Up or down? What has to happen in the Fed’s interest rate decision for stocks to rally
The Federal Reserve is expected to keep interest rates steady during this week’s meeting of the Federal Open Market Committee, with Fed chair Jerome Powell seemingly in favor of a wait-and-see approach amid ongoing economic uncertainty caused by President Donald Trump’s policies.
“We should wait”
Experts are predicting that the Federal Reserve will on Wednesday announce that it is maintaining its benchmark rate in its current range of 4.25% to 4.5%.
This would be the second straight meeting that the Fed has opted against an interest-rate change, after the U.S. central bank also maintained the status quo in January. That came after three straight cuts in late 2024.
“The costs of being cautious are very, very low,” Powell said in an appearance at the University of Chicago earlier this month, per CNBC. “We should wait,” added the 72-year-old, who has headed up the Fed since 2018.
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Fed’s dilemma amid economic uncertainty
Among his most notable moves since taking office in January, President Trump has instituted an aggressive policy of tariffs on goods imported from countries such as Canada, Mexico and China. Such actions have led to fears of rising inflation and a slowing of economic growth in the U.S.
It’s a situation that leaves the Fed in a “tough spot”, notes USA Today’s economics reporter Paul Davidson, as the two issues have opposite solutions.
“The Fed raises rates, or keeps them higher for longer, to tame inflation,” Davidson explains. “It cuts rates to bolster a weak economy and job market.” Given that it appears to be caught between two stools, the Fed is likely to “play it down the middle”, Davidson adds.
Deutsche Bank analysts agree, telling a investors in a note on Friday, per The Hill: “We expect the Fed to hold rates steady for the second consecutive meeting.”
It’s also the outcome anticipated by the CME FedWatch predictor, which says there is a 99% chance of the Fed keeping its benchmark interest rate at the same level.
How does the Fed decision affect the stock market?
On Wall Street, recent economic uncertainty under President Trump has led to major market volatility.
Although Reuters notes that there have been gains in recent days, U.S. stocks fell once more on Tuesday.
This comes after what CNBC’s Sean Conlon and Alex Harring describe as “several tough weeks”, in which key indexes such as the S&P 500 and Nasdaq both took heavy tumbles.
While it is not an expected outcome in this week’s meeting, experts seem to agree that Wall Street typically benefits when the Fed opts to drop interest rates.
That’s because interest rates and the stock market “tend to move in opposite directions”, says Investopedia financial expert Mary Hall.
“When the Federal Reserve cuts interest rates, it generally causes the stock market to go up,” Hall explains. “When it raises interest rates, it causes the stock market to go down.”
However, Hall also stresses that there is “no guarantee” as to how the stock market will respond to any Fed decision.
Motley Fool’s financial blogger Anthony Di Pizio offers a similar note of caution on the relationship between interest rates and Wall Street, but appears to agree with Hall’s overall assessment.
“Conventional wisdom suggests lower interest rates are great for stocks,” Di Pizio says. “It makes perfect sense, because rate cuts allow businesses to borrow more money to fuel their growth, while also reducing the amount of interest they pay on loans which is a direct tailwind for their earnings.”
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