What lower rates mean for markets

With the Federal Reserve shifting gears and cutting interest rates by a half point, it’s time for investors, households and businesses to take a long hard look at where their money is.

With the Federal Reserve shifting gears and cutting interest rates by a half point, it’s time for investors, households and businesses to take a long hard look at where their money is. The Fed on Wednesday lowered interest rates, marking the first rate cut since March 2020. That comes after the central bank aggressively raised rates to a 23-year high to tamp down wayward inflation spurred by near-zero borrowing levels during the Covid pandemic. A decline in interest rates should, theoretically, mean good news for the stock market. Lower borrowing costs free up cash for companies to reinvest in themselves and return to shareholders. But it also has broader implications about the state of the economy and where it could be headed. The Dow is up 1.3% for the week, while the S&P 500 has gained 1.1%. Both indexes notched new record highs this week. The Nasdaq Composite has jumped 1.2%. The S&P 500 has gained 5.5% on average during the 12 months following a rate cut, according to LPL Financial data based on nine rate hiking cycles since the 1970s. But some investors say the market could see more volatility in the coming months as Wall Street contends with a number of uncertainties. The labor market, while strong by historical measures, has weakened in recent months. While inflation has cooled considerably since the Fed began hiking rates in 2022, Fed Chair Jerome Powell acknowledged that it is still not at the central bank’s 2% target. It’s unclear whether the US economy will avoid a recession.