The Hidden Risks Of Interest Rate Cuts—And What Investors Should Really Be Watching
Gabriela Berrospi is the founder of the Latino Wall Street movement, which provides financial education to the Latino community.
When interest rates have been high for a while, the idea of lowering them seems a no-brainer. For borrowers, it means they are able to access credit in a much easier and cheaper way. For the financial markets, it often translates into optimism and rallies. For the average family, it can feel like all the pressure is finally starting to ease. The problem is, most people welcome lower rates with open arms without being aware of the hidden risks.
From my personal experience—both as an investor and financial educator—I’ve learned that rate cuts aren’t a free lunch. Especially when they happen too soon, the long-term impact can outweigh the short-term quick fix to stimulate the economy.
As we approach what many believe will be a new stage of monetary policy, here are some key hidden risks I think every investor should keep their focus on.
1. Inflation Doesn’t Always Stay Down
The main risk of lowering rates is that doing so is inflationary. How the economy works is based on supply and demand. History shows that the lower the rates, the higher the demand to borrow cheap money and invest in different markets (stock market, real estate, crypto).
When we look back in history at times when the Fed has hiked rates, like for example 2022-2023, we finally see inflation cooling down. But inflation isn’t something you can beat once and forget. If rate cuts come while demand is still strong, there’s a real risk of prices creeping back up—especially in services, where inflation tends to be more persistent.
In Latin America, for example, I’ve seen how political pressure can lead central banks to slash rates too soon and for the wrong reasons. The result has been hyperinflation and a loss of trust in the currency. The U.S is in a stronger position than the rest of the world, but we shouldn’t ignore the lessons from other countries.
2. Cheap Money Can Lead To Risky Bets
When the Fed cuts rates, the sentiment becomes that everything feels safer than it is.
In the pandemic, for instance, I remember many of my friends and investors who were borrowing cheap to load up on stocks, real estate and even crypto. It worked for a while—it almost seemed like nobody could lose any money—until rates rose and the party was over. Ironically, the over-leverage that many investors had that boosted their returns became the main reason for their losses.
The main takeaway is that cheap money is not always good news, as it fuels speculation. It tends to push valuations higher than fundamentals justify.
And while that can feel like a bull market, it’s often just a bubble in disguise.
3. A Weaker Dollar Can Impact You Directly
What most people don’t realize is that rate cuts are not just cheap money; they can also impact the dollar. That might benefit U.S. exporters because it makes American-made goods and services cheaper and more competitive in foreign markets. Yet, for the average family, a weaker dollar represents a loss of purchasing power and higher prices for basic items such as food and fuel.
I’ve seen this hit families hard, particularly those who send money abroad. A weaker dollar means those remittances don’t stretch as far. It also complicates things for investors with international exposure—currency swings can eat into returns and add a layer of risk many people don’t account for.
4. The Illusion Of Stability
There’s also a psychological risk that’s harder to measure but just as dangerous.
When rates are lowered, some people assume the worst is behind us. This can lead to riskier financial behavior, such as spending more, saving less and chasing quick wins in the markets. I’ve seen this firsthand while teaching financial literacy in underserved communities. The belief that “the Fed has our back” can be a costly illusion.
As we enter a new stage of monetary policy, being prepared matters. It is important to start preparing by making sure you have a strong financial foundation. This consists of a solid emergency fund, being cautious on taking new debt and reevaluating the level of risk in your investment portfolio.
If markets react with renewed optimism, don’t get swept up; rather, use it as a chance to rebalance, reduce overexposure and ensure your strategy still matches your long-term goals. Always remember to consider the full picture: how currency gets impacted, how inflation affects you and how the market sentiment shifts.
It is crucial to stay informed and up to date. Rate cuts can open doors, but they also carry risks that aren’t always so obvious at first glance. The more you understand how these changes ripple through the economy, the better equipped you’ll be to respond and not react. No one can time the market perfectly, but you don’t need to. With a clear plan, steady discipline and a commitment to ongoing education, you’ll be in a strong position to navigate whatever comes next.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?