When the Fed cuts rates, what actually changes in your portfolio
A rate cut makes money cheaper: the bonds you already hold rise in price, shares that promise distant profits are worth more, and the dollar tends to weaken. But the reason for the cut matters more than the cut itself: if the Fed is cutting because the economy is deteriorating, stock markets can fall regardless.
The bonds you already hold go up
A bond pays a fixed coupon. If new rates fall, your older bond paying more becomes more desirable, and its price rises. This is the most direct effect and the most reliable of all.
The effect is stronger the further away the maturity: a ten-year bond moves far more than a two-year one for the same cut.
Shares: it depends which ones
Companies whose value lies mostly in what they will earn many years from now — technology, growth — are the most sensitive: with low rates that distant future is worth more today. Companies already earning steadily right now move less.
Banks often go the other way: they earn on the gap between the rate they lend at and the rate they fund at, and that gap narrows when rates fall.
Why markets sometimes fall anyway
The Fed doesn't cut as a favour to investors: it cuts because it sees the economy slowing, or unemployment rising. The cut is the medicine, and medicine arrives when there is an illness.
So the reaction depends on what the market had already taken for granted. A cut expected for months is already in the price. A surprise cut, made in a hurry, can frighten more than it reassures: it says the Fed has seen something bad.
In short
- A cut raises the price of the bonds you already hold.
- Growth shares benefit most; banks often suffer.
- The reason for the cut matters more than the cut.
- An expected cut is already priced in: markets react to surprise, not to news.
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