For the first time in more than four years, the Federal Reserve is getting ready to cut interest rates, which could impact everything from U.S. stocks to bonds to savings accounts.
Speaking at the central bank’s annual Jackson Hole Economic Symposium on Aug. 23, Fed Chair Jerome Powell said at the conference of bankers, economists, and monetary policymakers that “the time has come for policy to adjust.”
Heading into the September policy meeting, financial markets will debate the size and frequency of interest rate cuts.
Running of the Wall Street Bulls
In the runup to Powell’s green light to a rate cut, the leading benchmark indexes have performed well and recuperated from the three-day market crash earlier this month.Year-to-date, the blue-chip Dow Jones Industrial Average is up more than 9 percent, the tech-heavy Nasdaq Composite Index has rallied nearly 20 percent, and the S&P 500 has surged about 18 percent.
Is there more room for gains, or has Wall Street already baked a Fed rate cut into the cake?
The Fed loosening monetary policy as early as next month will likely benefit the stock market, says Robert Johnson, the chairman and CEO at Economic Index Associates and professor of finance at Heider College of Business.
“The near certainty of Fed loosening and falling interest rates in the coming meetings means that investors should be optimistic concerning their expectations for broad equity market returns,” Johnson told The Epoch Times.
Looking at market data from 1966 to 2023, he says, the S&P 500 generated a 16.4 percent return when the Fed lowered interest rates. Conversely, the index has given investors a 6.2 percent return when the central bank has raised rates.
Additionally, in a lower-rate investment climate, the top-performing sectors have been automobiles, apparel, and retail. The worst-performing sectors have been financials, consumer goods, and utilities.
David Materazzi, the CEO of automated trading platform Galileo FX, thinks the stock market will surge after the Fed’s rate cut and “will certainly cause stocks to burn brighter in the short term.“ At the same time, retail investors must refrain from ”being swept away by the illusion of never-ending growth.”
Safe-Haven Assets
The Fed’s high-rate environment for two-plus years has been a boon for bond investors and savers—and financially damaging for borrowers.Money markets—an arena of short-term debt securities and cash equivalents—have attracted immense investment from institutional investors and armchair traders amid yields of around 5 percent.
Since the Fed’s quantitative tightening campaign was launched in March 2022, money market funds have witnessed exceptional retail interest.
However, now that the central bank is trimming its policy rate from the current 23-year high of 5.25 percent and 5.5 percent, experts warn bond investors might have to transition to long-term duration instruments.
“As investors become convinced of lower future interest rates, they may invest more into the long end of the yield curve—corporate and treasury bonds with 15, 20, or 30 years’ maturity—where interest rate moves have a greater effect on prices,” Michael Ashley Schulman, the partner and CIO of Running Point Capital Advisors, told The Epoch Times.
The benchmark 10-year yield slumped following Powell’s speech, sliding below 3.8 percent.
Cash’s reign as king over the last couple of years could end, too.
The Fed does not dictate banks’ interest rates on savings accounts, but the central bank’s benchmark federal funds rate does influence rates across the marketplace, Johnson explained.
“Savings account rates will fall as the Fed lowers rates. While the Fed doesn’t set savings account interest rates, its actions influence rates throughout the financial markets from automobile loan rates and savings account rates to mortgage rates and credit card rates,” he said.
“As the Fed lowers its target Fed funds rate, rates throughout the financial markets will fall.”
Gold is another safe-haven asset that would benefit from the institution’s looser monetary policy.
Beyond Interest Rates
While market watchers have concentrated mainly on interest rates, Schulman notes many other factors can influence investor sentiment and the broader financial markets.“Economic conditions, government regulation, employment, trade and tax policies, and international conflicts also sway attitudes and outlooks,” Schulman told The Epoch Times.
During the August 2024 market meltdown, traders panicked about the Institute for Supply Management’s (ISM) worse-than-expected Manufacturing Purchasing Managers’ Index (PMI) and the weaker-than-expected July jobs report that activated the Sahm rule, a key recession indicator. Their concerns were alleviated after three consecutive weeks of decent initial jobless claims reports.
Before the Fed convenes its next two-day Federal Open Market Committee (FOMC) policy meeting on Sept. 17 and 18, the financial markets will digest the August jobs report, more inflation data, and another second-quarter GDP estimate.
Additionally, from the 2024 presidential election to geopolitical tensions, movements on the New York Stock Exchange might be driven by more than just interest rates moving down by 25 or 50 basis points.
In the end, savers might be disappointed in a falling-rate climate, but borrowers and investors will be ebullient in the next policy cycle.