Introduction to the Federal Reserve’s Policy Meeting
The Federal Reserve will hold its next two-day policy meeting on September 16 and 17. This meeting is crucial as the Fed has yet to cut interest rates in 2025, but a deteriorating jobs market could force its hand next week. The Federal Reserve is tasked with supporting a healthy jobs market and keeping inflation under control by adjusting the federal funds rate.
How the Fed Influences the Economy
The central bank adjusts the federal funds rate to influence economic activity when the unemployment rate or the Consumer Price Index (CPI) measure of inflation deviates too far from its target levels. The Fed is facing a conundrum right now: the U.S. economy is creating far fewer jobs than expected, which would normally warrant an interest rate cut, but the CPI is still hovering significantly above its 2% target.
The Current State of the Economy
The CPI increased at a rate of 8% during 2022, which was a 40-year high, driven by a combination of pandemic-era stimulus and supply chain disruptions that sent prices soaring. The Fed aggressively raised the effective federal funds rate from its pandemic low of 0.1% to a two-decade high of 5.33% over an 18-month period between March 2022 and August 2023. The goal was to slow economic activity in order to cool prices, and it appears to have worked. The CPI increased at a rate of 4.1% in 2023, and then 2.9% in 2024. As of 2025, it’s currently rising at an annualized rate of 2.7%, so it’s clearly trending toward the Fed’s 2% target.
Wall Street’s Expectations
Wall Street thinks an interest rate cut is a near certainty at the Fed’s upcoming two-day meeting. The Fed Chair Jerome Powell expressed concerns about the health of the jobs market during his speech at the Jackson Hole Economic Policy Symposium on August 22. CME Group’s FedWatch tool now places the odds at 100% for an interest rate cut, with a 90% chance of a 25-basis-point cut, and a 10% chance of a more aggressive 50-basis-point cut.
The Potential Impact on the Stock Market
Conventional wisdom suggests lower interest rates are great for the stock market. They allow businesses to borrow more money to fuel growth, and the reduced interest cost is a direct tailwind for corporate earnings. However, an economic downturn can negatively impact corporate earnings, which can be a trigger for a temporary decline in the stock market even if the Fed is slashing interest rates. There have been several examples of this over the last 25 years, including the dot-com tech crash in 2000, the great recession in 2008, and the COVID-19 pandemic in 2020.
Historical Precedents
History proves the S&P 500 always trends higher over the long term, so any weakness is likely to be a buying opportunity rather than a reason to exit the market. The S&P 500 headed south even with interest rates falling sharply during the dot-com tech crash, the great recession, and the COVID-19 pandemic.
Investing in the S&P 500 Index
Before investing $1,000 in the S&P 500 Index, consider the current market conditions and the potential impact of the Fed’s policy decisions. The Motley Fool Stock Advisor analyst team has identified what they believe are the 10 best stocks for investors to buy now, and the S&P 500 Index wasn’t one of them. These 10 stocks could produce monster returns in the coming years.
Conclusion
In conclusion, the Federal Reserve’s upcoming policy meeting on September 16 and 17 will be crucial in determining the direction of the economy and the stock market. While a rate cut is expected, its impact on the stock market is uncertain. Historically, the S&P 500 has trended higher over the long term, but an economic downturn can negatively impact corporate earnings and trigger a temporary decline in the stock market. As such, investors should carefully consider the current market conditions and the potential impact of the Fed’s policy decisions before making any investment decisions.
