The Fed's interest rate cut in September was like a flash of lightning, instantly igniting the passion for Bitcoin, causing its price to soar to a peak of $64,000, and the U.S. stock market followed suit and rebounded in small steps. However, the wise men on Wall Street smelled a hint of something unusual at this time. They believed that this was just a short-term reaction of the market to expectations, and the economic barometer had not really turned clear.
The latest interest rate dot plot seems to indicate that there is a possibility of two more rate cuts this year. Analysts at JPMorgan Chase pointed out that if the employment data continues to be sluggish, the Fed may directly offer a double dose of rate cuts in November, rather than cutting one point each in November and December. This may mean that the risk of economic recession is approaching, and the Fed must speed up its pace to prevent the collapse of the economic building.
The Wall Street Journal's report sounded the alarm, saying that the current economic situation is strikingly similar to the eve of Lehman Brothers' bankruptcy in 2008, and a new storm may be brewing.
Lehman Brothers Reappears, a Cycle of History?
What risks are hidden behind the Fed's decision? Spencer Jakab of the Wall Street Journal made an in-depth analysis in an article. He compared the current situation with that of 2007-2008 and pointed out that the beginning of the interest rate cut cycle is often accompanied by a "false prosperity". On the surface, the economy is thriving, but in fact, there are undercurrents.
In 2007, after the Federal Reserve cut interest rates, the U.S. stock market experienced a period of carnival, the Dow Jones Industrial Average soared, and Lehman Brothers' stock price rose by 10%, which seemed to be a good thing. However, this was just the calm before the storm. At that time, the market was optimistic. David Malpass, chief economist of Bear Stearns, published an article in the Wall Street Journal in August 2007, trying to calm the panic of the market. He firmly believed that the liquidity of the financial system was enough to withstand the storm.
However, the severity of this financial tsunami was beyond imagination. Three weeks after the peak of the bull market, in January 2008, the bubble burst and Lehman Brothers collapsed within a year, creating the largest bankruptcy record in US history. The Federal Reserve continued to cut interest rates to 20%, but two months after Lehman's bankruptcy, interest rates had dropped to an ultra-low level of 0%-0.25%.
In the era of zero interest rates, the S&P 500 and the Dow Jones Industrial Average experienced a brief rebound, but soon fell to the bottom again, losing a quarter of their value before hitting bottom in March 2009.
Current Economic Concerns
Back to the present, Jakab warned that excessive leverage in the credit and real estate markets, weakness in the Chinese market, over-hype on AI in the global economy, and high debts of governments after Covid-19 all pose huge risks. Research by Goldman Sachs strategist David Kostin pointed out that if the economy has fallen into a substantial recession before the interest rate cut, the median path of the S&P 500 index will be a 14% decline; conversely, if there is no recession, it may rise by 14%.
For bond investors, interest rate fluctuations are particularly critical, and it takes time for low interest rates to have an economic effect on businesses and consumers. This may explain why the Fed seems to be dovish, but in fact it has room for maneuver. Before more economic data emerges, the true economic situation remains unknown.
