Confirm the type of interest rate cut by the Federal Reserve in the absence of a preset interest rate cut path.
1. The Federal Reserve’s September interest rate meeting: the federal funds rate was cut by 50 basis points to 4.75%-5.00%, the first rate cut since March 2020.
The first rate cut of 50BP was in line with the high probability event predicted by CME Interest Rate Watch before the meeting, but it exceeded the market's expectations of a 25BP steady opening of the rate cut window and avoiding recession concerns caused by the first 50BP cut.
2. Powell: The upside risks to inflation have weakened, while the downside risks to the labor market have increased.
Our decision today reflects our growing confidence that the strong labor market performance can continue.
Powell wanted to express:
He sees the cliff ahead, so he slams on the brakes (brakes hard) and the car stops at the edge of the cliff in advance;
The cliff is the risk of recession, and early stopping is the Federal Reserve’s own preset expectation;
How to realize this expectation? Landing of beautiful expected data;
Then, if the subsequent data shows no stall, it corresponds to a soft landing.
The data exceeded expectations. If you brake too hard and stop the car prematurely, the car may overturn or even roll off a cliff.
And here the employment data is taken to a new level of importance.
3. What data does the Federal Reserve expect?
4. Interest rate outlook: The Fed does not have a preset fixed path for interest rate cuts, and will hold meetings one by one to make decisions; if the economy remains stable and inflation remains stubborn, it may adjust policies more slowly. Rate cuts can be fast or slow or even suspended, and don't regard a 50BP rate cut as normal.
Although interest rates have begun to fall, each interest rate decision will be made based on the situation at the time and there is no preset path.
5. Dot plot: The median of the Fed’s dot plot shows that the Fed will cut interest rates by a cumulative 100 basis points in 2024. After a 50 basis point cut in September, there is an expectation of another 50 basis point cut. The Fed is expected to cut interest rates by another 100 basis points in 2025, the same as the rate cut expected in the June dot plot.
Minutes: The Committee will continue to reduce its holdings of Treasury bonds, agency debt, and agency mortgage-backed securities.
The Committee remains firmly committed to supporting maximum employment and restoring inflation to its 2 percent objective.
Compared with the 100BP rate cuts in three interest rate decisions in 2024, the 100BP rate cuts in eight interest rate decisions in 2025 seem like a trickle;
And the balance sheet reduction will continue; the Fed is committed to guiding the market to reinforce a soft landing.
In the article Risks of Fed Rate Cuts, Shang Ge clearly stated that C3 (soft landing) has the weakest effect on the long-term rise in risk asset prices (starting from the low point after the rate cut).
Shangge's opinion:
In this interest rate decision, we saw the Federal Reserve's artistic handling of the first 50BP cut: the realization of the high-probability event of the CME interest rate window solved the urgent need for liquidity, while at the same time dispelling the market's concerns about recession risks.
Such a change in expectations is simply due to Powell's rhetoric. Will the economic fundamentals change because of different rhetoric?
Will the subsequent development of the market be completely consistent with the direction the Federal Reserve expects?
Will funds rush in massively under such expectations?
In the absence of balance sheet expansion, existing funds are the only factor that improves liquidity.
Moreover, while lowering interest rates, the balance sheet was reduced at the same time, which is a typical case of playing both sides.
In the macro sense, the rate cut of 50bp this year is slightly more than expected, which has accelerated the expected price increase of US Treasuries, which is good for the bond market and the replacement of US Treasuries due to maturity. What is interesting is that the Fed itself wants to reduce its holdings of US Treasuries by reducing its balance sheet;
The speed at which equivalent U.S. stock liquidity is diverted by U.S. bonds is accelerating, which is a risk;
The Federal Reserve believes that a large interest rate cut is intended to avoid a recession. Historically, a large interest rate cut for the first time is one of the signals of recession risk.
There will inevitably be moments when the market trades on the Fed’s expectations, and there will inevitably be moments when the market prices in the risk that the Fed is lying.
Of course, the door to the Fed's interest rate cut cycle has already been opened, liquidity will gradually improve, and it is inevitable that Gami Asset will reap the cyclical dividends.
Strategy: Take reasonable positions, effectively participate in assets with strong expectations, and pay attention to avoiding risk nodes.
The above content is for communication purposes only and is not intended as investment advice.