Weekend Read - What to Expect as the Fed Begins Its Rate Decrease Cycle

Weekend Read: What to Expect as the Fed Begins Its Rate Decrease Cycle

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Over the past few years, we’ve witnessed a period of aggressive interest rate hikes by the Federal Reserve followed by an extended period where they held those rates steady at elevated levels. This strategy was a response to rising inflation. The Fed raised rates rapidly and held them there, intending to cool down the economy and bring inflation back to its 2% target.

As we look ahead, the conversation has been shifting toward when, not if, the Fed will begin a rate decrease cycle. This shift, should result in a variety of economic and market reactions that I’d like to breakdown for you.

Expected Economic Outcomes

When the Fed starts to cut rates, we would typically expect several outcomes. Lower borrowing costs should encourage both businesses and consumers to spend and invest more. For companies, cheaper financing can mean more expansion, hiring, and capital expenditures. For consumers, lower rates often translate to lower mortgage payments and credit card interest, which can boost spending.

However, this increased activity could come with a lag. After a period of high rates, businesses and households may remain cautious, preferring to rebuild balance sheets or maintain savings rather than immediately increase spending. Should we see some lag, its reasonable that the hyper analysis we’ve been directing towards the Fed’s decision to hold rates high, would shift to the rate at which they are lowering them.

On the flip side, the Fed will need to be mindful of the risks of cutting rates too quickly. One significant risk is reigniting inflation. If the economy overheats due to rapid rate cuts, we could see prices begin to rise again, forcing the Fed to reverse course and raise rates once more.

Stock Market Implications

The Federal Reserve's primary focus is on maintaining stable prices and promoting maximum employment, not on managing the stock market². Any effects on the stock market are secondary to these broader economic goals. Nonetheless, the Fed’s decisions should continue to be a large driver in short term market volatility.

For the stock market, a rate decrease cycle is generally viewed positively. Lower interest rates reduce the cost of capital, making it cheaper for companies to invest in growth. This often boosts corporate earnings, which can drive stock prices higher. Historically, rate cuts have been followed by stock market rallies.  Since 1929, there have been 14 rate cut cycles and the average return for the 12 month period following the first cut has been 13.37% with 12 of the 14 periods being positive¹.

However, it’s important to remember that the stock market doesn’t always respond immediately or uniformly to rate cuts. If the Fed is lowering rates because of concerns about a recession, investor sentiment could remain cautious, leading to volatility. Additionally, markets might react differently depending on how aggressively the Fed cuts rates and the economic context in which those cuts occur.

As the Fed begins its rate decrease cycle, it's important to understand how these changes might ripple through the economy and your investments. The shift could bring opportunities, but it also comes with risks that we’ll need to watch closely. I’ve seen how these economic shifts can impact financial plans, and I’m here to help you navigate the potential challenges ahead. If you’re wondering how this might affect your portfolio or what steps to take next, feel free to reach out. I’m always here to discuss your options and help you stay on course.

If you’ve only recently joined my email list, you’ve missed out on many insights and updates that I've been sharing each week. Be sure to visit my blog to explore past content that you might find valuable.

Jeremy Raffer, MBA
Director & Wealth Manager
Author “Financial Planning for Widows”

m. 201-747-2705
w. rafferwealthmanagement.com
e. jeremy.raffer@stewardpartners.com

Steward Partners
115 W. Century Rd, Suite 145
Paramus, NJ 07652.

¹https://www.schwab.com/learn/story/what-past-fed-rate-cycles-can-tell-us

²https://www.federalreserve.gov/faqs/what-economic-goals-does-federal-reserve-seek-to-achieve-through-monetary-policy.htm

The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates.  All opinions are subject to change without notice.  Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.  Past performance is no guarantee of future results.

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