Navigating the Fed's Recent Rate Cut and Understanding the Fall Market Dynamics
On September 18, The Federal Reserve enacted its first interest rate cut since the beginning of the Covid-19 pandemic, cutting rates by half a percentage point off benchmark rates “in an effort to head off a slowdown in the labor market.”5
With inflation having surged to levels not seen since the Carter and Reagan eras, the Fed had previously responded by raising the short-term federal funds rate to a 23-year high.
While inflation has cooled from its peak, it remains stubbornly high, prompting the Federal Open Market Committee (FOMC) to approach any decisions about rate cuts with caution. (1)
Understanding Which Factors Influence Interest Rates
While the Fed opted to cut interest rates by a half point, it’s important to understand the driving factors behind interest rates, as the full extent of these cuts, and the future trajectory of borrowing costs, remains a topic of intense speculation.
Several factors influence interest rates, including:
Economic Growth: A robust economy often leads to higher rates, while a weakening economy can drive rates down.
Employment Levels: High employment may bring rate increases, whereas rising unemployment might prompt rate reductions.
Inflation Trends: Lower inflation usually brings rate reductions, while high inflation tends to keep rates elevated.
Political Climate: Election cycles and political uncertainty can cause fluctuations in interest rates as market expectations shift.
Global Events: Geopolitical tensions and global economic events can sway rates. For example, conflicts that drive up oil prices may keep inflation high and prevent significant rate cuts. (3)
Federal Reserve Cuts Interest Rates by Half a Point on September 18, 2024, Speculation Going Forward
As both the jobs picture and inflation soften, the central bank’s Federal Open Market Committee chose to lower its key overnight borrowing rate by a half percentage point, or 50 basis points. (5)
The U.S. economy, which grew at an annualized rate of 3.0% in the second quarter, is expected to maintain or exceed the Fed’s non-inflationary growth rate of 1.8% in the coming years. Unemployment is currently projected to remain around 4.2% through the end of 2026, and the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is forecast to hit the 2% target by the first quarter of 2025. (2)
The Historical Fall Market Trends: The “September/October Effect”
As we head deeper into the fall, it's also worth examining the historical patterns of market performance during these months.
The "October Effect" refers to the belief that stock markets tend to decline in October. This notion, however, is more psychological than based on solid statistical evidence. Historically, October has been a month of significant volatility, but it has also been a period of positive net returns over the long term.
In fact, while October has seen notable market events such as the 1907 panic, Black Tuesday, Thursday, and Monday in 1929, and Black Monday in 1987, it is not uniquely problematic.
The “September Effect”, suggests that September is a particularly weak month for markets, is often cited, but the data shows that September typically performs worse than October.
Interestingly, October has historically marked the end of more bear markets than the beginning. Research from LPL Financial highlights that October is the most volatile month for stocks, with more 1% or larger swings in the S&P 500 compared to any other month since 1950. This volatility can be partly attributed to the fact that October precedes U.S. elections held in early November every other year. (4)
Closing Thoughts
As we navigate the upcoming effects of the Fed’s rate cuts and typical fall market volatility, it's crucial to stay informed and prepared. While historical trends offer some guidance, each market cycle is unique. Staying attuned to economic indicators, Fed announcements, and broader geopolitical events will help in making well-informed financial decisions.
For personalized advice and strategic insights tailored to your financial situation, don’t hesitate to reach out to our team.
Article Sources:
(1) Burrows, Dan. “Will the Fed Cut Rates in September? Here’s What Experts Predict.” Kiplinger. September 16, 2024.
(2) Ghosh, Indradip. “Fed to cut rates by 25 basis points on Sept. 18, twice more in 2024: Reuters poll.” Reuters. September 11, 2024.
(3) Wu, Sharon. “Here's how far mortgage rates could fall after the September Fed meeting.” CBS News. September 10, 2024.
(4) Hayes, Adam. “October Effect: Definition, Examples, and Statistical Evidence.” Investopedia. October 11, 2023.
(5) Cox, Jeff. “Fed slashes interest rates by a half point, an aggressive start to its first easing campaign in four years.” CNBC, September 18, 2024.
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