Stock Market Predictions 2024: The Fed Expected to Make Significant Interest Rate Cuts in 2024 — What Does It Mean for Stocks?

In the past two years, the U.S. Federal Reserve has shifted its monetary policy in a hawkish direction due to unprecedented economic and health emergencies caused by the COVID-19 pandemic and rising inflation. As a result, interest rates have reached historic highs, with the average 30-year fixed mortgage rate hitting 7.8% in October, causing significant strain on the economy.

However, Wall Street experts are now predicting that the Fed will make six interest rate cuts in 2024, making investors new stock market predictions 2024, providing much-needed relief and potentially igniting a positive movement in the stock market.

The Surge in Inflation Triggered a Drastic Response from the Fed

The Federal Reserve has a mandate to maintain price stability, with a target annual inflation rate of 2% measured by the Consumer Price Index (CPI). However, in 2022, the CPI hit an alarming 40-year high of 8%, prompting urgent action from the Fed.

Between March 2022 and August 2023, the Fed raised the Federal Funds Rate from a historically low range of 0% to 0.25% to a much higher range of 5.25% to 5.50%. This significant increase in interest rates has been a major contributor to the current strain on the economy.

Impact on the Stock Market

The S&P 500 index, a key indicator of the stock market’s performance, began to decline at the start of 2022 as investors anticipated a policy response to the rising inflation. By mid-year, it had fallen by over 20%, officially entering bear market territory.

However, the market began to recover before the end of 2022, despite the Fed continuing to raise interest rates, as investors looked ahead and anticipated a decrease in inflation. In 2023, there were fewer rate hikes and CPI inflation is projected to end the year at 3.5%, a significant decrease from 8% in 2022 and closer to the Fed’s target of 2%. Consequently, the S&P 500 has also seen a substantial increase of 25.6% this year.

Potential Gains for Investors

While the expected 150 basis point reduction in interest rates may not bring them back down to pre-pandemic levels, it is a significant move that could provide relief for the economy and potentially drive further gains in the stock market, making promising stock market predictions 2024. The lower cost of capital would make stocks more attractive to investors compared to risk-free assets such as cash and government bonds.

Furthermore, the potential for increased economic activity and a positive outlook for businesses could prompt a major rally in the stock market. Some analysts predict that this could lead to the benchmark S&P 500 index potentially reaching all-time highs.

History Repeats Itself

The Fed has a history of making significant interest rate cuts in response to economic shocks. For instance, during the global financial crisis in 2008, the federal funds rate was reduced from 3.50% to 0.25%. While the S&P 500 initially declined by 37%, it bounced back with a gain of 26.4% in 2009 and continued to see growth for the next nine years. Throughout this period, the federal funds rate remained below 2.50%.

Similarly, in 2020, the Fed made rapid cuts from 1.75% to 0.25% due to the pandemic and government stimulus measures. Despite the ongoing crisis, the S&P 500 still saw a gain of 18.4% that year.