Rate Cut
Definition
A rate cut is when the Federal Reserve lowers its benchmark federal funds rate target, which reduces borrowing costs throughout the economy — it's typically used to stimulate economic activity during slowdowns and is generally considered bullish for stocks and risk assets.
Example
“The Fed cut rates 50 basis points — double what the market expected. Futures spiked 1.2% in the first minute. I waited for the initial knee-jerk to settle, then bought the first pullback on rising breadth for a trend trade into the close.”
Detailed Explanation
The federal funds rate is the interest rate at which banks lend to each other overnight, and it ripples through the entire economy. When the Fed cuts this rate, borrowing becomes cheaper for businesses and consumers — corporations can finance expansion at lower cost, homebuyers can get cheaper mortgages, and the return on "safe" assets like bonds falls. This last point is critical for stocks: when bond yields fall after a rate cut, stocks become relatively more attractive on a yield basis, drawing money from bonds into equities. Lower rates also reduce the discount rate used to value future earnings, mechanically increasing the theoretical value of equities.
The market reaction to rate cuts isn't always straightforward. If a cut is widely expected and "priced in" by the market in advance, the announcement might not move stocks much at all — or could even trigger a "sell the news" reaction as traders who bought in anticipation now exit their positions. The size of the cut matters: a 25 basis point cut might disappoint a market expecting 50 bps, causing stocks to fall despite a literal rate cut. The Fed's language and projections (the "dot plot" showing expected future rate paths) often matter more than the cut itself because they signal what's coming over the next 12–18 months.
For day traders, Fed rate decisions create some of the most volatile intraday conditions of the year. The announcement at 2:00 PM Eastern is followed by a press conference at 2:30 PM where Fed Chair comments can completely reverse the initial reaction. The two-stage volatility event (announcement spike + press conference spike/reversal) makes the 2–3 PM window on FOMC days extremely challenging. Many experienced traders reduce size significantly or avoid trading entirely during the announcement window and only reenter once a clear direction has established, typically 15–30 minutes after the press conference begins.