Fed Chief Powell on Interest Rate Course – What Does This Mean for the S&P 500?

The US Federal Reserve pursues two central objectives: increasing the inflation rate by 2% per year and maintaining full employment, with no specific target for the unemployment rate. In 2022, the Consumer Price Index (CPI) experienced a 40-year high of 8%, triggering one of the most aggressive interest hike campaigns in Fed history. Since then, however, inflation has noticeably cooled, allowing the Fed to lower interest rates for the first time since March 2020 in September. Recent projections from the central bank indicate further rate cuts, which historically could impact the S&P 500 stock index—but not necessarily in the expected direction. The CPI ended 2023 at 4.1% and reached an annualized rate of only 2.5% in August 2024, bringing the Fed's target of 2% within reach. Therefore, the influential Federal Open Market Committee (FOMC) decided at its September meeting to lower the key interest rate by 50 basis points. The FOMC forecasts a key interest rate of 2.8% for 2026, significantly below the peak of 5.33% reached in 2023. Falling interest rates enhance companies’ borrowing capacity and reduce their interest costs—positive factors that can continue to drive growth. However, historical data suggests that declining interest rates could predict a short-term decrease in the S&P 500, as such rate reductions often coincide with a cooling economy. Nevertheless, the S&P 500 tends to move upward over the long term, so investors should not be discouraged by possible temporary weaknesses. Considering the drop in the unemployment rate to 3.7% at the beginning of 2024, which rose to 4.1% by September, it appears that a downturn in the labor market may also influence consumer behavior. This could have negative impacts on the overall economy and might prompt analysts to lower their earnings outlooks for American companies, making a correction of the S&P 500 likely. However, investors should not sell hastily in such a case. Rather, a potential decline could present an excellent buying opportunity due to the index's long-term upward trend.