Fed Rates to Slash: USA Stock Market to Boom or Collapse?

As the United States' Federal rates are about to be slashed, the country's stock market is reacting in several ways. Investors in the country anticipate cut-offs in fed rates in September 2025, leaving stock actors with the thought of whether it will be advantageous for the stock market or not. It has been seen earlier that the S&P 500 has performed well during such rate cuts. 

However, when it comes to the stock market, one cannot really rely on history, as things here change most unpredictably. Previous financial crises and other uncertain periods have seen drops in the stock market even after a rate reduction. Moreover, it can be predicted that the ongoing trade tensions and tariff negotiations might impact the actions of the Federal Reserve.

After a prolonged period of weak job growth, investors are depending on the Federal Reserve with eager hope. According to a report, many investors are expecting the central bank to cut interest rates at the September meeting. And if history is considered, this could prove to be a whopper for the stock market.

Trump’s Fed Governor Choosing Puts the US Dollar Under Pressure

Although the US dollar was static on Friday, its weekly performance wasn’t up to the mark. After the US President Donald Trump temporarily selected a Federal Reserve governor to replace Jerome Powell (after the end of his term), the dollar witnessed a decline. As concerns regarding the softening of the US labor market spike hopes for Fed rate cuts, the dollar was down by 0.6% throughout the week.

While investors remain worried about the central bank’s credibility and autonomy after Trump’s repeated criticism for not slashing interest rates, some market analysts feel that Stephen Miran’s appointment as the Council of Economic Advisers Chairman will not have a harmful impact on the US stock market.

However, Trump recently backed off from his action of replacing Powell. Current Fed Governor Christopher Waller, who voted for a rate cut in the last meeting, is a potential candidate for the same position, according to a report by Bloomberg News on Thursday.

Looking at the current financial condition of the country, it can be said that investors will now shift their focus to the US consumer price inflation data to look for clues to whether the recent tariff-driven price pressures are reshaping the Fed’s policy path. On Thursday, Atlanta Fed president Raphael Bostic said that, as risks to the job market have increased, it is too soon to promise rate cuts. However, market traders are betting on a 93% chance of a rate cut in September, with the cuts expected to be implemented by the end of this year.

What does the History Say about the Fed’s Interest Cuts?

According to a current LPL Financial analysis reported by Business Insider, the S&P 500 has historically performed well during times of rate cuts. Since 1974, the rate cut index has obtained an average of 30.3% from the first rate cut, and the media return in those times was 13.3%. The stocks, however, finished in six out of nine cases according to the same report by Business Insider.

"Using history and prior Fed cutting cycles as a guide, some upside potential may remain for the second half of 2025. But of course, past performance does not guarantee future results, and a new tariff regime not seen since the 1930s could slow earnings growth and fuel volatility," commented LPL’s chief equity strategist, Jeff Buchbinder.

The Largest Financial Markets often rely on Fed Easing Cycles

The most remarkable gains in the history of the stock market were followed by periods of declining interest rates. In the US financial market, the stocks of the S&P 500 soared 161% from 1995 to 1999, taking the leading position. Other than that, some other noteworthy growths of the index include a gain of 62.8% from 1984 to 1993 and 38.2% from 2019 to 2021.

Fed Rate Slashes May Not Be Equal to Stock Gains

So far, we have seen that the stock market has witnessed a rise after a reduction in interest rates. But, as far as history is concerned, the scenario is not always the same. There were times when rate-cutting cycles stumbled. It was during the 2007-2009 financial crisis, when the market share slumped 23.5% despite rate cuttings. A similar scenario is observed between 2001 and 2004, when the S&P 500 index fell to 9.6%. Such downfalls are subject to specific context and timing.

What does the Present Scenario tell?

Talking about context and timing influencing index growth in the stock market, the present political scenario of the US could be of great influence for the Federal government. Given the first rate cut by the Fed last September, the stock market has already risen above 12%. That rise was largely escalated by the thrill around artificial intelligence and the exponential growth of the technology industry.

As mentioned by Buchbinder, “The delayed effects of trade policy are likely to weigh on the economy in the second half, leading to weaker labor market demand.” He continued to mention that the current complacency of the market toward trade policy and the country’s dependency on robust economic data to strengthen the economy are potential weaknesses that could interfere with the Fed’s decision, extensively impacting us stocks.

New York Stock Exchange: Diverging Points of View on Fed Cut Rates in 2025

Amidst the tense trade war and tariff negotiations, investors are pricing heavily on the interest rate cuts assumed to take place in September of 2025. CME FedWatch is showing more than 93% odds in the slashes. However, major organizations like Bank of America and Morgan Stanley believe that the Federal Reserve may not change rates for the rest of 2025, as reported by Business Insider. Bond traders are intensifying their bets on the Fed’s rate cutting, as the US President demanded a reduction in the borrowing costs by the central bank, with a weakening US economy to support the scenario.

Whom to Keep Your Eyes on During the Rate-Cut Procedures?

With such dividing points of view among investors, Buchbinder suggests taking a cautious approach toward the rate-cutting cycles. Although the Fed rate slashes do not have any direct impact on the global economy, they do influence other economic interest rates in the global market.  Moving from the global economic viewpoint, concentrating on the impact of the Fed rate cuts on the best stock sectors of the US that operate globally is important.

In Buchbinder’s view, it is too early to amplify portfolio risk beyond the benchmark levels, and he recommends focusing on the growth of large capital stocks, financials, and communication services. In his words, "Bottom line, investors may be well served by bracing for occasional bouts of volatility given how much optimism is currently reflected in equity prices."

LPL’s strategy team is also monitoring tariff negotiations, bond outcomes, earnings results, and inflation data to identify a better entrance strategy for equities.

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