How the Fed Cutting Interest Rates Affects Banks, Stocks and More

It’s easy to assume that lower interest rates are a panacea. Almost everyone, after all, is affected to some degree by the cost of borrowing. When the Federal Reserve cuts its benchmark rates — as it is expected to do this week for the first time since the pandemic — that makes credit less expensive for consumers and corporations alike.The cheaper debt means companies can spend more to expand, just as consumers might be able to afford bigger homes with lower mortgage rates.

But there is a complicated and somewhat unpredictable interplay between interest rates and the business world. Lower rates bolster the economy, but for companies and their investors, lower rates do not always carry unalloyed positive effects.

Here’s what to expect for corporate America when the Fed lowers rates:

For markets, it’s all about ‘why.’

All else equal, lower rates are good for the stock market. When investors gauge the value of a stock, they tend to come up with a higher figure when interest rates fall because of a common valuation principle known as discounting, in which a company’s future cash flows and costs become more attractive under low-rate conditions.

Fed officials are expected to cut rates by a quarter or a half a percentage point at this week’s meeting. In practice, according to analysts, the reason rates are being lowered matters more than the precise timing or magnitude.

If the economy is faltering, forcing the Fed to lower rates quickly, that can be a headwind to the stock market. A gentle return to a more normal level of rates — at least in the context of the past few decades — is less likely to crimp corporate profits in the way that an economic downturn could.

“It’s less about when they cut and how quickly, and more about why they cut,” said Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas.