Traditionally, big Fed interest rate cuts and equity prices hovering near all-time highs are ominous signs for the stock market.
Large rate cuts – such as those Fed officials approved and forecast last week – typically reflect an economy the Federal Reserve is trying to dig out of recession. And record-high stock values often mean market gains are tapped out and have little room to run.
Not this time.
Some analysts say the market is poised to benefit from a rare best-of-all-worlds scenario.
“The Fed is easing and it’s a healthy economy,” said Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments. “That’s a potent combination for (significant) market returns.”
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At least one expert, though, argues the Fed’s dramatic steps last week underscore it’s worried the economy is at risk of slipping into a downturn. Such a tailspin probably would hammer stocks.
What did the Fed do with interest rates?
The Fed last week lowered its key short-term interest rate by a sizable half a percentage point, its first rate decrease in four years and more than many economists expected. It also forecast a total 2.25 percentage points in cuts by the end of next year and 2.75 points by the end of 2026, taking the benchmark rate from about 5.4% before the meeting to 2.9%.
There’s little doubt markets love Fed rate cuts, which reduce borrowing costs for business and consumers, spurring economic activity that bolsters corporate…
