Long Pauses Before Rate Cuts Have Fueled Equity Gains

Fed’s Rate Cuts After Pause: A Boon for Stocks, but Risks Loom

A Turning Point for Monetary Policy

After a nine-month pause, the Federal Reserve decided this Wednesday that it was time to lower interest rates again. Markets had been waiting for this moment with anticipation — and history suggests their optimism may not be misplaced. Past patterns show that rate cuts following extended breaks have often boosted stocks.

Political Pressure Clouds Fed Independence

Yet this moment is not without complications. President Trump’s unrelenting pressure on the Fed, combined with the presence of Stephen Miran — a senior Trump adviser temporarily serving on the Fed’s board — has raised questions about the central bank’s independence. Trump has also clashed with Fed Chair Jerome H. Powell and is pushing to remove Governor Lisa Cook. While Powell insists decisions remain data-driven, critics warn that political interference could cloud policy judgment.

What History Tells Us

Looking back over the past five decades, the record is striking. According to Ned Davis Research, in seven instances since 1976 when the Fed resumed rate cuts after a pause of at least six months, the S&P 500 gained over the following year in six of them. The average one-year return was 15.5%, compared with 10.1% across all years.

Notably, rallies followed the July 1982 and March 1986 cuts, when stocks surged nearly 50% and 29% respectively. Even in more modest periods, investors typically welcomed easing cycles as signals to buy.

A separate analysis by Carson Group found that when rate cuts occurred near record highs, as they have now, markets rose 100% of the time over the following year, with an average gain close to 14%.

Why This Time Could Differ

Still, experts caution that history doesn’t guarantee the future. Rate cuts are generally bullish when they stimulate growth, but they can also signal weakness ahead. If corporate earnings slip or the economy slows too much, lower rates may not be enough to shield investors.

Economists surveyed in the Blue Chip Economic Indicators report forecast modest growth, with recession risks easing slightly but still elevated at 38%. Uncertainty over tariffs, labor market revisions, and political disputes adds further unpredictability.

Market Heat and Inflation Fears

The stock market is already overheated, and additional rate cuts could fuel what some analysts call a potential “melt-up” — a surge of irrational exuberance pushing valuations higher. The CAPE ratio, developed by economist Robert Shiller, shows equities trading at historically rich levels, suggesting long-term returns may be capped even if short-term gains continue.

The Fed hinted at further rate reductions this year and into 2026, but some warn this could echo the 1970s, when political pressure led to cuts that ultimately unleashed runaway inflation. The only historical case where stocks fell after resumed cuts — in 1976 — also coincided with stubbornly high consumer prices.

A Balanced Approach for Investors

For now, investors appear confident, and the Fed’s moves align with historical trends favoring equities. Still, risks are considerable. Another bout of inflation, slowing growth, or stagflation could easily derail today’s optimism.

Long-term investors may find it prudent to remain diversified, balancing stock exposure with safer assets, rather than betting entirely on the current momentum.

The bottom line: Fed rate cuts after long pauses have usually rewarded stockholders. But in today’s politically charged and uncertain climate, caution may be as important as confidence.