The Federal Open Market Committee (FOMC) of the Federal Reserve announced a 50 basis point cut in the federal funds rate to 4.75% to 5.00%, exceeding market expectations and marking the first rate cut since March 16, 2020.
This signifies the completion of the Federal Reserve's policy shift and the official start of a new round of monetary easing.
The FOMC policy statement indicated that while inflation has made further progress towards the 2% target, it remains at a "slightly high" level, and the risks to employment and inflation targets are in a balanced state.
Following the announcement of the Federal Reserve's interest rate decision, the U.S. stock market gains expanded, with the Nasdaq up over 1%, the S&P 500 up 0.72%, and the Dow Jones up 0.74%.
Advertisement
Spot gold continued to rise, touching the $2,600 per ounce mark, setting a historical high.
The Federal Reserve's rate cut has a significant impact on global asset allocation, dollar liquidity, the U.S. stock and bond markets, commodity trends, and the economies of other countries.
Which markets or sectors will welcome new investment opportunities?
How will the dollar, U.S. stocks, and U.S. bonds perform?
Will China's economy and capital markets be affected by the Federal Reserve's rate cut?
How will investors "fight back"?
In this regard, the reporter from Daily Economic News interviewed many well-known institutions' chief economists, chief strategists, and research teams at home and abroad, selecting six representative judgments for investors, economic researchers, and policymakers to refer to.
Brian Coulton, Chief Economist at Fitch Ratings: This easing cycle will last for 25 months with 10 rate cuts totaling 250 basis points.
At 2 a.m. on the 19th, the FOMC concluded its two-day interest rate meeting and announced the interest rate decision, lowering the target range for the federal funds rate by 50 basis points to 4.75% to 5.00%.
This means that the Federal Reserve has officially joined the ranks of major central banks such as the European Central Bank and the Bank of England, starting the easing cycle.
The press release issued by the FOMC showed that all voting members supported a 50 basis point rate cut, except for Governor Bowman, who believed that a 25 basis point rate cut should be implemented.
The "Summary of Economic Projections (SEP)" and the "dot plot" released at the same time showed that the FOMC has revised down the growth expectation for this year's U.S. GDP from 2.1% in June to 2%, the core PCE expectation at the end of the year from 2.8% to 2.6%, and the unemployment rate expectation from 4.0% to 4.4%, and is expected to cut rates by another 50 basis points within the year.
With the first rate cut in place, the pace of the next rate cuts has also become a focus of market attention.
Most members believe that the federal funds rate at the end of this year will be reduced to a level of 4.25% to 4.50%, but there is a divergence of opinion on whether there should be a total of 100 basis points or 125 basis points of rate cuts by 2025.
Brian Coulton, Chief Economist at Fitch Ratings, said in an email to the reporter of Daily Economic News that he expects the Federal Reserve to cut rates twice this year, five times in 2025, and three times in 2026, and by September 2026, the federal funds rate will be reduced to 3%.
This means that during this easing cycle, which is expected to last for 25 months, the Federal Reserve will carry out 10 rate cuts, with a total reduction of 250 basis points.
Coulton explained: "Excluding some very short easing cycles in the 1970s and early 1980s, the median reduction and duration of the Federal Reserve's easing cycles since the 1950s will be 550 basis points and 18 months, respectively."
He also pointed out that the reason for expecting the Federal Reserve to ease at a relatively moderate pace is that it still has work to do in combating inflation.
Barclays Research Team: Option trading can be an attractive tool for hedging against recession risks.
Recently, as traders prepare for the Federal Reserve's first rate cut, the dollar has been under pressure.
In theory, a rate cut by the Federal Reserve will reduce the motivation for investors to buy U.S. Treasury bonds, thereby weakening the demand for the dollar.
Analyzing the impact of previous Federal Reserve rate cut cycles on the dollar's trend, Goldman Sachs believes that monetary policy coordination is key, and the magnitude and speed of the Federal Reserve's rate cuts will not have a clear impact on the dollar.
Even during the Federal Reserve's rate cut cycles, the dollar's performance is not necessarily inferior to other currencies; on the contrary, the coordination of rate cuts and the macroeconomic environment are more important.
The Barclays Research Team pointed out in an interview with the reporter of Daily Economic News that recently, due to the increased economic uncertainty caused by the risk of a U.S. economic recession, the foreign exchange market has become more volatile, but the current level of foreign exchange volatility is still low compared to historical standards, and the risk premium of major currency options is still below the historical average.
Therefore, option trading can be an attractive tool for hedging against recession risks.
Regarding the impact of rate cuts on the U.S. stock and bond markets, Dr. Zhang Ling, Chief Economist at Huatong Securities International, believes that it should be considered in conjunction with the magnitude of the rate cut in the short term.
A 25 basis point rate cut implies a higher possibility of a preemptive rate cut, while a 50 basis point rate cut indicates that the Federal Reserve may believe that the possibility of an economic "hard landing" is relatively large, bringing uncertainty.
Lian Ping, Chairman of the China Chief Economists Forum: Rate cuts may jointly drive up gold prices with a series of other factors.
Since early June of this year, under the continuous heating of expectations for a rate cut by the Federal Reserve, COMEX gold has been continuously strengthening.
As of noon on September 17, COMEX gold has risen from $2,304.2 per ounce at that time to over $2,600 per ounce.
After the Federal Reserve announced the rate cut, spot gold continued to rise, touching the $2,600 per ounce mark as of the time of writing, setting a historical high.
Lian Ping, Dean of the Guangkai Chief Industry Research Institute and Chief Economist, and Chairman of the China Chief Economists Forum, told the reporter of Daily Economic News that the Federal Reserve's start of rate cuts will bring an impact to the gold market in the short term, which may see a larger increase, or may fall back to a certain extent following the "fall of the rate cut shoe."
Overall, there may be large fluctuations in the short term.
In the medium to long term, Lian Ping analyzed that this round of rate cuts is likely to be relatively gradual, expected to last from September this year to the end of next year or even longer.
This time it is a preemptive rate cut, mainly to avoid the economy from continuing to decline towards a recession, so the strength of the rate cut will not be too large, and it is expected to be between 150 and 200 basis points, unless the U.S. economy shows a clear recession in the short term.
Therefore, the Federal Reserve's rate cut stimulation to gold prices may be a gradual process in the medium term, with relatively moderate driving force.
Lian Ping further analyzed that in fact, in the future period, the Federal Reserve's rate cuts are very likely to jointly drive up gold prices with a series of other factors.
After the rate cut, inflation may gradually rise slightly, thus, the value preservation function of gold will be highlighted again.
At the same time, in the complex environment where geopolitical conflicts continue, future "black swan" events may continue to occur, promoting a more obvious demand for risk aversion.
Moreover, the international monetary system has also seen a series of new changes, with the dollar's credit shaken and the euro performing weakly.
Against the backdrop of de-dollarization, the renminbi has won development opportunities.
However, the renminbi is still in the early stages of internationalization.
Under this circumstance, considering the reserve function, central banks around the world may pay more attention to maintaining and increasing their gold reserves.
In summary, Lian Ping pointed out that in the medium to long term, gold still has room for further appreciation.
Guan Tao, Global Chief Economist at BOC Securities: Rate cuts help to expand China's monetary policy autonomy.
From the perspective of the economic cycles of China and the United States, Guan Tao, Global Chief Economist at BOC Securities, pointed out in an interview with the reporter of Daily Economic News that, given other conditions remain unchanged, the rate cut by the Federal Reserve helps to converge the economic cycles and monetary policy differentiation between China and the United States, alleviate the pressure of capital outflows and exchange rate adjustments in China, and expand the autonomous space for China's monetary policy, but this should not be expected too high.
First of all, in his view, China has always adhered to a monetary policy that is "centered on itself."
Before 2022, in the response to the pandemic, China's monetary policy was advanced and exited first, playing the role of a leader rather than a follower.
The future rate cut by the Federal Reserve does not mean that China will necessarily follow suit in lowering reserves and interest rates, because China also needs to consider the balance of long-term and short-term, internal and external equilibrium, and stable growth and risk prevention.
Secondly, after the first rate cut is initiated, the market's focus will turn to the timing and magnitude of the next rate cut by the Federal Reserve, and market expectations will continue to switch between a "soft landing," "hard landing," and "no landing" for the U.S. economy, making international financial turmoil inevitable.
Guan Tao pointed out that no matter what situation the U.S. economy encounters, it has both advantages and disadvantages for China's economy, and the key for China is to do its own things well.
If the U.S. economy does not fall into a recession, it is possible that the Federal Reserve will not significantly cut interest rates, and the dollar will not trend to weaken, which will continue to externally constrain China's monetary policy but help to stabilize external demand and support the stable operation of China's economy.
If the U.S. economy falls into a recession, it is possible that it will trigger a significant rate cut by the Federal Reserve, and after the market's risk aversion fades, the dollar will trend to weaken, which will help to open up space for China's monetary policy and alleviate external pressures on China's capital outflows and exchange rate adjustments, but it is not conducive to stabilizing external demand and affecting the stable operation of China's economy.
For China, Guan Tao finally pointed out that it is necessary to prepare for contingencies based on scenario analysis and stress testing, to be prepared for any eventuality.
Regarding other emerging markets, the Barclays Research Team also pointed out in an interview with the reporter of Daily Economic News that the impact of the Federal Reserve on emerging market policies has declined.
Barclays believes that under the lifting of restrictions on the Federal Reserve's monetary policy, slow global growth, and controlled global commodity inflation, central banks in emerging markets may prioritize more accommodative policies over strong currencies.
The bank believes that most central banks will relax their policies as much as possible under low inflation, but maintain higher real interest rates to protect their currency exchange rates.Huatong Securities International Chief Economist Zhang Ling: Emerging markets are likely to receive more international capital inflows.
As the Federal Reserve begins to cut interest rates, exchange rate fluctuations will not only affect the settlement costs of international trade but may also trigger accelerated capital flows and changes in foreign exchange reserves.
Theoretically, the Fed's monetary easing cycle will lead to a decrease in U.S. dollar interest rates, driving international capital towards emerging markets with higher returns.
J.P. Morgan Asset Management recently published an article stating that in four out of the past five interest rate hiking cycles since 1988, emerging market stocks have shown positive performance two years after the Fed's last rate hike, with an average return rate of 29%, which is 17 percentage points higher than that of developed market stocks during the same period.
"Of course, the broader fundamental background is also important, but U.S. interest rates do play a disproportionately significant role in driving capital inflows and outflows in emerging markets.
As a higher-risk asset class, emerging market assets tend to benefit when the Fed completes interest rate hikes, the global economic sentiment improves, and risk appetite is high," the article points out.
Dr. Zhang Ling, Chief Economist at Huatong Securities International, also pointed out to the reporter of "Daily Economic News" that, based on the long-term performance of the Fed's multiple interest rate cutting cycles over the past decades, emerging markets have indeed performed well during these cycles, and it can be seen that the asset prices closely related to the U.S. dollar and U.S. stocks have significantly increased in the past two weeks.
"However, how international capital flows during the interest rate cutting cycle still depends on whether the U.S. economy can reflect people's expectations as a whole, and whether its fundamental performance is strong enough.
If the interest rate cut is too fast, it may lead to concerns about the global economy.
At present, we remain cautiously optimistic.
In terms of the current global economy, especially the performance of economies closely related to the U.S., the overall asset prices are at a low level, and it is a high probability event that emerging markets will have more international capital inflows under the Fed's interest rate cut."
Dr. Zhang Ling added to the reporter.
However, some studies have pointed out that in the past monetary easing cycles, the funds flowing into many emerging and developing markets have been proven to be relatively resilient, thanks to their robust policy frameworks and healthy foreign exchange reserves.
Shenyin & Wanguo Securities Research Institute Chief Market Expert Gui Haoming: From an investment perspective, U.S. dollar holders are not likely to sell immediately, and it is unlikely to have a significant direct impact on the domestic capital market.
Under the influence of the Fed's interest rate cut, how can asset allocation strategies be tactically responded to?
Gui Haoming, Chief Market Expert at Shenyin & Wanguo Securities Research Institute, pointed out in an interview with the "Daily Economic News" reporter that in terms of equity assets, the Fed's interest rate cut helps to improve market risk appetite, especially in terms of triggering capital outflows from the U.S. capital market and then flowing into other markets, which is worth paying attention to.
However, the current adjustment of the A-share market has its inherent logic, and the focus is not on the relatively high interest rate spread between China and the U.S.
According to his analysis, it will take a certain time for the interest rate spread between China and the U.S. to eventually disappear, and it is not expected that a single interest rate cut will fundamentally change the direction of capital flows.
This is a gradual process.
Therefore, for domestic risk assets, it is difficult to expect a big shift due to the Fed's interest rate cut.
In summary, Gui Haoming said that the Fed's interest rate cut will bring some benefits to domestic economic activities, but more from a long-term perspective.
Since we are at the end of this effect transmission, the short-term impact will not be very significant.
As for A-shares, it is more of a psychological effect.
In terms of low-risk asset allocation, Gui Haoming analyzed that low-risk investors pay more attention to safety.
Currently, although domestic interest rates are relatively low, investors value obtaining relatively stable returns.
Under such circumstances, it is difficult to say that the trading behavior of domestic fixed-income assets is carried out with reference to U.S. dollar interest rates.
From the perspective of U.S. dollar allocation, he believes that one or two interest rate cuts will not change the relatively high level of U.S. dollar interest rates.
From an investment perspective, the U.S. dollar is still more attractive, and U.S. dollar holders are not likely to sell immediately just because of this interest rate cut.
However, Gui Haoming emphasized that the greater significance of this Fed interest rate cut lies in the opening of the U.S. dollar interest rate cut channel.
The upward trend of U.S. dollar interest rates for several consecutive years has been substantially changed.
In the future period, it is highly probable that the U.S. dollar interest rates will gradually decline, and their impact on the operation of the international economy will become increasingly apparent.
However, this will all take a process.
Therefore, at present, this U.S. dollar interest rate cut is unlikely to have a significant direct impact on the domestic capital market.