Study of Effects of the Fed’s Interest Rate Cut on Stock Market Based on VAR Model

Ziqian Li ()
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Ziqian Li: China Agricultural University, College of Economics and Management

A chapter in Proceedings of the 2025 International Conference on Financial Risk and Investment Management (ICFRIM 2025), 2025, pp 509-519 from Springer

Abstract: Abstract The interest rates cut always has significant influence on countries’ economic, especially on the stock markets. On Sept. 19th 2024, the Federal Reserve announces the cut of Federal Funds Effective Rate, which caused some impacts on stock markets. To improve the accuracy of the conclusions of the empirical analyses, the study utilizes VAR model and the data of Fed Funds Rate, Consumer Price Index, Volatility Index and S&P 500 collected on a monthly basis from December 2000 to October 2024 to analyse the effect of Fed’s interest rate cut on stock market. The results showed that Fed’s interest rate cut has negative impact in short term, and positive impact in long term. Short-term impact effects are greater than long-term impact. Actionable recommendations for investors, corporations, and policymakers are provided accordingly. For investors, monitoring monetary policy changes, diversifying asset allocation, and optimizing financing strategies is advised. For corporations, focus on leveraging opportunities and adjusting financing strategies to enhance resilience in a low-interest-rate environment. For policymakers, strengthening macroeconomic regulation and reinforcing macro-control mechanisms to safeguard economic stability is worth mentioning.

Keywords: Federal Reserve’s interest rates cut; Stock market; Inflation; Market expectation; VAR model (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-748-9_57

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DOI: 10.2991/978-94-6463-748-9_57

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