How do US assets perform when the Fed cuts rates?
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With the US Federal Reserve expected to cut interest rates, how have US stocks, bonds and cash performed in previous rate cutting cycles and what can we expect to see going forward?
In the 12-months after the US Federal Reserve (Fed) starts cutting interest rates, the average return from US stocks has been 11% ahead of inflation. Stocks have also outperformed government bonds by 6% and corporate bonds by 5%, on average.
Cash has been left even further in their wake. Stocks have beaten cash by 9% in the 12 months after rates start to be cut, on average. Bonds have also been a better place to be than cash.
These outcomes are the findings of new, long-term, analysis of investment returns during 22 US interest rate cutting cycles since 1928 – see Figure 1.
Figure 1: Stocks have outperformed bonds which have outperformed cash when the Fed has started cutting rates, on average*
| Date of first cut | Cut to rates in each cycle, % | US stock market | Government bonds | Corporate bonds | Cash |
| 30/09/1929* | 5.9 | -33% | 15% | 16% | 8% |
| 31/12/1931* | 3.1 | 2% | 30% | 24% | 13% |
| 31/03/1933* | 1.0 | 82% | 0% | 10% | -5% |
| 30/11/1953* | 1.6 | 46% | 9% | 7% | 1% |
| 31/10/1957* | 2.9 | 27% | 0% | 5% | 0% |
| 31/05/1960* | 2.7 | 22% | 8% | 7% | 1% |
| 30/11/1966 | 2.0 | 17% | -10% | -7% | 2% |
| 28/02/1970* | 5.3 | 7% | 4% | 8% | 1% |
| 30/09/1971 | 2.3 | 12% | 2% | 6% | 1% |
| 30/09/1973* | 1.8 | -45% | -16% | -21% | -3% |
| 31/07/1974* | 8.3 | 7% | 3% | 7% | -3% |
| 30/04/1980* | 8.6 | 19% | -17% | -18% | 1% |
| 31/01/1981* | 4.4 | -10% | -4% | -9% | 6% |
| 31/07/1981* | 6.7 | -19% | 14% | 11% | 6% |
| 30/04/1982* | 6.4 | 43% | 30% | 39% | 5% |
| 31/08/1984 | 5.8 | 14% | 25% | 26% | 5% |
| 31/05/1989 | 6.9 | 12% | 3% | 3% | 4% |
| 30/06/1995 | 0.8 | 23% | 0% | 2% | 3% |
| 30/09/1998 | 0.9 | 25% | -11% | -8% | 2% |
| 31/12/2000* | 5.4 | -13% | 2% | 9% | 2% |
| 31/07/2007* | 5.2 | -16% | 3% | -5% | -3% |
| 31/07/2019* | 2.4 | 11% | 24% | 21% | 0% |
| Average | 11% | 5% | 6% | 2% | |
| Average: no-recession | 17% | 2% | 4% | 3% | |
| Average: recession | 8% | 7% | 7% | 2% | |
12-month real returns from the date of first cut
Past performance is not necessarily a guide to the future and may not be repeated
Stocks perform better when recession can be avoided, but usually cope ok even when it’s not
These returns are even more impressive considering that in 16 of the 22 cycles the US economy was either already in a recession when cuts commenced or entered one within 12 months.
Recession dates are marked in Figure 1 and shaded in Figure 2, below.
Stock returns were better if a recession was avoided but even if it wasn’t they were still positive on average.
Figure 2: The 22 main rate cutting cycles since 1928**
There are big exceptions, and a recession is obviously not something to be welcomed but – for stock market investors – it has not always been something to unduly fear either.
Bond investors, in contrast, tend to do better if a recession occurs. They usually benefit from safe-haven buying (especially government bonds), which drives yields lower and bond prices higher. But they’ve also done ok if a recession was avoided.
Corporate bonds have outperformed government bonds, on average, in the more economically-rosy scenario.
The range of historical returns is wide for stocks and bonds, but both have tended to do well when the Fed has started cutting rates.
What about today? Unlike most historical episodes, the Fed is not considering cutting rates because it’s worried that the economy is too weak. It is doing so because inflation is going in the right direction, meaning policy does not have to be so restrictive.
If it is right, and it can engineer a “soft landing”, then 2024 could be a good year for stock market investors and bond investors.
* Indicates recession occurred within 12-months. Source for return data: CFA Institute Stocks, Bonds, Bills, and Inflation (SBBI®) database, and Schroders. Source for Fed Funds data: Post-1954 is direct from FRED. Earlier data is based on the Federal Funds rate published in the New York Tribune and Wall Street Journal, also sourced from FRED. I follow an approach consistent with that outlined in A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-54, St Louis Fed. For that earlier data, a 7-day average has been taken to remove daily volatility i.e. the month-end figure is the average in the 7 days leading up to month-end.
** Monthly series shown. Post-1954 data is direct from FRED. Earlier data is based on the Federal Funds rate published in the New York Tribune and Wall Street Journal, also sourced from FRED. An approach consistent with that outlined in A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-54, St Louis Fed, has been followed. For that earlier data, a seven-day average has been taken to remove daily volatility i.e. the month-end figure is the average in the seven days leading up to month-end.
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