At long last, after four years, the Federal Reserve has finally cut the Fed Funds rate by 50 basis points, bringing the target range down to 4.75% – 5%.
Expectations suggest we’ll see another 50 basis points cut in 2024, with a total reduction of 100 basis points by the end of 2025. Fed Chair Powell remains optimistic, describing the economy as “very solid” and seeing no elevated risk of a downturn.
By 2025, the Fed Funds target rate could drop to 3.25% – 3.5%. With such clear visibility for rate cuts, the outlook for consumers and investors looks positive. As long as the Fed isn’t behind the curve, as it was in September 2007 when it cut, we could see continued economic growth and rising wealth for most of us.
What’s not to love about that?
The Federal Reserve dot plot for cutting rates in 2024, 2025, 2026, and 2027 The Fed Cutting Rates When Stocks Are at All-Time Highs
How lucky are we that the Fed is cutting rates while the S&P 500 is at an all-time high? Few of us would have believed stocks would perform so well after the aggressive rate hikes of 2022.
Now, with rates coming down through 2025, it’s like having your okonomiyaki and eating it too. Lower borrowing costs will enable companies to invest more, while lower interest expenses boost profitability. As businesses grow profits, they might also hire more employees.
Corporate earnings now have a tailwind, which is good for share prices. Although the S&P 500 is expensive based on historical valuations, if earnings can surprise on the upside, the S&P 500 can continue to perform.
It almost sounds too good to be true—which is why it’s worth keeping a watchful eye. Corrections will happen again.
According to J.P. Morgan, “over the