The Federal Open Market Committee (FOMC) will be making its next interest rate announcement today, September 18th, at 2pm EST. The Fed Funds Rate, which is the short-term interest rate that banks lend to each other at, is set to decline for the first time since March of 2020. How might the S&P 500, best measured by the SPDR S&P 500 Trust (SPY), react after the Fed’s decision?
Expectations Prior to Today’s Announcement
A heavy majority of market participants had previously been expecting a rate decrease of 25 bps, which has historically been the most common size of interest rate movements by the FOMC. In recent weeks, however, momentum has been growing for a 50 bps rate cut amid fears of a slowing economy and sluggish employment data in the U.S.
A recent assessment of Fed Funds Rate Futures has the probability of a 50 bps cut pegged at 61%, according to Reuters. There’s a notable lack of consensus for the FOMC’s decision this time around. That should lead to active, and possibly volatile, trading once the interest rate decision is announced.
While a 50 bps cut will be seen as providing the economy an extra boost, that may not equate to further gains for stock markets. Not only has the S&P 500 risen +4.18% in the last 7 trading sessions (September 9 – September 17), potentially frontrunning a bigger rate cut, but a 50 bps move might be interpreted by investors as the FOMC being more concerned about the economy that previously thought. A 50 bps cut could lead to profit taking in stocks for that reason. It’s possible that a 25 bps will offer some reassurance to those who are worried about a potential recession.
What History Tells Us
We looked back through 25 years of historical Fed Funds Rate cuts. During this period, the FOMC has cut rates by 50 bps or more 18 times. In half of those occasions, markets closed lower on the day of trading following the rate cut.
The average S&P 500 market move on the trading day following a 50 bps rate cut has been -0.13% since the year 2000.
Investors may wish to monitor for sentiment changes after the initial reaction to today’s rate announcement.
