{"id":13414,"date":"2024-09-30T21:18:59","date_gmt":"2024-09-30T21:18:59","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=13414"},"modified":"2024-09-30T21:19:00","modified_gmt":"2024-09-30T21:19:00","slug":"what-fed-rate-cuts-mean-for-the-markets-and-economy","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/what-fed-rate-cuts-mean-for-the-markets-and-economy\/","title":{"rendered":"What Fed Rate Cuts Mean For The Markets And Economy"},"content":{"rendered":"\n<p><strong>Rate Cuts are Here. What That Means for the Economy and Markets<\/strong><\/p>\n\n\n\n<p>The most highly anticipated Fed meeting of the year took place on September 17-18, and with it came a 50-basis point rate cut\u2014arguably the outcome the market hoped for. 11 of 12 Fed officials voted in favor of the cut, which lowered the benchmark Fed funds rate to a range between 4.75% and 5%. Projections released after the meeting signaled that the Fed could go further, cutting by 25 basis points at each of the next two meetings (scheduled for November and December).<sup>1<\/sup><\/p>\n\n\n\n<p>The equity market\u2019s response has been positive in the short term, but the financial media has not been so sure. On one hand, some pundits argue the larger rate cut is bullish because it underscores the Fed\u2019s commitment to making a decisively dovish pivot, which should lower borrowing costs while boosting economic activity and market returns. The bears, on the other hand, argue that the Fed sees an economy in trouble, thus requiring a larger rate cut to stave off recession.<\/p>\n\n\n\n<p>Neither camp is right, in my view.<\/p>\n\n\n\n<p><strong><u><a href=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\" data-type=\"link\" data-id=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\">Investing After Fed Cuts: Key Insights in Our September Report<\/a><\/u><\/strong><\/p>\n\n\n\n<p>With the Fed lowering the benchmark rate, and signals of further cuts ahead, it&#8217;s crucial to stay informed.<\/p>\n\n\n\n<p>To help you navigate this evolving market with confidence, I recommend downloading our <strong><em><u><a href=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\" data-type=\"link\" data-id=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\">September 2024 Stock Market Outlook Report<sup>2<\/sup><\/a><\/u><\/em><\/strong>, which offers key insights, such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Capital markets commentary<\/li>\n\n\n\n<li>Key U.S. economic data<\/li>\n\n\n\n<li>Global market data<\/li>\n\n\n\n<li>Zacks S&amp;P 500 earnings insights<\/li>\n\n\n\n<li>Zacks sector picks<\/li>\n\n\n\n<li>And more\u2026<\/li>\n<\/ul>\n\n\n\n<p>If you have $500,000 or more to invest, request our <strong><u><a href=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\" data-type=\"link\" data-id=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\">free September Stock Market Outlook Report<sup>2 <\/sup><\/a><\/u><\/strong>today!<\/p>\n\n\n\n<p>Let\u2019s start with the bulls. The issue I have here is one I\u2019ve written about frequently in the past, which is the idea that there is a strong correlation between the direction of rates and the direction of stocks. In theory, rate cuts are supposed to be bullish, while rate hikes are bearish. But history doesn\u2019t support causation or correlation between rates and stocks.<\/p>\n\n\n\n<p>For example, if we look at every bull market from 1950 onward, it\u2019s easy to find several instances when interest rates were rising, the economy was expanding, and the stock market was going up\u2014all at the same time. It happened in every bull market between 1950 and 1980, and notably from 2004 to 2006 and again from 2015 to 2019. Conversely, interest rates were falling in the aftermath of the tech bubble and during the 2008 Global Financial Crisis, and stocks were falling too.<\/p>\n\n\n\n<p>For the bears, I think there\u2019s a case of reflexive thinking when it comes to the Fed and monetary policy. Since the Fed has historically been too late on monetary policy adjustments, bears see it as likely\u2014or even near certain\u2014that Fed officials have also missed the mark in this cycle.<\/p>\n\n\n\n<p>In other words, the bulls place too much emphasis on the role that monetary policy plays on stock market returns, and the bears aren\u2019t allowing for the possibility that the Fed can execute a soft landing.<\/p>\n\n\n\n<p>While the bears\u2019 critique of historical monetary policy decisions is a fair one, I view the current economic setup differently. Looking at key U.S. macroeconomic fundamentals today, this is what we see:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>U.S. annualized GDP growth of 2.5% in 2023, with 1.4% growth in Q1 2024 and 3.0% (second estimate) in Q2 2024<\/li>\n\n\n\n<li>Inflation at 2.5% (July PCE price index)<\/li>\n\n\n\n<li>Unemployment rate at 4.2%<\/li>\n\n\n\n<li>10-year U.S. Treasury bond at 3.75% (as of September 20).<\/li>\n<\/ul>\n\n\n\n<p>All things considered, these data points are quite close to where we want them to be long term. The one asterisk is the benchmark Fed funds rate, which at current levels of 4.75% to 5% indicates that monetary policy is far too restrictive, in my view.&nbsp;&nbsp;<\/p>\n\n\n\n<p>Enter current Fed policy. The 50-basis point cut seems to me to be an acknowledgment that the inflation problem is now behind us and that the Fed can now focus on moving short-term rates to a \u201cneutral rate,\u201d which would be significantly lower than the current 4.75% to 5%.<\/p>\n\n\n\n<p>In previous decades, when inflation was below 2%, investment and growth were strong but rarely booming, a neutral rate of around 2.5% was the target. Looking out from today, however, with sizable government deficits, shrinking labor forces, and a shift to \u2018onshoring\u2019 manufacturing, we may see more pressures on inflation and interest rates in the years ahead. The neutral rate in this scenario may be closer to 3.5%, which implies a few more rate cuts in this cycle. Should the jobs market remain stable, and inflation remain anchored to acceptable levels\u2014as rates continue to fall\u2014the \u2018elusive\u2019 soft landing may be precisely what we get.<\/p>\n\n\n\n<p><strong>Bottom Line for Investors<\/strong><\/p>\n\n\n\n<p>I made the argument previously that rate cuts are not automatically bullish or bearish. Stocks have done well when rates are rising, and they\u2019ve done well when rates are falling. There\u2019s no distinct correlation.<\/p>\n\n\n\n<p>What we know from history, however, is that the stock market does tend to perform well when rates are falling <em>and <\/em>the economy is growing. Falling rates lower borrowing costs for businesses and consumers, which can bolster investment and spending. Small-cap stocks can especially get a boost since they tend to have more floating-rate debt than their large counterparts. This relationship is only relevant in an environment where the economy is growing, which should make growth\u2014not rates\u2014the focal point for investors.<\/p>\n\n\n\n<p>To help you navigate these shifts, I\u2019m offering all readers our comprehensive <strong><em><u><a href=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\" data-type=\"link\" data-id=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\">September Stock Market Outlook Report<sup>3<\/sup><\/a><\/u><\/em><\/strong>, which provides an in-depth analysis and practical insights to keep you ahead of the curve, including:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The Presidential election and economic policy<\/li>\n\n\n\n<li>Key U.S. economic data<\/li>\n\n\n\n<li>Global market data<\/li>\n\n\n\n<li>Zacks S&amp;P 500 earnings insights<\/li>\n\n\n\n<li>Zacks sector picks<\/li>\n\n\n\n<li>And more\u2026<\/li>\n<\/ul>\n\n\n\n<p>If you have $500,000 or more to invest, request our free <strong><em><u><a href=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\" data-type=\"link\" data-id=\"https:\/\/go.steadyinvestor.com\/stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2024_09_30&amp;content=stock_market_outlook_report\">September Stock Market Outlook Report<sup>3<\/sup><\/a><\/u><\/em><\/strong> today!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Fed finally made the highly anticipated benchmark funds rate cuts. Mitch looks at the arguments for whether the effect of these cuts will be bullish or bearish.<\/p>\n","protected":false},"author":3,"featured_media":13415,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-13414","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13414","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=13414"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13414\/revisions"}],"predecessor-version":[{"id":13416,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13414\/revisions\/13416"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media\/13415"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=13414"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=13414"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=13414"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}