To accurately assess whether the Fed's interest rate cut has a positive or negative impact on the market, the key is to distinguish whether the interest rate cut is for the purpose of "preventive interest rate cut" or as a "post-recession" response measure.
If the Fed implements a "preventive rate cut", it is usually seen as a signal that the economy is healthy and growth momentum is still strong. In this scenario, the interest rate cut is intended to prevent a possible economic slowdown in advance by reducing borrowing costs, rather than directly responding to a recession that has already occurred. Such an interest rate cut policy can often boost market confidence and enhance investor optimism, thereby driving up financial markets such as the stock market, forming a so-called "bull market" atmosphere.
On the contrary, if the Fed cuts interest rates after the economy has clearly fallen into recession, then this action is more likely to be interpreted as a response to economic difficulties. At this time, the interest rate cut may mean that there are problems with economic fundamentals, and the problems are serious enough to require strong intervention by monetary policy. In this case, the market may have concerns about the economic outlook, and the global financial market may fall into a state of panic, investor confidence will be frustrated, and asset prices may be under pressure.
The following is a detailed analysis of these two situations:
1. Cutting interest rates before a recession
1. Background and Purpose
Pre-recession interest rate cuts usually occur when the economy shows signs of slowing down but has not yet officially entered a recession. At this time, the Federal Reserve will take preventive interest rate cuts to prevent the risk of a recession. This interest rate cut aims to stimulate economic activity by reducing borrowing costs and increasing market liquidity, thereby avoiding a recession.
2. Characteristics of interest rate cuts
Smaller in magnitude: Precautionary rate cuts are usually smaller in magnitude than post-recession rate cuts to gradually adjust market expectations.
Short duration: The interest rate cut cycle is relatively short, aiming to respond quickly to economic changes and control risks.
Lower frequency: There are relatively few interest rate cuts because the economy has not yet shown a clear recession and policy adjustments are relatively cautious.
3. Typical Cases
1995-1998 interest rate cut cycle: The Fed made small interest rate cuts between July 1995 and January 1996, aiming to stimulate economic activity and avoid a potential recession through loose monetary policy. Thereafter, from September to November 1998, in response to the global market turmoil caused by the Asian financial crisis and the Russian debt crisis, the Fed cut interest rates again to further stabilize the market.
2. Cutting interest rates after a recession
1. Background and Purpose
Post-recession interest rate cuts occur after the economy has already fallen into recession. At this time, the Federal Reserve will take measures to reduce interest rates in a relief-style manner in order to stimulate economic recovery and alleviate the negative impact of the recession. This type of interest rate cut is larger and lasts longer, aiming to boost market confidence and increase consumption and investment by significantly reducing borrowing costs.
2. Characteristics of interest rate cuts
Large magnitude: In order to quickly stimulate economic recovery, the magnitude of bail-out interest rate cuts is usually large.
Long duration: The interest rate cut cycle is relatively long to ensure that the policy effects are fully manifested.
High frequency: During a recession, the Federal Reserve may cut interest rates multiple times to continue stimulating the economy.
3. Typical Cases
2001-2003 interest rate cut cycle: In response to the economic recession after the bursting of the Internet bubble and the subsequent impact of the 9/11 terrorist attacks, the Federal Reserve began to cut interest rates sharply from January 2001, with the federal funds rate falling from 6.50% to 1.75% in December 2001, and finally further to 1% in June 2003. This round of interest rate cuts lasted for more than two years, with a total rate cut of 500 basis points.
Interest rate cuts after the 2007-2008 financial crisis: After the global financial crisis, the Federal Reserve took more aggressive interest rate cuts. Starting in September 2007, it cut interest rates 10 times in a row, lowering the federal funds rate to an ultra-low level of 0.25% by the end of 2008. At the same time, the Federal Reserve also introduced unconventional monetary policy tools such as quantitative easing to stimulate the economy.
Summary: When evaluating the impact of the Fed's interest rate cut on the market, it is important to analyze the economic logic and policy intentions behind the rate cut in order to make a more accurate judgment.
At present, the Fed's interest rate cut is clearly a "post-recession" response. So I think it will take a long time for the bull market to come.
