The Fed's rate cut could lift stocks by double digits and boost household wealth, economist says

Economists have warned Americans that large interest rate cuts aren’t necessarily good for the economy, but one expert says it all depends on whom you are asking.

According to macroeconomist Alex Kruger, Federal Reserve’s half-point rate cut on Wednesday could boost household wealth in the short term.

“Historically, when the Fed begins its easing cycle with no recession, equities have rallied 10% in six months, while if the Fed begins the cycle in a recession, equities have fallen by 12%,” said Kruger.

Under normal circumstances, large interest rate cuts suggest a recession on the horizon. As strategist Charlie Bilello recently noted, the last two times the Fed cut rates by 0.5% were in 2001 and 2007—both recession years.

The difference this time is that the “U.S. economy is doing well,” Kruger said.

Although there's a growing body of data pointing to a weakening economy, the key indicators—consumer spending and GDP growth—remain positive. In the second quarter, the economy beat expectations and expanded at a robust 3%.

The upgrade was primarily due to larger contributions from consumer spending, business investment, and government spending.

Household wealth on the rise

If Kruger’s assessment is correct, Americans can expect a boost to their household net worth heading into 2025.

According to a Gallup study, roughly 62% of U.S. adults own stocks either directly or indirectly through mutual funds, exchange-traded funds, or retirement accounts.

This marks a notable increase from the mid-2010s when between 50% and 55% of adults had exposure to the stock market.

The Gallup study showed that a staggering 87% of high-income households have exposure to stocks, which partly explains why their net worth has soared since the pandemic.

As Creditnews recently reported, U.S. household net worth grew by $2.8 trillion to a record $163.8 trillion in the second quarter. Household net worth is now $47 billion higher than the pre-pandemic peak in 2019.

A rising stock market doesn’t just increase a household’s paper wealth; it also contributes to local economic growth.

According to a study by the National Bureau of Economic Research, “a rise in a country’s stock market wealth is associated with increase in local employment and payrolls.”

The study also found that the “residential construction sector is highly responsive to rising stock market wealth.”

U.S. stocks have soared following the Fed’s rate cut, pushing the S&P 500 to year-to-date gains of 18.5%. This market reaction, some economists say, should dispel any fears of a 'hard landing.'

“Now that the Fed is stimulating the economy, the hard-landing crowd should disperse,” wrote economist Ed Yardeni.

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