The Surprising Thing That Happens to Stock Markets When the Fed Cuts Interest Rates
What we discovered after crunching almost 25 years of data
The Federal Reserve announced last week that they were making an emergency 0.5% cut to the federal funds rate, reducing their target range to 1.00%-1.25%.
Immediately following this announcement, the S&P 500 shot up 2.5% before selling off throughout the rest of the day:
The market wasn’t having it. By the end of the day, the S&P 500 closed down -2.81%.
After seeing this happen in real time, I wanted to know: How do U.S. stocks typically perform after a Fed announcement? Do they go up? Do they decline?
To answer this, I collected data on every change to the federal funds rate since 1994 (when the Fed started publicly announcing their rate changes).
Below is a plot of the S&P 500 and all 73 changes to the federal funds rate over this time period (note: red points = when the Fed cut rates, green points = when the Fed raised rates):
In total, the Fed has increased rates 40 times and decreased rates 33 times since 1994.
Looking at the plot above it seems like the Fed cut rates when the stock market is falling and raises them when the market is rising. However, this is not technically the mandate that the Fed follows. The Fed is supposed to stabilize prices and maximize employment, but, after recent events, it can feel like they are trying to save the stock market.
This idea is anything but new. In the late 1980s, the term “Greenspan put” was coined in order to describe how the Fed would typically cut rates during stock market corrections. And if you look at the drawdowns in the S&P 500, they seem to partially correspond with rate changes:
