If the Federal Reserve Reverses Rate Cuts, It Could Be Disastrous
The Federal Reserve issued several interest rate cuts in 2024 with plans to issue a couple more in 2025, but there is a risk that they could increase rates instead.
Stock market gains over the past year have proven that the US economy is strong and is making incredible progress since the post-Covid lows. However, many are still fearful that the economy could relapse. If the Federal Reserve takes the strong economy as an indicator that they can now increase interest rates, that could be very harmful for the stock markets.
Rate cuts help the economy by giving consumers more reasons to spend money. Interest rate increases do the opposite and stifle spending and slow the economy. In the past year, the S&P 500 stock market index has grown by 27%. That could be enough to spur the Fed to reverse their decision on interest rate cuts. The US GDP is also up and growing faster than expected.
Is There Cause for Concern?
A rate increase in 2025 is very unlikely but not impossible. The reason that investors should have some concern in this regard is because the Federal Reserve has already modified their plans for rate cuts in 2025 by decreasing them slightly. That is somewhat worrying already, and if the economy continues to improve, who knows what the Fed will do with their planned rate cuts.
They meet eight times a year to discuss policy and make decisions that include interest rates. There are multiple opportunities for rate cuts to be reduced, eliminated, or reversed.
What is most likely, according to FedWatch tools, is that the Fed will issue a quarter point rate cut in 2025 and leave it at that. The other planned rate cuts may not happen. While there is some cause for concern regarding a rate increase, the chances of that happening are low.
Still, if the Fed reduces the planned rate cuts further, that could stifle stock market growth. The Fed did try to implement rate cuts throughout 2024 and was not successful until the last quarter of the year. Just because they have planned rate cuts for 2025, that does not mean they will happen.
For the Fed to follow through on those planned cuts at their current levels, the economy will have to show signs of growth or at least remain stable. If neither of those happen, then the rate cuts could be off the table entirely.
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