In its January 22nd edition, Barron s, that venerable weekly publication that I enjoy with coffee each Sunday morning, published a list of sectors that usually advance after the Federal Reserve cuts interest rates. The top two sectors on the list are Banks and Consumer Financials. That makes sense. Lower interest rates cut financial institutions cost of loaning out their product money. Reduced borrowing costs widen their profit margins on loans to businesses and consumers.
Borrowers are more eager to take on more debt.
Joe and Jane Public can easily rationalize new loans to buy a new home or remodel their current one, take a vacation, or expand their business. If Joe and Jane decide to refinance their existing mortgage, they may go to another bank, thus resulting in new business for the moneylender. Also, say Joe loses his job. He can repay loans more easily if low interest rates help keep his payments manageable. Lower interest rates also give a spike to brokerage firms.