When the Federal Funds Rate Falls

Below, you'll find the 30-year view of the Federal Funds Rate, the target interest rate set by the Federal Reserve at which commercial banks borrow and lend their extra reserves to one another overnight, along with the S&P 500 year-over-year return.

The Federal Funds Rate is often lowered to add liquidity to the market during times of distress. When the rate is lowered, it typically coincides with equities falling in value.

A notable exception occurred in 2020, where a sharp reversal in equity values followed the initial fall in prices, largely due to the substantial amount of stimulus injected into the economy.

Historic rate cuts are evident in 2001, 2008, and 2020. Each of these periods experienced recessionary pressures, prompting the Federal Reserve to cut rates to enhance access to capital.

In a press conference on January 31, Jerome Powell addressed the possibility of cutting rates in March, stating:

"I don't think it's likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to [lower rates]."

While people often claim that rate cuts benefit equities, during 2001 and 2008, such cuts did not serve as a parachute for equity markets. It is likely that these cuts prevented the markets from falling as sharply, but by no means did they prevent a decline.

Source: Board of Directors of the Federal Reserve Board, Chart by Reef Insights LLC

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