The stock market is demanding that the Fed lower interest rates. What you need instead.

Previous interest rate hikes are already in effect. Consumer prices rose less than 5% year-on-year in April, missing forecasts. The federal funds futures market is already pricing in an 87% chance that the Fed will keep interest rates where they are in June as well.

Investors now have to consider another scenario. With inflation falling so quickly, the Fed, worried about the near-term economic impact of higher interest rates, may cut them this summer. Right now, the fed funds futures market is quoting a 36% chance of a rate cut in July.

The rate cut, however, may not hurt the market as much as Wall Street hopes. Of course, lower rates could help the US economy stabilize and resume growth after it takes a hit and potentially slips into a recession. The problem is, however, that the initial economic impact may be worse than expected, and companies’ earnings results may decline.

Indeed, the S&P 500 typically falls within six months of the Fed’s first rate cut, according to Credit Suisse. “While the low funds rate is thought to be driving higher stock prices, it’s also a sign that the economy is faltering,” wrote Jonathan Golub, the bank’s chief equity strategist.

Conversely, Credit Suisse found that the S&P 500 typically rises in the six months following the last rate hike, absent cuts. If the Fed stops raising interest rates but doesn’t anticipate any cuts, that means inflation is falling but economic growth is steady, which is good for stocks.

Investors may not want to hear it, but the market isn’t off the hook just yet.

Email Jacob Sonenshine at jacob.sonenshine@barrons.com