Financials fell the most, which makes sense as lower rates can cut into interest margins and bank profitability. Tech held up better than most, but it still finished negative. Only Health Care and Consumer Staples – two classic defensive plays – fell the least.

Generally, you may expect a rate cut to boost the stock market... But the logic gets murky fast. Because it's not just about fundamentals, it's about who was leaning the wrong way, how much of the cut was already priced in, and subjective factors such as whether the Fed is seen as proactive or panicked.

Over the past couple of years, every rate cut was expected and therefore already priced in by the time the Fed met. The slight fall on the announcement was often just "giving back" some of the gains in the buildup to the news. And some market participants had been hoping for a bigger cut than what was announced and sold off on the news of a relatively smaller cut.

For me, what's interesting is not the reasons behind the stock market's price moves, but the magnitude. Note that the biggest hit to any sector was less than a 2% move... with most sectors moving less than 1%. And, for most of these sectors, the entire impact of these price moves would end up being erased within a couple of trading sessions. In the grand scheme of things, that's just not a big move.

All those headlines... all those articles... all those CNBC and Bloomberg News television segments... For long-term investors, it was just noise.

But Always Be Prepared for the Unexpected

There is, of course, another possible outcome for today's meeting: the Fed could throw a curveball and leave interest rates alone. What would that mean? Well, we don't have a crystal ball... but we do have data.

Since the beginning of 2024, there have been two meetings in which the Fed held the rates steady when the market was expecting a cut. Here are the average sector returns in the day following those meetings:

So, what happened when the Fed held steady, despite expectations for a cut?

Markets didn't panic, they moved higher... led by gains in Tech, Utilities, and Communication Services. Of course, there are other variables in play here. These unexpected rate holds were, in at least one instance, accompanied by stronger than expected economic data which I'm sure helped the move higher.

The main takeaway here is, again, the magnitude. These just aren't huge moves. Whether investors get what they're expecting or not, the stock market is not likely to convulse in any direction.

As an investor, this should be comforting.

Over the next couple of days, you'll be bombarded with terms like "hawkish," "dovish," "soft landing," and "easing"... If you've built a well-diversified portfolio of mutual funds and profitable businesses, then you can just ignore the weird, noisy terminology.

Instead, focus on the fundamentals of the businesses you own, the strength of your diversification, and your personal financial goals.

As many of you know, one of my main areas of focus is microcaps – the smallest publicly-traded companies in the market. Historically, small caps tend to outperform large caps during certain economic phases, especially when the market begins to look beyond macro uncertainty and focuses on growth potential.

One recent stock I covered exemplifies what I'm talking about.

A Small-Cap Drug Manufacturer to Put on Your Radar

I've actually been following Lifecore Biomedical (LFCR) for years. Lifecore is a contract development and manufacturing organization ("CDMO") that manufactures drugs for large pharmaceutical and biotech partners.

For more than a decade, Lifecore was buried in a midsized conglomerate of mostly lousy businesses and therefore had almost no visibility to the public markets. As of 2025, that has all changed. The non-CDMO businesses have been sold and Lifecore is finally a publicly traded CDMO "pure play."

After years of capital investment, the company has increased its manufacturing capacity by many multiples and now has significant upside potential thanks to currently underutilized manufacturing capacity and strong industry tailwinds.

Despite running at only 20% capacity today, over the next couple of years Lifecore stands to more than double revenues as demand for U.S.-based drug manufacturing surges – especially amid growing tariffs on imported pharmaceuticals and a booming injectable GLP-1 market.

At this point, GLP-1 drugs likely need no introduction. Sales of these injectable drugs topped $50 billion in 2024 and will likely be triple that by 2030, according to market research and consulting firm Grand View Research.

Novo Nordisk's (NVO) Ozempic (for type 2 diabetes) and Wegovy (for obesity and weight management) are the two most common GLP-1 drugs, though Eli Lilly's (LLY) Mounjaro and Zepbound are not far behind.

While we don't know the name of the partner, Lifecore recently secured a late-stage GLP-1 deal, signaling future growth aligned with the multi-billion-dollar obesity and diabetes drug market. There's an extremely high likelihood this combination of factors ends up attracting a company to buy Lifecore's business outright, bringing a boon to shareholders.

There are, of course, risks in play with Lifecore. And small-capitalization stocks, as a general rule, are volatile – the market capitalization for LFCR is about $300 million.

But with tariffs bringing drug manufacturing back to the states, and GLP-1 tailwinds howling, the business potential outweighs those risks.

It's my job to dig through the market to find opportunities like this. And against the backdrop of exciting businesses with genuine prospects, I can't help but yawn when I see a headline breathlessly predicting a 25-basis-point cut in the fed-funds rate.

Building your portfolio with a mix of high-quality individual stocks – especially those in promising small-cap companies – lets you tailor your risk and reward. It also gives you more control to navigate market cycles without panicking at every Fed announcement.

Yes, you'll still hear the "hawkish" and "dovish" headlines and see the endless speculation on rate moves. But with a thoughtful portfolio, you can treat that noise as background static rather than a call to action.

The markets are complex and ever-changing, but your approach doesn't have to be complicated. Stick to your plan, invest in businesses you believe in, and use Fed news as a data point – not a decision trigger.

Regards,

Bryan Beach