At around 4 AM yesterday, the Federal Reserve announced a 0.25% interest rate cut, bringing it to a level of 4.25%~4.5%; cuts are generally good for the stock market, but surprisingly, the three major U.S. indices fell instead of rising. Why is that? What impact does this have on us?
01
The reaction of U.S. stocks is more about expectations rather than already realized realities.
This time the interest rate was cut by 25 basis points, and the market had already reacted a few months in advance, so if it was just the announcement of a 25 basis point cut, it shouldn't affect the rise or fall of U.S. stocks.
The reason U.S. stocks are still down is that new expectations have emerged: the Federal Reserve has stated that the pace of future interest rate cuts may slow down.
Originally, market expectations were that there would be 3 to 4 rate cuts in 2025, totaling 0.75% to 1%;
But the statement is that there may only be two cuts in the future, totaling about 0.5%.
02
Why is the Federal Reserve slowing down the pace of interest rate cuts?
The Federal Reserve initially raised interest rates because the economy was too strong and inflation was too high;
Later, inflation came down, and the Federal Reserve started cutting interest rates from September this year;
But after a while, it was found that the U.S. economy is still very strong;
Inflation has still not fallen to a sufficiently satisfactory level, and it may take another one to two years to reach the 2% inflation target.
Because the economy is too strong, leading to an inability to lower interest rates, this kind of 'happy trouble' may only be unique to the U.S., which is enviable.
It may also be to respond to high tariffs;
High tariffs are a double-edged sword; as sellers, our business is definitely not as good as before, but buyers also have to pay higher prices;
American consumers are paying more for goods, CPI is rising, and inflation will go up.
Originally, without the tariff issue, CPI could already rebound; now the expectation of higher tariffs is growing stronger, which adds more pressure to U.S. inflation.
Therefore, the Federal Reserve can only release signals, delay the pace of interest rate cuts, dampen everyone's expectations, and tell everyone that the upcoming interest rate cuts are not set in stone.
It is this kind of statement that delays the pace of interest rate cuts, breaking the previous market expectations of significant cuts, which is why U.S. stocks fell significantly.
03
So what impact does the Federal Reserve's 25 basis point cut have on us?
In the coming period, we need to maintain a moderately loose monetary policy;
It must be noted that the strength of 'moderately loose' is very significant, which means we will continue to cut the reserve requirement and interest rates.
As we mentioned earlier, our monetary policy will still be suppressed by U.S. interest rates; the U.S. cuts rates, and only then do we have space to cut rates and achieve a moderately loose monetary policy;
However, there is now an important hypothesis: we may be preparing to free ourselves from the influence of U.S. interest rates; even if the pace of U.S. rate cuts slows down, we will continue to cut rates; the cost of doing so may be that we no longer strictly maintain the exchange rate. This may explain why our market opened low and rose high today, with the RMB exchange rate breaking 7.31 and hitting a 13-month low.
Is this judgment correct? In the next couple of days or next week, we will know if the rate cuts and reserve requirement cuts in December will materialize.
04
Why might they no longer stick to the exchange rate?
We know that the U.S. is a developed country, while we are a developing country;
The risk of assets in developed countries is lower than that in developing countries;
So logically, U.S. interest rates should be lower than those in China.
But now the situation is exactly the opposite; U.S. interest rates are not only higher than ours, but much higher;
The interest rate in the U.S. is 4%, while we are still below 2%;
If we want to maintain a moderately loose monetary policy, interest rates must continue to fall;
The large gap between our interest rates and those of the U.S. will lead to a significant flow of funds from Chinese assets to U.S. assets;
Our stock market and real estate market will continue to decline.
If the depreciation of the RMB is allowed, then the money that was originally intended to flow out would not be as cost-effective to exchange for U.S. dollars, offsetting the advantages brought by high interest rates in the U.S.
So one hypothesis is that if we want to continue cutting rates and widen the interest rate differential with the U.S., we may be preparing to abandon the exchange rate.
If this is the case, the depreciation of the RMB may be larger than we imagine.
Of course, before anything is finalized, nothing is 100% certain. My advice is to be prepared for multiple scenarios:
If we continue to maintain the exchange rate, then the stock market and real estate market still need to be cautious;
If we no longer maintain the exchange rate, then the stock market and real estate market may have positive expectations.
