Why Did The Stock Market Fall After The Federal Reserve Cut Interest Rates

When the Federal Reserve cut the federal funds target rate on September 18th, the stock market reacted negatively. Typically, we expect the stock market to react positively to a rate cut because it means borrowing has become cheaper. This is usually a good sign for companies and their growth prospects.

However, when the Fed announced a 50-basis point cut, the S&P 500 index initially rose but ended the day lower.

The announcement was made at 2:00 PM, and the S&P 500 initially rose but settled down on the day.

Why could this be? While we will never know for sure, here are a few ideas.

The Fall Was Modest

All three indices (the Dow Jones Industrial Average, S&P 500, and the Nasdaq) ended down on the day, but not by much.

Each was down less than half a percentage point—one could argue that’s hardly large enough of a fall to be concerned about.

A Rate Cut Was Already Priced In

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For months, the Fed has indicated it was going to cut rates. Would it be a 25-basis-point cut or a larger 50-basis-point cut?

As of Wednesday morning, the CME Group’s FedWatch tool predicted a 65% chance of a 50 basis point cut and a 35% of a smaller 25 basis point one.

The Fed did what the market expected, so could this be a case of “buy the rumor, sell the news?” Perhaps.

Chairman Powell Said the Economy is Fine

In remarks, Chairman Jerome Powell said that the economy is fine, but he did say that they might have cut rates earlier had they seen the July jobs report before their July meeting.

Perhaps the market believes the Fed is a bit behind on cutting rates, and a 50-basis cut might be an admission of that fact.

A Recession Is Still Possible

While talk of a recession may be quieting, the probability of one occurring between now and August 2025 is still high. The New York Fed calculates the probability of a recession based on the Treasury Spread.

The Treasury Spread is the difference between the 10-year Treasury bond rate and the 3-month Treasury bill rate. It’s not a perfect predictor—there is no such thing—but one that experts look to for guidance.

As of August 2024, the probability of a recession in the next 12 months is 61.78%.

Don’t Let This Impact Your Investing Decisions

Ultimately, don’t let the Federal Reserve, the target federal funds rate, or anything else influence your daily investing decisions.

While lower interest rates may mean you earn less on your high-yield savings accounts, it should change your investments.

If you make regular contributions and set an asset allocation that matches your risk tolerance and financial goals, you will be fine regardless of the interest rate.

However, it is still useful to understand why things move the way they do, especially when they go against expectations.