Here’s what usually happens to stocks when Fed cuts
Stock markets are likely to react decisively after a cut to interest rates if history repeats itself, according to a CNBC Pro analysis. The U.S. central bank is expected to keep interest rates steady this week but could hint at relaxing its monetary policy stance as soon as September. Any September decision to lower the Fed’s target range would be the first time interest rates have fallen since the hiking cycle began in March 2022. CNBC Pro analyzed stock market data over the past six tightening cycles since 1982, when the Federal Reserve switched to targeting the federal funds rate. The analysis found that, on four occasions the S & P 500 had risen by double digits within a year after a rate cut The analysis also revealed that the S & P 500 had set the direction of travel for annual returns within three months after a rate cut. When stocks rose, on average, they were up 6% in the quarter immediately after the cut and up 16% in the 12 months after the cut. However, stocks fell soon after the rate cut in 2001 and 2007 by 13.5% and 20.6%, respectively, due to the dotcom crash and the global financial crisis. Three months after the cut, the S & P 500 was down by 11% on average on those two occasions. The current tightening episode is the seventh in the past 40 years. Historically, the Fed has cut rates because the U.S. economy was heading into a recession or experiencing a notable growth slowdown. Uniquely, under current economic conditions, the Fed will be cutting when the economy continues to grow. The latest data shows that the U.S. real GDP increased at a 2.8% annualized pace adjusted for seasonality while inflation declined 0.1% month-on-month in June, putting the annual rate at 3% , around its lowest level in more than three years. While nominal rates peaked at 11.5% at the end of the 1983-84 episode, the current target range of 5.25%-5.50% is the highest this millennium. Rates peaked at 2.375% in the 2015-18 episode but were close to the current peak rate at the end of the 2004-06 episode at 5.25%. The current tightening cycle is also notable for being the most aggressive. The Fed’s target range was raised by 525 basis points in roughly 17 months, “thus larger than the cumulative increases in the other six episodes,” according to Kevin Kliesen, economist at the Federal Reserve Bank of St. Louis.
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