Thursday, October 31, 2019

What the Fed Rate Cut Means for Investors

Yesterday, the Federal Reserve lowered the federal-funds target rate for the third straight meeting by a quarter percentage point, to between 1.5 percent and 1.75 percent. The Fed also signaled it is likely to pause to see whether these cuts are enough to sustain the economic expansion.

If this is indeed the final cut for a while, it might be very good news for investors. Between 1995 and 1996 and in 1998, the Fed cut interest rates three times and then stopped. In each of these cases the S&P 500 returned 24.76 percent and 19.39, respectively, over the next year.

Historically, the danger for stocks is when the third cut is not the last and the Fed needs to jolt the economy further. In 2001 and 2007, during the dot-com bubble and the financial recession, the Fed cut interest rates three times and kept cutting in order to boost the economy. During those cutting cycles, the S&P 500 had dropped 12.64 percent and a stunning 42.37 percent one year later.

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