Fed Rate Cuts: Reshaping Asset Prices and Exploring the Future of the Economy
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On September 18, the Federal Reserve announced a 50 basis point cut to the federal funds target rate, bringing it down to a range of 4.75% to 5.00%. This marks the first rate cut by the Fed in four and a half years, with the magnitude of the cut being twice the usual size, signaling a significant turning point in its monetary policy. In the press conference following the decision, Federal Reserve Chair Jerome Powell stated that their patience over the past year "has really paid dividends in the form of our confidence that inflation is moving sustainably under 2 percent." Powell also mentioned that the substantial rate cut was aimed at addressing the weakening labor market, including a slowdown in job growth. He added that this decision demonstrates their resolve to no longer delay action and represents a move of great significance. As the rate cut policy takes effect, asset prices across various categories are expected to adjust accordingly, and investors should closely monitor the profound impact these changes may have on economic recovery and market stability.
1. A Historical Review of Interest Rate Cuts
A review of the historical background of the Federal Reserve's rate cuts clearly shows that each decision to lower interest rates not only reflects signals of economic and inflation slowdown but is also accompanied by unique contextual factors. These factors not only influence the timing and extent of the rate cuts but also shape the overall direction and objectives of policies.
- 1984-1986: High Deficits and a Strong Dollar
During this period, the United States faced dual pressures of a high fiscal deficit and a strong dollar, which led to setbacks in exports and a slowdown in economic growth. In response, the Federal Reserve adopted a rate-cutting strategy to stimulate domestic demand and improve economic conditions.
- 1989-1992: Savings and Loan Crisis
The rate cuts began in response to the U.S. financial industry's savings and loan crisis, which was marked by weak economic growth, rising unemployment, and declining inflation levels. The Federal Reserve aimed to alleviate pressure on financial markets and promote economic recovery by lowering interest rates.
- 1995-1996: No Economic Shock
During this round of rate cuts, although the economy experienced a slowdown, there were no significant shocks. The rate cut policy effectively supported a "soft landing" for the economy, ensuring a moderate growth trajectory.
- 1998: Asian Financial Crisis
The outbreak of the Asian Financial Crisis created an uncertain external economic environment. The Federal Reserve chose to lower interest rates to mitigate the potential impact on the U.S. economy and to restore confidence in the markets.
- 2001-2003: Dot-com Crash
As the internet bubble burst, the economy experienced turmoil. The Federal Reserve implemented aggressive rate-cutting measures aimed at restoring market confidence and preventing further economic decline.
- 2007-2008: Subprime Mortgage Crisis
During this rate-cutting cycle, the U.S. economy faced significant downward risks. The Federal Reserve's swift action to lower rates aimed to prevent a collapse of the financial system; however, the consequences were profound, ultimately leading to the global financial crisis.
- 2019: Tensions in Trade Relations
In the face of global economic slowdown and low domestic inflation pressures, the Federal Reserve once again lowered interest rates to stabilize economic growth and address the uncertainties brought about by trade tensions.
These background factors are interwoven, creating a complex picture of each round of interest rate cuts by the Federal Reserve, reflecting the sensitivity and foresight of policy decisions in relation to economic conditions. Analyzing the context of each rate cut not only helps us understand the Federal Reserve's policy choices but also provides important historical insights that can better equip us to address potential economic challenges in the future.
2. Changes in Asset Prices Following Rate Cuts
Following the Federal Reserve's announcement of a 50 basis point rate cut, the three major U.S. stock indices—the Dow Jones, S&P 500, and Nasdaq—initially surged before fluctuating to close lower. By noon on September 19, most global major indices were down. After reaching a historic high, the price of international spot gold retreated. Additionally, most major global commodities experienced declines. Analysts indicate that this rate cut marks a shift in the U.S. monetary policy from a tightening phase to a loosening phase. During this rate-cutting cycle, the performance of various asset classes has also differed:
- U.S. Treasury Market: Interest Rates Trend Downward
U.S. Treasury yields typically exhibit a downward trend before and after rate cuts; however, under a "soft landing" scenario, yields may experience a temporary rebound within one to two months following the cut. In the seven rate-cutting cycles, from two months prior to the cut to three months afterward, the yield on the 10-year Treasury bond generally maintained a downward trajectory, with an average decline of approximately 20 basis points within 60 days post-rate cut. However, during the three "soft landing" periods in 1995, 1998, and 2019, the downward potential for the 10-year Treasury yield was relatively limited, and a short-term rebound may have occurred within one to two months following the rate cuts.
- U.S. Stock Market: Rally Pauses
The U.S. stock market may experience a "cooling off" period immediately before and after the initial rate cut but typically resumes its upward trajectory two to three months after that. In the seven rate-cutting cycles, the S&P 500 index maintained an upward trend during four "soft landing" scenarios and one "hard landing" scenario. Generally, within the first month following the initial rate cut, U.S. stocks undergo a period of volatile adjustment as the market grapples with differing views on the economic and policy outlook. However, unless a "hard landing" occurs, U.S. stocks typically rebound within three months post-rate cut, with the S&P 500 index averaging a 2.8% increase compared to the day before the initial rate cut.
- Gold Market: Initial Rise Followed by Consolidation
Gold is more likely to rise prior to a rate cut, but its trajectory following the cut is more complex. In the two months leading up to the initial rate cut, the price of spot gold rose on four occasions, with an average increase of 1.8%. In the two months following the rate cut, gold prices rose five times, but they also experienced five declines within the three months after the cut. The movement of gold prices does not show a clear correlation with whether a "soft landing" occurs. For instance, in 2007 and 2019, despite the economy experiencing a "hard landing" and a "soft landing," respectively, gold prices surged significantly due to safe-haven demand. Conversely, in 1984 and 1989, gold prices declined, primarily influenced by falling oil prices and a reduction in inflation expectations.
- Oil Market: More Likely to Decline
The probability of oil prices declining following a rate cut is relatively high, but not guaranteed. In the seven rate-cutting cycles, WTI crude oil futures often rebound one to two months before the cut, with five increases occurring in the two months prior, averaging an increase of 2.8%. However, after the initial rate cut, oil prices are more likely to decline, with five decreases observed within three months post-cut, with both the average and median declines being 6.0%. The drop in oil prices is primarily related to economic weakening and market concerns regarding demand.
3. Potential Impacts Following Rate Cuts
Rate cuts are not only a direct measure to address economic slowdowns but also serve as a profound policy tool capable of triggering a series of chain reactions. These potential impacts encompass the interest rate environment, asset prices, monetary policy flexibility, consumer confidence, inflation risks, and dynamics in international markets.
- Interest Rate Environment
Rate cuts directly reduce the cost of short-term borrowing, stimulating consumption and investment. Businesses and consumers can obtain loans at lower interest rates, thereby promoting an increase in economic activity. This environment encourages businesses to expand and consumers to increase their spending, driving economic growth.
- Increase in Asset Prices
Rate cuts often lead to an increase in asset prices, particularly in the stock and real estate markets. Investors, seeking higher returns, channel their funds into the stock market, which drives up the indices. Simultaneously, the low interest rate environment stimulates activity in the real estate market, as homebuyers are willing to borrow to purchase properties, further pushing up housing prices.
- Flexibility of Monetary Policy
Rate cuts provide the Federal Reserve with greater policy leeway. During periods of economic weakness, the Fed can flexibly adjust interest rates to respond to market changes. Additionally, rate cuts create conditions for the use of other monetary policy tools, such as quantitative easing, which further enhances liquidity.
- Improvement in Consumer Confidence
Rate cuts typically enhance consumer confidence. When borrowing costs decrease, consumers often perceive an improvement in economic conditions, leading them to increase their spending. Consumption is a crucial driver of economic growth; therefore, rate cuts contribute to sustaining stable economic expansion.
- Inflation Risks
While rate cuts have positive effects on the economy, they may also pose risks of inflation. Low interest rates can lead to excessive borrowing and increased market liquidity, which in turn can drive up the prices of goods and services. This necessitates vigilance on the part of the Federal Reserve when implementing rate cuts to prevent inflation from spiraling out of control. The trends in PCE and core PCE inflation rates following a rate cut are relatively uncertain. Typically, rate cuts do not directly trigger a rebound in inflation; rather, they may be influenced by economic slowdown. Changes in the 10-year inflation expectations before and after the rate cut indicate that the weakening economy has a stronger suppressive effect on inflation.
- Impact on International Markets
The Federal Reserve's rate cuts not only impact the U.S. economy but also reverberate through global markets. Other countries may face pressures such as capital outflows and currency depreciation. At the same time, rate cuts may prompt central banks in other countries to follow suit to maintain competitiveness, further influencing the international economic landscape.
4. Final Thoughts
The Federal Reserve's decision to lower interest rates marks a significant turning point in the economy, presenting new opportunities and challenges for investors. Rate cuts often increase uncertainty in traditional markets, while digital assets, with their advantages of decentralization and liquidity, may emerge as new safe-haven options. Through well-known trading platforms like MEXC, investors can flexibly engage in the trading of cryptocurrencies and other digital assets. The MEXC platform offers a diverse range of products and a low fee structure, enabling investors to more effectively manage risk and optimize returns during rate-cutting cycles, helping them seize growth opportunities in emerging markets. In summary, rate cuts not only reshape the traditional financial environment but also create new opportunities for the rise of digital assets. Investors should promptly adjust their strategies to meet future challenges and opportunities.
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