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The Fed Could Rescue The Stock Market

Mar. 02, 2020 12:28 PM ET4 Comments
Kevin Means profile picture
Kevin Means


  • The fed funds futures market is indicating that a rate cut may lie ahead.
  • In the past, this has been very positive for stocks.
  • There has been an 18% correlation between 6-month ahead Fed funds futures implied rate change and next-month stock market return.

Shutterstock image of "cut" and $100 billSource: Shutterstock

The Fed funds Rate

The Fed funds rate is the rate at which banks lend their excess reserves at the Fed to other banks in need of increasing their reserves. As such it directly affects the ability and willingness of U.S. banks to make loans. It is also a key interest rate that has a rippling effect on many other interest rates. The Federal Reserve has traditionally made managing the Fed funds rate its primary tool of monetary policy.

Prior to December 16, 2008, the Federal Open Market Committee voted on a target Fed funds rate, but on that date, the Fed changed to a policy of announcing a target range of zero to .25%. That range was left unchanged until December 17, 2015, when it was raised to .25% to .50%. Each change after that has been an increase or decrease in the range in increments of .25%.

Databases often use the top end of these target ranges as the target rate. In addition, there is also an “effective Fed funds rate” which is a volume-weighted median of overnight federal funds transactions updated daily by the New York Federal Reserve. The CME Group offers monthly Fed funds futures contracts based upon the 30-day average of the effective Fed funds rate at settlement. Futures prices reflect the opinions of market participants with respect to future effective Fed funds rates.

Post-Recession Monetary Policy

U.S. monetary policy changed after the Great Recession of 2008, perhaps forever. The Fed funds rate was pushed down to an historic low of 0% to .25% and kept near zero until the end of 2015. Never before had the Fed gone to such extremes to stimulate the U.S. economy, and never for so long, and rarely with so little apparent effect on economic growth. It did boost the stock and bond markets, however.

This article was written by

Kevin Means profile picture
I manage portfolios specializing in “go anywhere” tactical timing of exposures to asset classes, countries, currencies, sectors, industries, and investment factors (such as small vs large, growth vs value, etc.). As a former hedge fund manager of my own hedge fund firm, former chief investment officer of several large investment organizations, and former director of quantitative research, my background has well prepared me for my current endeavor.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (4)

OK, just low to -10 the interest rates and bull market forever...
Keep buying dips, its your money, you can burn it if you want.
Rescue the market with more debt???? Is this the solution, more debt? REALLY?
Maga infinity profile picture
@YONATAX make debts greater again.
....YEP let s build another floor upon the already decrepit, debt ridden house of cards ...
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