At 2 a.m. tonight, the Federal Reserve will make its September interest rate decision. This meeting is known as the "most unpredictable" in history and may be the "biggest surprise in 15 years." Just last week, the market had collectively determined that the interest rate cut would be 25 basis points, but this week, well-known journalists and former Fed officials, known as "Federal Reserve mouthpieces," said that the interest rate cut should be more radical, and the probability of a 50 basis point cut prevailed.

CME's "Fed Watch Tool" currently predicts that the probability of a 50 basis point rate cut tonight is 64%, while the probability of a 25 basis point cut has shrunk to 36%. In fact, whether the US will cut interest rates is no longer a problem. What is more important is whether the People's Bank of China will follow suit.

After the Federal Reserve cut interest rates in the early morning of September 19, September 20 was the day when the central bank announced the LPR quotation rate.

Given the current economic situation, it is not enough to just cut interest rates, even a large cut is not enough. QE is necessary to save the economy, but the stronger the medicine, the greater the damage to the long-term health of the economy. The central bank's LPR cut on September 20 may not necessarily increase the rate. If it does not cut interest rates, it will inevitably fall sharply. If the LPR is only reduced by 10 points, it will most likely fall, and a 20-point reduction may slightly increase. I hope it can be reduced by 20 points or even more, but everyone has experienced many things in the past few years, so it seems necessary to prepare for the worst.

Back to the Fed’s rate cuts, at the end of last year, many media outlets said that the US would cut rates in early 2024. I was very skeptical at the time, because it was very simple. The US raised rates very late in the beginning, and under the mirror effect, it is very likely that the rate cut will be postponed. There is no doubt that the rate will be cut in September this year, after all, the US employment and CPI can no longer bear it. But the Fed is not willing to cut rates sharply now. At the beginning of the year, the sellers said that the rate would be cut at least 6-8 times this year, but now it is 25BP or 50BP in September. The disagreement over this 25BP is like squeezing toothpaste.

The Fed’s decision-making reaction arc is very long. Generally, when it cuts interest rates continuously, the recession trend has already formed. Unless it starts to trade recession and the US stock market collapses, it will cut interest rates sharply to hedge. When interest rates are cut, the market is often pricing in recession and commodities are falling sharply. Therefore, the early to mid-term of the Fed’s interest rate cuts are often the most dangerous time for the US stock market. At this time, the economy is likely to fall into recession and corporate profit expectations are very poor.

Dongcai made a chart: Since 2000, the US stock market has experienced significant adjustments before and after the three interest rate cuts by the Federal Reserve, but has continued to strengthen since then. Given that the US stock market has experienced an epic and ultra-long bull market cycle, I think the decline in the US stock market this time will probably not be lower than the previous three times (the bursting of the Internet bubble in the early 21st century, the financial crisis in 2008, and the epidemic in 2020). It is also likely that it will continue to rise after the fall. The premise of continuing to hold is that you can withstand this plunge, but isn’t it a wiser choice to wait for it to fall before buying?

However, I still have to say that the macroeconomic management of the United States is indeed strong. The current high interest rate is 5.5%. If the US stock market really collapses in the future, there is too much room for policy reserves. It can cut interest rates several times in a row to hedge. The situation is much better than during the 2008 financial crisis and the 2020 epidemic. In contrast, we can only sigh...