Fed Rate Cuts Impact Stocks and Bonds in 2023
- The Federal Reserve is likely to begin rate cuts at the September 18 meeting, with expectations for a 25 basis point cut.
- Historically, stocks have risen two-thirds of the time one year after rate cuts, despite a high likelihood of recession following such actions.
- The current economic conditions suggest that the Fed may successfully navigate a soft landing, contrasting with historical precedents.
Following the monthly jobs report, the Federal Reserve is expected to initiate rate cuts at the September 18 meeting, with a 30% chance of a 50 basis point cut and a more likely 25 basis point cut. Historical data shows that 78% of the time, the economy was either in or headed towards recession after the Fed began easing monetary policy. However, two-thirds of the time, stocks have risen one year after rate cuts, with a median return of 10.8% on the S&P 500. The Fed's previous easing cycle in 1995, which avoided recession, serves as a potential model for the current economic situation, complicated by the post-COVID recovery. The Fed's ability to manage monetary policy effectively could lead to a soft landing for the economy, despite historical trends suggesting otherwise. If a recession occurs, it may negatively impact stock prices, while high-quality bonds could provide some protection during economic downturns.