Written by: Deep Tide TechFlow

Introduction

In Today's Continuously Changing Global Economic Landscape, the Federal Reserve's Monetary Policy Direction Impacts Global Financial Markets. In September 2024, the Federal Reserve Cut Rates for the First Time Since 2020, Beginning a New Round of Rate Cuts.

Binance Research Recently Released a Report that Thoroughly Explained the Origins of the Federal Reserve's Interest Rate Policies and Their Impact on the Economy and Various Assets.

This report systematically analyzes the relationships between core economic indicators such as interest rates, inflation, and employment, based on economic fundamentals and combining the latest data and historical experiences. It also comprehensively analyzes the performance of different asset classes such as stocks, bonds, commodities, and cryptocurrencies during rate cut cycles, providing investors with clear decision-making references.

Deep Tide TechFlow Has Summarized the Key Information from This Report, as Follows.

Key Points

Latest Rate Cut Dynamics: The Federal Reserve Announced a 0.5% Rate Cut in September 2024, Followed by a Further 0.25% Cut in November, Marking the First Rate Cut Action Since the COVID-19 Response in March 2020. The Market Expects Continued Rate Cuts of 1-2 Percentage Points in 2025, with a Probability of About 62% for a Further 0.25% Cut in December.

Policy Background Analysis: The Federal Reserve Adheres to a 'Dual Mandate' Principle, Committed to Promoting Maximum Employment and Maintaining Price Stability (Inflation Target of 2%). In Mid-2022, Inflation Once Surged Past 9%, Prompting the Federal Reserve to Take Aggressive Rate Hike Measures, Raising Rates to Their Highest Levels in 20 Years. As Inflation Gradually Cools, the Federal Reserve Begins a New Round of Rate Cuts.

Mechanism of Interest Rate Impact: As 'the Price of Money', changes in interest rates will affect the market through two main channels:

  • Lower Borrowing Costs Make It Easier for Market Participants to Access Funds While Reducing the Burden of Existing Debt

  • Lower Risk-Free Yields Drive Investors to Seek Other Investment Channels to Increase Returns

Historical Trends: U.S. Interest Rates Have Shown a Structural Downward Trend Over the Past 50 Years, Dropping from 8-10% in the 1980s to Near Zero Rate Periods in the 2010s, and Recently Rising Above 5%.

Asset Performance Analysis:

  • The Stock Market (S&P 500) Generally Shows an Upward Trend After Rate Cuts, But Exceptions May Occur During Economic Recessions

  • The Relationship Between Commodities and Interest Rates is Complex, Affected by Multiple Factors Such as Inventory Costs, Lack of Yield, and Exchange Rates

  • Bond Prices Exhibit a Clear Inverse Relationship with Interest Rates

  • While Historical Data on Cryptocurrencies is Limited, Their Performance During Rate Cut Cycles Has Been Strong, Such as a 537% Increase Within 12 Months After the Rate Cut in March 2020

Policy Shift: The Curtain on Global Central Bank Rate Cuts Has Been Raised

On September 18, 2024, the Federal Reserve Lowered the Target Range for the Federal Funds Rate by 0.5 Percentage Points to 4.75-5.00%, Marking the First Rate Cut Since the COVID-19 Response in March 2020. Prior to This, to Address Rising Inflation, the Federal Reserve Aggressively Hiked Rates from March 2022 to July 2023, and Subsequently Maintained Rates Steady for Eight Consecutive Meetings Until This Rate Cut. The 0.25% Cut in November Further Confirms the Start of a New Rate Cut Cycle.

The Federal Reserve's Policy Actions Have Always Centered Around Its Dual Mandate: Promoting Maximum Employment and Maintaining Price Stability. In the Post-Pandemic Period, Prices Rose Rapidly, and Inflation Surged Past 9% in Mid-2022, Prompting the Federal Reserve to Launch the Most Forceful Rate Hike Cycle in 20 Years, Raising the Target Rate from 0-0.25% During the Pandemic to 5.25-5.50%. As Inflation Gradually Cools, the Federal Reserve Begins to Shift Towards Easing. The Current Market Expects a Rate Cut Space of 1-1.5 Percentage Points in 2025, with a Probability of About 62% for a 0.25% Cut in December (with a Probability of About 38% for No Change).

The Relationship Between Inflation, Rate Cuts, and the Broader Economic System (Including Asset Performance) is Complex and Worthy of In-Depth Attention from Market Participants.

It is Noteworthy that Multiple Central Banks Worldwide Have Started the Rate Cut Process in 2024, a Trend That Will Have Profound Impacts on Global Financial Markets.

Basic Concepts: Interest Rates and Economic Operating Mechanisms

Warren Buffett Once Said: 'Interest Rates Drive Everything in the Economic Universe'. Let's Start from the Most Basic Concepts to Understand How Interest Rates Affect Economic Operation.

Basic Principles of Interest Rates

Core Definition: Interest Rates are Essentially the 'Price of Money'

  • Higher Interest Rates = More Expensive Money

  • Lower Interest Rates = Cheaper Money

Two Major Impacts of the Current Rate Cut Environment

1. Debt and Borrowing Effects

  • Companies and Institutions Can Obtain Financing at Lower Costs, Promoting Investment Expansion

  • The Interest Burden on Existing Debt Decreases, Improving Cash Flow Conditions

  • Consumer Borrowing Costs Decrease, Stimulating Consumption and Housing Demand

  • Overall Economic Activity is Boosted, Helping Economic Growth

2. Yield Effects

  • Yields on Risk-Free Assets Like Government Bonds Decrease

  • Investors Are Forced to Seek Other Investment Channels to Obtain Higher Returns

  • Valuations of Risk Assets like Stocks and Real Estate are Supported

  • Funds Shift from Low-Risk Assets to High-Risk Assets

Major Economic Variables

1. Inflation

  • The Federal Reserve Sets 2% as Its Long-Term Target Inflation Rate

  • Inflation Once Surged Past 9% in Mid-2022

2. Employment Situation

  • Current Unemployment Rate Remains at a Relatively Healthy Level of 4.1%

  • Non-Farm Payroll Data is Released on the First Friday of Each Month, an Important Market Indicator

3. Market Environment and External Factors

  • Corporate Profits: Quarterly Reports and Expectations as a Barometer of Market Confidence

  • Regulatory Policies: Regulatory Attitudes Towards Financial Innovations Including Cryptocurrencies (As shown in the figure below, the number of cryptocurrency-friendly individuals in the U.S. House and Senate significantly increased during the elections represented in green)

  • Geopolitics: External Shocks such as International Trade Relations and Regional Conflicts

  • Macroeconomic Indicators: Including Trade Balance, Consumer Confidence, PMI, etc.

Historical Perspective: Past Federal Reserve Rate Cut Cycles and Asset Performance

Trend of Interest Rate Changes

In the Past 50 Years, U.S. Interest Rates Show a Structural Downward Trend:

  • 1980s: Maintained at High Levels of 8-10%

  • 2010s: Approaching Zero Rate Levels

  • Recent: Rising Above 5%

  • September and November 2024: Beginning a New Round of Rate Cuts

Historical Performance of Various Assets

1. Stock Market (S&P 500)

  • Overall Trend: Generally Rising After Rate Cuts

  • Specific Performance:

First Rate Cut in September 1984: +1% in 3 Months, +9% in 6 Months, +14% in 12 Months

Rate Cut in July 1995: +6% in 3 Months, +13% in 6 Months, +22% in 12 Months

Special Cases: Negative Returns Occurred in 2001 and 2007 (During Economic Recession)

  • January 2001: -12% in 12 Months

  • September 2007: -18% in 12 Months

2. Commodities

Influencing Factors:

  • Inventory Costs: Interest Rates Affect Holding Costs

  • Yield Characteristics: No Fixed Income

  • U.S. Dollar Exchange Rate: Commodities are Primarily Priced in U.S. Dollars

Inflation Correlation:

  • Usually Seen as Leading Indicators of Inflation

  • Commonly Used as Inflation Hedging Tools

3. Bonds

Core Characteristics: A Clear Inverse Relationship with Interest Rates

Operating Mechanism:

  • Rising Interest Rates → Falling Bond Prices

  • Falling Interest Rates → Rising Bond Prices

Ten-Year Treasury Yield: Highly Correlated with Federal Funds Rate

4. Cryptocurrencies

Historical Data: Only Two Rounds of Rate Cut Cycles Experienced (Second Half of 2019 and March 2020)

Performance Highlights:

  • Rate Cut in July 2019: +25% in 12 Months

  • Rate Cut in March 2020: +537% in 12 Months

Special Considerations:

  • Short Sample Period

  • Market Size Relatively Small, High Volatility

  • Affected by Multiple Factors, Not Limited to Interest Rate Changes

This Historical Review Shows That While Rate Cuts Generally Support Asset Prices, Their Specific Performance Varies by Asset Class and Macroeconomic Environment. Particularly During Economic Recessions, Even Rate Cuts May Not Prevent Asset Prices from Falling, Indicating That Investors Need to Consider Multiple Factors Rather Than Making Investment Decisions Based Solely on Whether Rates are Cut.

Conclusion: A Global Rate Cut Cycle Begins, Opportunities and Challenges Exist in the Market

As the report shows, September 2024 Becomes the Fourth Major Rate Cut Month of This Century, with a Total of 26 Central Banks Worldwide Implementing Rate Cut Policies. This Trend Continues in October and November, Marking the Start of a New Cycle in Global Monetary Policy. The Federal Reserve, as the Most Influential Central Bank Globally, Has Had a Profound Impact from Its Two Rate Cuts in September and November, Indicating Possible Wider Policy Easing in 2025.

Historical Experience Shows That Rate Cut Cycles Often Reduce the Cost of Money, Improve Market Liquidity Conditions, and Thus Support Asset Prices. However, This Round of Rate Cut Cycle Has Its Unique Characteristics: Global Inflation Has Clearly Retreated From Its 2022 Highs, but the Risk of Inflation Rebounding Still Needs to Be Watched; The Employment Market Remains Relatively Stable, with the Unemployment Rate at a Healthy Level of 4.1%; Geopolitical Situations Add Additional Uncertainty.

Looking Ahead to 2025, the Market Generally Expects the Federal Reserve to Continue to Cut Rates by 1-1.5 Percentage Points. Against This Background, Major Central Banks Worldwide May Follow the Federal Reserve's Footsteps to Further Improve the Liquidity Environment. However, While Seizing Opportunities, Investors Also Need to Remain Alert: Different Asset Classes May Exhibit Differentiated Performance During Rate Cut Cycles, and Simply Following Rate Cuts May Not Yield Ideal Returns. It is Recommended That Investors Focus on Structural Opportunities and Exercise Caution in Layout to Better Respond to This New Market Environment.