For the past few years, higher interest rates have affected markets like stocks, cryptocurrency, and commodities, such as oil. Now that the Federal Reserve (Fed) has started to lower rates, many are asking: what will happen next, and how will this impact markets over time?
At its meeting on September 17-18, the Fed reduced the federal funds rate by 50 basis points, bringing it down to a range of 4.75% to 5.0%. With inflation slowing, the Fed decided it was the right moment to ease up on its strict monetary policies.
This rate cut could be the first in a series aimed at helping to support the U.S. economy as it moves forward.
Why Lower Rates Matter to Investors
Interest rates are one of the most powerful tools the Fed uses to influence the economy. When rates are lowered, it becomes cheaper to borrow money, encouraging people and businesses to spend more. On the other hand, higher rates make borrowing more expensive, which slows down spending—something the Fed does to help control inflation.
During the last few years, the Fed raised rates 11 times to fight inflation. This tightening of monetary policy led to major drops in markets like stocks and cryptocurrencies, which rely heavily on investor confidence and economic conditions. Additionally, commodities markets can also be affected by such changes, and understanding how to trade commodities becomes essential in navigating these economic shifts effectively.
In 2022, for example, many stock prices fell as rising interest rates signaled tougher times ahead. But by 2023, as it became clear that rate hikes were coming to an end, the outlook for markets improved. The S&P 500, one of the major stock market indexes, climbed by around 24%, while the Nasdaq Composite saw gains of about 43%.
How Have Interest Rates Affected Stocks and Crypto?
High-growth stocks and cryptocurrencies were hit hard by rising interest rates in 2022. Many companies that were unprofitable, but had high growth potential, saw their stock prices plummet. For example, firms like Cloudflare and Zoom Video Communications are still worth less than half of their all-time highs.
On the other hand, more established companies like Microsoft and Apple performed better during this period. Even though 2022 was challenging for them, these big-name tech companies bounced back strongly in 2023.
Cryptocurrencies also struggled when interest rates went up. Bitcoin and other digital currencies saw sharp declines throughout 2022, but things changed as rates stabilized in 2023. Bitcoin even hit an all-time high in March 2024, thanks in part to the approval of Bitcoin ETFs, which increased demand from investors.
What to Expect from Lower Rates
With interest rates now heading lower, we could see more movement in the markets. Sectors sensitive to rate changes, such as banks and real estate investment trusts (REITs), have already shown signs of benefiting from the lower borrowing costs. Smaller companies, often represented by indexes like the Russell 2000, have also gained in recent weeks, as rate cuts become more likely.
Interestingly, some of the biggest tech companies like Apple, Microsoft, and Amazon have not yet fully rebounded, despite the lower rates. These companies fell off their 52-week highs, although they have seen some recovery recently.
However, uncertainty about how fast the Fed will lower rates—and how that will impact the economy—continues to drive volatility in the markets.
How Do Interest Rates Affect Your Investment Strategy?
Interest rates, inflation, and market uncertainty can create a challenging environment for investors. With so much volatility, it’s natural for investors to feel cautious about their next move.
However, for most investors, the best approach in a market like this is to stick to a long-term investment plan. This typically involves regularly investing in a diversified portfolio of stocks, bonds, or other assets, without being overly influenced by short-term market fluctuations. For others, this strategy might include holding well-diversified index funds. The key is to avoid letting emotions influence your long-term financial goals.
Short-term traders might feel stressed about how interest rates are moving or whether a recession is on the horizon. But for those with a long-term perspective, the focus should be on maintaining a steady course. Instead of trying to time the market perfectly, long-term investors can use market volatility as an opportunity to potentially add more to their portfolio.
Market downturns, while unsettling, can actually present opportunities. When prices drop, it can be a good time to invest in quality assets at a discount. As Warren Buffett once said, “You pay a very high price in the stock market for a cheery consensus,” meaning that when most people agree that the market is attractive, prices are often already high.
Conclusion
The Federal Reserve’s decision to lower interest rates signals a turning point in its approach to managing the economy. For long-term investors, this shift may present new opportunities as markets adjust to lower rates. While the road ahead may still be uncertain, understanding the influence of interest rates on stocks, cryptocurrencies, and commodities can help investors stay informed and prepared for what’s next.