How Do Interest Rate Cuts Affect Stocks, Bonds, the Dollar and Gold?

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When the Federal Reserve cuts interest rates, most people expect the same script. Stocks go up, bonds go up, the US dollar goes down and gold goes up.

I went back through every Fed cutting cycle since 1990 to check that script. There are 8 of them, and 5 have data for all four markets. Only 1 of those 5 followed the script in full: the cycle that began in August 2019.

So here is the short answer. What a rate cut does to markets depends on why the Fed is cutting. When it cut as insurance and no recession followed, the S&P 500 rose between 18.6% and 20.9% over the next 12 months, all 3 times. When it cut to rescue an economy already sliding into recession, the S&P 500 ended the year anywhere from up 4.1% to down 18.3%. The 10-year Treasury yield was higher a year after the first cut in 5 of the 8 cycles. The dollar rose in 4 and fell in 4. Gold rose in all 5 cycles where I have gold data, but by anything from 3.6% to 42.6%.

The rest of this post shows the numbers behind each of those lines, so you can judge the next cutting cycle on its own facts instead of on the script.

What is an interest rate cut?

An interest rate cut is a decision by a central bank to lower its policy rate. In the US, that is the federal funds rate, the rate banks charge each other for overnight loans. The Fed’s committee sets a target range for it, such as 4.75% to 5.00%, and moves it in basis points. One basis point is 1/100 of a percentage point, so a 50 basis point cut lowers the range by 0.5 percentage points.

The policy rate then leaks into everything priced off it. Bank deposits pay a bit less, floating-rate loans get a bit cheaper, and money market funds yield less, so some of that cash goes looking for a better return in bonds, stocks or anything else that still pays.

That is the textbook chain, and it is true as far as it goes. The trouble is what the textbook leaves out, which is the reason the Fed cut in the first place.

Why does the Fed cut rates, and why does the reason matter?

The Fed cuts for two very different reasons, and the record below suggests markets care more about the reason than about the cut.

Think about the last time you took a car on a long drive. Topping up the tyres before you leave and calling a tow truck on the expressway both involve “doing something to the car”, but they tell you very different things about the trip.

I sort cutting cycles the same way, into 2 types:

1. Insurance cuts. The economy is still growing, inflation is under control, and the Fed trims rates to keep a slowdown from turning into something worse. The cycles that started in 1995, 1998 and 2024 fit here. No recession began within two years of any of them.
2. Rescue cuts. The economy is already rolling over, and the Fed is cutting into the fall. The cycles that started in 1990, 2001 and 2007 fit here. Each one overlapped a recession dated by the National Bureau of Economic Research, the body that officially dates US recessions.

The 2019 and 2020 cycles sit in a box of their own. The 2019 cuts began as insurance, and then a pandemic arrived in early 2020 that no rate model was ever going to predict.

The 2024 cut is a good example of the insurance type. US consumer prices had risen 9.1% in the 12 months to June 2022, and the Fed answered with 11 hikes between March 2022 and July 2023, taking the target range to 5.25% to 5.50%. In September 2024 it cut by 50 basis points, to 4.75% to 5.00%. Its statement that day said the economy had “continued to expand at a solid pace”.

What happened in the last 8 Fed cutting cycles?

Here is each cycle, measured over the 12 months after the first cut took effect.

First cut	Fed rate before → at the last cut	Recession (NBER)	S&P 500	10-year yield	US dollar index	Gold
Jul 1990	8.25% → 3.00% (Sep 1992)	Yes, Jul 1990 to Mar 1991	+4.1%	-0.24 pts	+6.4%	n/a
Jul 1995	6.00% → 5.25% (Jan 1996)	No	+20.1%	+0.87 pts	+8.3%	n/a
Sep 1998	5.50% → 4.75% (Nov 1998)	No	+20.9%	+1.36 pts	+2.8%	n/a
Jan 2001	6.50% → 1.00% (Jun 2003)	Yes, Mar to Nov 2001	-9.2%	+0.20 pts	+6.7%	+3.7%
Sep 2007	5.25% → 0-0.25% (Dec 2008)	Yes, Dec 2007 to Jun 2009	-18.3%	-1.03 pts	-2.1%	+24.7%
Aug 2019	2.25-2.50% → 1.50-1.75% (Oct 2019)	Feb to Apr 2020 (pandemic)	+9.8%	-1.48 pts	-5.1%	+37.6%
Mar 2020	1.50-1.75% → 0-0.25% (Mar 2020)	Feb to Apr 2020	+25.5%	+0.54 pts	-5.7%	+3.6%
Sep 2024	5.25-5.50% → 3.50-3.75% (Dec 2025)	None dated	+18.6%	+0.45 pts	-2.9%	+42.6%

Each move runs from the close on the trading day before the first cut took effect to the close 12 months later. Index levels exclude dividends. Gold is front-month COMEX gold futures, and the data I used starts in August 2000. “pts” means percentage points of yield.

Eight cycles is a small sample, so this table is a set of case studies rather than a law. Even so, a few patterns are hard to miss.

How do interest rate cuts affect stocks?

For stocks, the type of cut is what shows up in the numbers.

In the 3 insurance cycles, the S&P 500 was up 20.1%, 20.9% and 18.6% a year later. In the 3 rescue cycles it was up 4.1%, down 9.2% and down 18.3%.

And the 12-month number hides the worst of the rescue cycles. Say you had bought into the S&P 500 on 2 January 2001, the day before the Fed’s first cut. By 9 October 2002, with the Fed still cutting, you were down nearly 40%. In the 2007 cycle the index peaked on 9 October 2007, three weeks after the first cut, and then fell about 57% to its low on 9 March 2009. The Fed kept cutting until December 2008, and the index kept falling for three more months. The cuts did not stop the fear.

So you might be thinking, surely small companies do better, since they borrow more? It is a popular line, and it sounds right. In this sample, the Russell 2000 small-cap index beat the S&P 500 over the 12 months in only 3 of the 8 cycles: 2001, 2007 and 2020. In 2007, “beating” only meant falling less.

Personally, I find this the most useful thing in the whole table. A cut is a reply to the data. The data that made the Fed reply tells you more than the reply does.

If you want a simple daily routine for reading moves like these in 15 minutes a day, the free 15-Minute Swing Trader’s Checklist is at the end of this post.

How do interest rate cuts affect bonds?

Start with the mechanics, because they are simple. A bond’s price moves the opposite way to its yield. When yields fall, existing bonds that pay a higher coupon become worth more, so their prices rise.

But the Fed only sets the overnight rate, and the 10-year Treasury yield is set by the market every day, so a cut at the short end can arrive while the long end does something else entirely.

In 5 of the 8 cycles, the 10-year yield was higher 12 months after the first cut than the day before it. The 2024 cycle is the clearest recent case. The 10-year yield was about 3.68% on 18 September 2024, the day before the first cut took effect. By 13 January 2025, after 100 basis points of cuts, it had climbed to about 4.80%.

How does that happen? My read is that the bond market prices the cuts in well before the Fed delivers them. By the time the cut is announced, long yields may already have fallen as far as the market thinks they should. After that, the 10-year trades on growth, inflation and government borrowing, and the Fed’s next move is only one input.

The 10-year yield did fall hard in the 2007 and 2019 cycles. Those two windows held the 2008 financial crisis and the 2020 pandemic. Long bonds rallied most when the reason for the cut turned out to be serious.

How do interest rate cuts affect the US dollar?

The theory says a lower US rate makes dollar deposits less attractive, so the dollar should weaken.

The record is a coin flip. The US dollar index rose over the 12 months in 4 cycles, in 1990, 1995, 1998 and 2001, and fell in the other 4, in 2007, 2019, 2020 and 2024.

Even the 2024 fall took a detour. The dollar index was at 100.60 the day before the first cut, and a month later it was at 103.49. By 13 January 2025 it was about 9% above where it started, which is the opposite of what the theory promised. Only then did it reverse, ending the 12 months 2.9% lower.

The reason is that currencies are priced in pairs. A US rate cut matters against what the other central banks are doing at the same time, and against how the US economy is doing relative to everyone else. For a Singapore investor holding US assets, that currency swing can be as large as the move in the asset itself, which is why currency hedging deserves its own decision.

How do interest rate cuts affect gold?

Gold pays no interest. When cash and bonds pay less, the return you give up by holding gold shrinks, so gold tends to look more attractive when rates fall.

In the 5 cycles where I have gold data, gold was up 12 months after the first cut every time. The size of the move is all over the place, though: 3.7% in 2001, 24.7% in 2007, 37.6% in 2019, 3.6% in 2020 and 42.6% in 2024.

The 2007 cycle shows why some investors hold gold at all. In the 12 months after that first cut, the S&P 500 fell 18.3% and gold rose 24.7%. Five data points is still a very thin record, so I would not read this as a rule. If you want the longer case for and against holding it, I cover that in should you own gold.

What should you watch when the Fed starts cutting?

Three questions do most of the work.

1. Why is the Fed cutting? The statement and the data behind it usually answer this. A sharp jump in unemployment and falling earnings point to a rescue. Steady growth with cooling inflation points to insurance.
2. What was already priced in? If the cut was expected for months, the market may have done its moving before the announcement. The 2024 bond market is the reminder.
3. What are the other markets saying? Stocks, bonds, the dollar and commodities often disagree with each other at turning points. Reading them together is the whole idea behind intermarket analysis, and the yield curve is part of the same picture, which I cover in what an inverted yield curve says about recessions.

It also helps to remember that a cutting cycle can stop and reverse. The Fed cut 6 times between September 2024 and December 2025, by 175 basis points in all. Then in September 2026 it raised rates again, by 25 basis points, to 3.75% to 4.00%.

If you want to see how the Fed’s meetings themselves move prices on the day, I break that down in what the FOMC meeting is and how to trade it.

Frequently asked questions

Do stocks always go up when the Fed cuts rates?
No. In the 8 cutting cycles since 1990, the S&P 500 was lower 12 months after the first cut twice, in 2001 and 2007, and both times a recession was under way. In the 3 cycles with no recession, it was up between 18.6% and 20.9%.

Do bond prices rise when interest rates are cut?
Short-term yields follow the Fed closely, so short-term bond prices usually rise. The 10-year Treasury yield is set by the market, and it was higher a year after the first cut in 5 of the last 8 cycles, which means long bond prices fell over that stretch.

Why did the 10-year yield rise after the Fed cut in 2024?
The market had priced the cuts in before they happened, and the economy kept growing. The 10-year yield went from about 3.68% the day before the first cut to about 4.80% by 13 January 2025.

Does the US dollar always weaken after a rate cut?
No. Over the 12 months after the first cut, the US dollar index rose in 4 of the last 8 cycles and fell in the other 4.

How big is a basis point?
One basis point is 0.01 percentage points. A 25 basis point cut lowers the Fed’s target range by 0.25 percentage points, and a 50 basis point cut by 0.5.

Over to you. Which type of cut do you think the Fed’s next cycle will be, insurance or rescue? Which of these markets would you watch first to find out? And did the 2024 bond market catch you by surprise?

Let me know your answers in the comments below!

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