The Federal Reserve finally cut interest rates this morning, announcing a 50 basis point cut to a level between 4.75% and 5.00%. This is the first rate cut by the Federal Reserve since March 2020, and the long-awaited rate cut cycle has finally begun. After the meeting, the Federal Reserve disclosed the latest dot plot, with the median interest rate expected to be 4.38% at the end of 2024, which means that there are two more rate cuts expected this year; it will be reduced by 100 basis points in 2025, and is expected to drop to 3.38% by the end of the year, and to less than 3% by the end of 2026. The market is actually quite full of expectations for rate cuts in the next two years.
The 50 basis point rate cut was a bit beyond expectations, so when the data was first seen, the market thought that the Fed had seen data that no one knew about. Powell explained in his subsequent speech that if they knew that the July employment data was weak at the end of July, they would have chosen to cut interest rates at that time, which was actually managing market expectations: Although I cut by 50bp, I did not dove.
Secondly, Powell once again stressed the importance of employment, and mentioned that the expected unemployment rate for next year and the year after is 4.4%. The latest employment data in the United States in August was 4.2%, which has some room compared to 4.4%, indicating that the Federal Reserve has a certain tolerance for economic slowdown. However, if the subsequent situation significantly exceeds 4.4%, the Federal Reserve will accelerate the pace of interest rate cuts.
There are two kinds of opinions in the market, whether it is a preventive interest rate cut for the economy or a recessionary interest rate cut. Simply put, it is a normal economic cycle interest rate cut, or is it because of concerns about a crisis? The current situation is that everyone thinks it is a preventive interest rate cut for the economy. In fact, this is a false proposition. If a recessionary interest rate cut contains a certain crisis component, if it can be judged in advance, then the powerful people will clear their positions and run away. However, it is certain that the interest rate will be cut only when the economy turns downward, and the interest rate cut is a tool to smooth the downward trend of the economy. Whether it is preventive or recessionary, it is all looking back, and macro analysts are the same. Who dares to make a 100% guarantee?
Performance of global assets after the rate cut. US stocks, Dow Jones, Nasdaq, S&P 500 rose and fell, among which, Dow Jones and S&P 500 hit record highs. Gold rose and fell, and crude oil also fell. However, as for the futures index that reflects the market in advance, the Nasdaq is strong again, and the corresponding A50 and Hong Kong Hang Seng Index futures representing China's futures are also slightly positive, and the euro futures rose sharply. The Nikkei index rose sharply after opening at 8 am.
Judging from the short-term performance of assets, global assets still accept the fact that the Fed's interest rate cut exceeded expectations. As for the later stage, in line with historical rules, after the Fed enters the interest rate cut cycle, assets will become more volatile, not necessarily rising.
Overall, the 50 basis point rate cut exceeded expectations, but Powell's speech after the meeting revealed that the subsequent rate cuts would be one step at a time. The overall tone was hawkish, and the expectation management ability was really good. Global assets rose first and then fell during the session, and gold and TMF, which are the most sensitive to liquidity, both showed a cashing trend.
