• Article
• 2024-07-19

Fed's Rate Cuts: Economy & Assets

Before the Federal Reserve has initiated rate cuts in the past, there have been signals of economic and/or inflation slowdowns.

In retrospect, out of seven cycles, the U.S. economy experienced a "hard landing" three times and achieved a "soft landing" four times.

Within a few months after the first rate cut, the U.S. economy and employment may continue to weaken due to inertia, and inflation is not likely to rebound.

Prior to the first rate cut, U.S. Treasury bonds and gold typically benefit; after the first rate cut, the volatility risk of most asset prices tends to increase temporarily, and after 2-3 months, the financial conditions loosened by the rate cuts and the expectations of recovery may lead to positive performance in U.S. Treasury bonds and stocks.

Before and after the rate cuts, the winning rate of U.S. Treasury bonds is relatively high.

Looking at the present, on one hand, if there are no serious economic or financial market shocks in the future, this round of rate cuts is more likely to achieve a "soft landing."

On the other hand, the Federal Reserve has started this round of rate cuts relatively late, with strong signals of a weakening economy and job market before the rate cuts.

After the rate cuts, the economy and job market may also continue to decline for a period due to inertia.

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The background of the 01 rate cut initiation is the focus of this article's analysis of the seven rounds of rate cuts in the United States from 1982 to 2019.

After 1982, the Federal Reserve gradually began to shift towards the "federal funds target procedure."

Prior to this, the Federal Reserve's policy objectives were relatively complex and diverse, using a combination of indicators such as the monetary base (M1), the discount rate, and the federal funds rate.

This means that after 1982, the interest rate cycles divided by the federal funds target rate could more accurately reflect the real "monetary cycle."

The seven rounds of rate cuts we selected all started with the first rate cut after the rate hike (excluding the cases of rate cuts after a pause).

The rate cut cycle that began in 2019 intentionally excluded the rate cuts triggered by the pandemic in 2020, to ensure that the selected rate cut cycles have "endogeneity," which has strong implications for the present.

Overall, the background of each time the Federal Reserve has started rate cuts has some commonalities, with signals of economic and/or inflation slowdowns; there are also their own special backgrounds: 1) 1984-1986: High deficits and strong dollar.

2) 1989-1992: Savings and loan crisis.

3) 1995-1996: No economic shock.

4) 1998: Asian financial crisis.

5) 2001-2003: Internet crisis.

6) 2007-2008: Subprime mortgage crisis.

7) 2019: Trade tensions.

1.

1984-1986: High Deficits and Strong Dollar From September 1984 to August 1986, the Federal Reserve maintained a trend of rate cuts for nearly two years, with a cumulative reduction of 562.5 basis points, and the target federal funds rate was lowered from 11.5% to 5.875%.

This round of rate cuts was not entirely continuous; the Federal Reserve had several small rate hikes in January-March and July-August 1985, and April-June 1986.

According to an article by the Federal Reserve Bank of New York [1], the background of the Federal Reserve's first rate cut in 1984 was that the U.S. economy showed signs of slowing down after rapid growth at the beginning of the year.

The unemployment rate fell from 8% at the beginning of the year to 7.2% in June, and then rebounded to 7.5% in July-August.

At the same time, although the PCE inflation rate was still at the level of 3%-4%, the rate of decline was relatively fast, falling from 4.3% in March 1984 to 3.4% in September 1984, and inflation was no longer the main problem for the economy.

At that time, the Federal Reserve also faced two major economic "extra questions": one was the expansion of fiscal deficits under "Reaganomics."

After Reagan took office in 1981, he implemented supply-side reforms, increased government deficits and debt to deal with the economic recession.

According to data from the OECD and IMF, from 1980 to 1983, the U.S. general government deficit ratio increased by 2.8 percentage points to 7.2%, and the debt ratio increased by 6.7 percentage points to 47.8%.

The second was the "strong dollar" and the expansion of the trade deficit.

From 1980 to 1984, the U.S. dollar index continued to strengthen, rising from around 85 to around 140 in August 1984, an increase of more than 60%.

During this period, the U.S. trade deficit expanded rapidly, from $16.2 billion in 1981 to $109.1 billion in 1984, an increase of 6.7 times.

2.

1989-1992: Savings and Loan Crisis From June 1989 to September 1992, the Federal Reserve initiated a rate cut cycle of more than three years, with a cumulative reduction of 681.25 basis points, and the policy rate ceiling was reduced from 9.8125% to 3%.

During this period, the Federal Reserve never raised interest rates, only pausing rate cuts.

In 1989, the background of the Federal Reserve's rate cuts was that the policy focus was on controlling inflation.

At the beginning of the year, Greenspan said in his speech to Congress, "The current inflation rate of 4%-5% is unacceptable."

However, the U.S. economy slowed down in the second quarter, including the cooling of non-farm data, the weakening of the manufacturing PMI entering the contraction range, etc., and the PCE inflation rate also fell from 4.7% in February to 4.2%.

In 1990, U.S. inflation fluctuated, especially in August when the third oil crisis broke out, and the pace of the Federal Reserve's rate cuts slowed down.

At the beginning of 1991, the United States entered the Gulf War, and with the decline in oil prices, the Federal Reserve continued to maintain a long-term rate cut operation.

The larger background of this round of rate cuts was that from 1988 to 1991, the U.S. financial industry experienced the "savings and loan crisis," with more than 200 banking institutions (including savings and loan associations) going bankrupt or being rescued each year, triggering credit tightening and economic recession.

From August 1990 to March 1991, the U.S. economy fell into the recession period defined by the National Bureau of Economic Research (NBER), lasting for 8 months.

3.

1995-1996: A Typical "Soft Landing" From July 1995 to January 1996, the Federal Reserve initiated a half-year rate cut, with a cumulative reduction of three times, totaling 75 basis points, and the policy rate ceiling was reduced from 6% to 5.25%.

After that, the Federal Reserve kept interest rates unchanged for more than a year until it raised interest rates again in March 1997.

The background of the Federal Reserve's rate cuts in 1995 was that the U.S. economic growth slowed down, with the actual GDP growth rate in the first half of the year only recording 1.2%-1.4%, lower than the average level of more than 4% in 1994; the unemployment rate once briefly rose from 5.4% in April to 5.8%, and then fell back to 5.6%-5.7%, and the manufacturing PMI fell into the contraction range in May-June; the PCE inflation rate remained at 2.1%-2.3% in the first half of the year.

An article by the Federal Reserve Bank of Richmond pointed out [2] that the Federal Reserve's decision to cut interest rates in 1995 was not "imminent," as there was no sign of an economic recession and a significant increase in the unemployment rate.

Therefore, this round of interest rate cycles is also regarded as a typical case of a "soft landing."

On the other hand, the Federal Reserve's operations successfully avoided inflation "taking off," and during the rate cut process, the PCE inflation rate hardly exceeded 2.3%, remaining relatively stable.

4.

1998: Asian Financial Crisis From September to November 1998, the Federal Reserve cut interest rates three times, with a cumulative reduction of 75 basis points, and the policy rate ceiling was reduced from 5.5% to 4.75%.

Before the rate cut, the policy rate had been maintained at the 5.5% level for as long as a year and a half.

In 1998, the background of the Federal Reserve's rate cuts was that the economy maintained a certain resilience, but the external environment was turbulent, and the U.S. stock market adjusted.

The actual GDP growth rate in the United States remained at a relatively high level of 3.8%-4.1% in the first half of the year, and the unemployment rate remained at a relatively low level of about 4.5% in the second half of 1998.

However, the manufacturing PMI fell into the contraction range in June; the PCE inflation rate has been slowly declining from 2% since 1997, and has been below 1% since February 1998.

In the second half of 1997, Thailand's abandonment of the fixed exchange rate triggered the "Asian financial crisis," and the Asian foreign exchange and financial markets continued to be turbulent in 1998.

In September 1998, the Russian financial market was also affected, and this crisis did not basically end until 1999.

In July-August 1998, the S&P 500 index adjusted for nearly two months, with the deepest drop approaching 20%.

The Federal Reserve's meeting statement in September 1998 stated, "The rate cut was to alleviate the negative impact of the increasingly weak foreign economy and the insufficiently loose domestic financial environment on the economic outlook of the United States."

According to CNN's report on the day of the rate cut [3], the global market had been highly anticipating the Federal Reserve's rate cut before this rate cut; after the rate cut, the U.S. stock market fell because some investors believed that the Federal Reserve's rate cut was too conservative.

However, in retrospect, the U.S. economy was not significantly impacted, and the actual GDP growth rate in the second half of 1998 was as high as 5.1%-6.6%.

The Federal Reserve revised the economic outlook upwards in March 1999 and resumed raising interest rates in June.

Federal Reserve officials later stated that the rate cut in 1998 was an overreaction and failed to realize how strong the U.S. economy was.

Although the then-Chairman of the Federal Reserve Greenspan did not regret the rate cut, he believed that the economic risks at the time were more threatening than inflation risks [4].

5.

2001-2003: Internet Crisis From January 2001 to June 2003, the Federal Reserve cumulatively cut interest rates 13 times, totaling 550 basis points, and the policy rate ceiling was reduced from 6.5% to 1.0%.

The pace of the Federal Reserve's rate cuts in this round was relatively fast, with the first rate cut adjusting by 50 basis points, and five consecutive rate cuts of 50 basis points, totaling 475 basis points within a year.

The background of the Federal Reserve's rate cuts in 2001 was the bursting of the "Internet bubble," financial market turmoil, and signs of economic weakness.

At the end of the 1990s, the rapid development and popularization of Internet technology represented by "Web1.0" led to an "entrepreneurial boom" and excessive speculation.

From October 1999 to March 2000, the NASDAQ index rose by as much as 88% in five months, and the S&P 500 index rose by 11%.

From June 1999 to May 2000, the Federal Reserve raised interest rates six times, totaling 275 basis points, to deal with economic overheating.

In March 2000, after the NASDAQ index peaked, it fell rapidly, and the Internet stock bubble gradually burst.As of January 2, 2001 (the day before the interest rate cut), the NASDAQ index had fallen by 55% from its peak in March 2000, although the S&P 500 index fell by less than 10% during the same period.

In 2000, the US unemployment rate remained around 4.0%, the manufacturing PMI entered the contraction zone since August, and the PCE inflation rate fluctuated at a higher level of 2.2%-2.7%.

On January 3, 2001, the Federal Reserve announced an emergency interest rate cut of 50BP, stating that "the background of the rate cut action is the softening of sales and production, the decline of consumer confidence, the tension in some financial market conditions, and the weakening of household purchasing power due to high energy prices," but also emphasized that "inflationary pressures are still controllable."

6.

2007-2008: Subprime Mortgage Crisis From September 2007 to December 2008, the Federal Reserve cumulatively cut interest rates 10 times, totaling 500BP, with the policy interest rate ceiling falling from 5.25% to 0.25%, that is, reduced to "zero interest rate."

In the following 7 years, the Federal Reserve did not raise interest rates again and successively implemented three rounds of quantitative easing (QE) operations.

In 2007, the background of the Federal Reserve's interest rate cut was the outbreak of the subprime mortgage crisis, which posed a serious threat to the strong US economy.

In the second and third quarters of 2006, the growth rate of US GDP had obviously slowed down, with the quarter-on-quarter annual rate falling from 5.5% in the first quarter to 0.6%-1.0%, and the GDP in the first quarter of 2007 fell from more than 2% before to 1.6%, and then rebounded.

Before the interest rate cut in 2007, the US unemployment rate remained at 4.4%-4.7%, and the manufacturing PMI basically maintained expansion; the PCE inflation rate basically remained at 2.1%-2.6%, but it fell to 1.9% in August, and the core PCE inflation rate fell from around 2.5% at the beginning of the year to around 2% in June-August.

In 2007, the US subprime mortgage crisis gradually fermented, and the "blowout" of BNP Paribas in August had a significant impact, becoming a key node at the beginning of this crisis [5].

On August 17, the Federal Reserve announced a reduction of the discount rate by 50BP to 5.75%, but did not reduce the target federal funds rate; the market responded positively, and the stock market rose, with most investors believing that "the situation is controllable"; the market expected the Federal Reserve to cut interest rates by 25BP in September, and a relatively radical expectation was to cut interest rates three times a year, each by 25BP, and some critics were worried that cutting interest rates would fuel inflation [6].

On September 18, the Federal Reserve reduced the target federal funds rate by 50BP to 4.75%, stating that the development of financial markets has increased the uncertainty of the economic outlook, and the tightening of credit conditions may exacerbate the adjustment of real estate, and today's action aims to prevent financial market chaos and promote long-term moderate growth.

In addition, the statement also pointed out that some inflation risks still exist, and the Federal Reserve will closely monitor this.

7.

2019: Tensions in Trade Situations From August to October 2019, the Federal Reserve cut interest rates three times in a row, totaling 75BP, with the policy interest rate ceiling falling from 2.5% to 1.75%.

Before this round of interest rate cuts, the Federal Reserve had kept interest rates stable for nearly eight months.

In March 2020, the Federal Reserve continued to cut interest rates due to the impact of the COVID-19 pandemic.

In 2019, the background of the Federal Reserve's interest rate cut was that the economy and the job market were stable, but the inflation rate was below 2%, and the trade situation was tense.

In the first half of 2019, the actual GDP growth rate of the United States was recorded at 2.2%-3.4%, the manufacturing PMI maintained expansion but showed a downward trend, and fell into the contraction zone in August; the unemployment rate fell from 4% at the beginning of the year to 3.6% in May-June; the PCE inflation rate remained at 1.4%-1.6%, and the core PCE inflation rate fell from around 1.9% at the beginning of the year to around 1.6% in March-May.

On July 31, 2019, the Federal Reserve announced a reduction of the interest rate by 25BP to 2.25%, stating that the US economy was growing moderately, the job market was stable, but the overall and core inflation rates were both below 2%, and there was no particular emphasis on the motivation for cutting interest rates.

The statement also showed that two members opposed the interest rate cut and supported keeping interest rates unchanged.

NPR reported [7] that this interest rate cut was an "insurance policy" aimed at preventing economic slowdown, especially considering the tense trade situation and the background of slowing global growth; the market responded negatively on the day, and the stock market fell, as investors believed that the motivation for the Federal Reserve's interest rate cut was not positive enough; then-President Trump also criticized on Twitter: "Powell has let us down."

On October 30, after the third interest rate cut, the Federal Reserve released a signal to pause the interest rate cut, partly because the trade situation improved, that is, there were positive developments in the China-US trade negotiations and the UK's Brexit negotiations [8].

02 The Economy After Interest Rate Cuts 1.

"Hard Landing" and "Soft Landing" In the 7 interest rate cut cycles since 1982, the US economy has encountered "hard landing" 3 times (1989-1992, 2001-2003, 2007-2008), that is, after the interest rate cut, the US economy fell into the recession zone defined by the NBER, and the easing cycle (including other easing operations after the interest rate cut) lasted for more than 3 years.

The other 4 times successfully achieved a "soft landing" (1984-1986, 1995-1996, 1998, 2019), in these cycles, although the economy may weaken stage by stage, the degree and duration of the weakening are limited, and it is not defined as a recession zone.

The interest rate cut cycle is as short as 3 months, and the longest does not exceed 3 years.

How will the US economy, employment, and inflation develop before and after the first interest rate cut?

We mainly counted the changes in various economic indicators in the United States during the 6 months before and after the first interest rate cut in the 7 cycles, and the following conclusions can be drawn: 2.

Production and Consumption: Both weaken before and after the interest rate cut.

After the first interest rate cut, the US ISM manufacturing PMI and the growth rate of private actual consumption usually continue to weaken within 3 months, and bottom out and rise within 3-6 months; in the "soft landing" situation, actual consumption usually shows stronger resilience, but the manufacturing PMI may still weaken.

In the 7 cycles, the ISM manufacturing PMI almost all showed a significant weakening 3-6 months before the interest rate cut, with an average decline of 6.2 percentage points from 6 months before the interest rate cut to the month of the interest rate cut, and a higher probability of falling into the contraction zone; there is still a higher probability of continuing to weaken within 3 months after the first interest rate cut, with an average decline of 1.3 percentage points compared to the month of the interest rate cut, but there is a higher probability of rising within 6 months after the first interest rate cut, with the average decline compared to the month of the interest rate cut narrowing to 0.6 percentage points.

The year-on-year growth rate of actual personal consumption expenditure (PCE) shows a similar pattern, with an average decline of 0.3 percentage points from 6 months before the first interest rate cut to the month of the interest rate cut, further declining by an average of 0.5 percentage points within 3 months after the interest rate cut compared to the month of the interest rate cut, and narrowing the decline to 0.3 percentage points within 6 months after the interest rate cut compared to the month of the interest rate cut.

In both "hard landing" and "soft landing" situations, the trend of manufacturing PMI shows weakening, with no obvious difference; however, the change in the growth rate of actual private consumption is quite different, with a clear downward trend in the 3 "hard landings", and it may rise or rebound within a year after a phased decline in the 4 "soft landings".

3.

Employment: There is still pressure after the interest rate cut.

After the first interest rate cut, the trend of the US unemployment rate is uncertain, but the "Samu Index" [9] (the difference between the 3-month moving average of the unemployment rate and the lowest point of the 3-month rolling moving average in the previous 12 months) usually rises within 6 months after the interest rate cut, indicating that the employment market margin pressure continues to increase; the unemployment rate is more likely to rise in the "hard landing" situation, and it may speed up after the first interest rate cut 6 months later.

In the 7 cycles, the US unemployment rate is more likely to rise 1-2 months before the interest rate cut, but the probability of the unemployment rate rising and falling is about the same within 6 months after the first interest rate cut.

However, the Samu Index, which better reflects the marginal changes in the employment market, is more likely to rise in the first month before the interest rate cut, and is more likely to rise further within 6 months after the interest rate cut.

Specifically, compared with the month of the interest rate cut, the Samu Index rose by an average of 0.12 and 0.20 percentage points respectively after 3 and 6 months after the interest rate cut.

In both "hard landing" and "soft landing" situations, the unemployment rate is more likely to rise in the "hard landing" situation, but usually rises relatively little within 6 months after the interest rate cut, and speeds up after 6 months.

In the two "hard landings" of 2001 and 2007, the "Samu Index" rose to 0.5 in 6-7 months after the first interest rate cut, triggering the "Samu Rule"; in other situations, it did not reach 0.5 within a year after the first interest rate cut.

4.

Inflation: Not easy to rebound after the interest rate cut.

After the first interest rate cut, the trend of the US PCE and core PCE inflation rates is uncertain, but the 10-year inflation expectation model usually declines within 3-6 months, or it means that the Federal Reserve's interest rate cut itself is not easy to trigger inflation and inflation expectation rebound, and the possible reason is that the weakening of the economy has a strong drag on inflation and inflation expectations.

In the 7 cycles, from 6 months before the first interest rate cut to the month of the interest rate cut, the PCE and core PCE year-on-year usually show a decline, with an average decline of 0.14 and 0.21 percentage points respectively.

However, after the first interest rate cut, the probability of the above inflation rates continuing to decline and rebounding is about the same, and the probability of the core PCE stabilizing is relatively large.

On the other hand, the 10-year inflation expectation model of the Atlanta Fed is more likely to decline before and after the interest rate cut, with an average decline of 0.27 percentage points from 3 months before the interest rate cut to the month of the interest rate cut, and the average decline of 0.13 and 0.11 percentage points respectively within 3 months and 6 months after the interest rate cut compared to the month of the interest rate cut.

In both "hard landing" and "soft landing" situations, there is no obvious difference in the trend of core PCE, both of which may show resilience; there is no obvious difference in the trend of model inflation expectations, and they have all declined to varying degrees after the first interest rate cut.

In addition, the absolute level of inflation is not obviously related to whether it is a "soft landing" or not.Here is the translation of the provided text into English: **How do asset prices evolve before and after the first interest rate cut after a rate cut?

We mainly analyzed the changes in the prices of major asset classes during the 60 days before and 90 days after the first interest rate cut in 7 cycles (see Appendix 3), and the following conclusions can be drawn:** 1.

**U.S. Treasuries: Interest rates tend to decline** - The trend of U.S. Treasury rates is downward, but they may rebound temporarily within 1-2 months after the first rate cut in a "soft landing" scenario.

In 7 cycles, from 2 months before the rate cut to 3 months after, the 10-year U.S. Treasury rate generally maintained a downward trend.

After the first rate cut, there is usually still room for the 10-year U.S. Treasury rate to decline, with an average decrease of 20 basis points 60 days after the rate cut, based on the day before the first rate cut.

However, in the three "soft landings" of 1995, 1998, and 2019, the downward space for the 10-year U.S. Treasury rate was relatively limited, and a rebound may occur within 1-2 months after the rate cut.

2.

**U.S. Dollar: Direction unclear** - The trend of the U.S. Dollar Index has no absolute correlation with the rate cut or whether it is a "soft landing."

In 7 cycles, the probability of the U.S. Dollar Index rising or falling within 1-3 months after the rate cut is roughly equal.

In 3 "hard landings," the U.S. Dollar Index is more likely to weaken before and after the rate cut, but there were 2 instances where it surpassed the level 2 months before the rate cut within 3 months after the rate cut.

In 4 "soft landings," the U.S. Dollar Index was flat or rebounded before and after the rate cut in 3 instances.

A special case was 1998, when, despite the Fed cutting rates only three times and the U.S. economy experiencing a "soft landing," the U.S. Dollar Index weakened significantly before the rate cut, stabilized after the rate cut, but did not rebound to the level 2 months before the rate cut.

The special background at the time was the Asian financial crisis, which caused the U.S. Dollar Index to rise significantly for most of 1997-1998 until it began to fall rapidly in August 1998.

Although the Fed started cutting rates in September, the U.S. Dollar Index was still in the inertia of falling.

3.

**U.S. Stocks: Temporary pause in the rally** - The rally in U.S. stocks may "cool off" before and after the first rate cut, but usually resumes rising 2-3 months after the rate cut.

In 7 cycles, before and after the first rate cut, U.S. stocks (S&P 500 index) maintained an upward trend in all 4 "soft landings" and 1 "hard landing."

Looking at the rhythm, U.S. stocks usually experience fluctuations and adjustments within 1 month before and after the first rate cut, possibly due to market disagreements on the economic and policy outlook.

However, unless there is a "hard landing," U.S. stocks usually resume rising 3 months after the first rate cut, with the S&P 500 index averaging a 2.8% increase compared to the day before the first rate cut.

In terms of style, there is no clear pattern in the change of U.S. stock style before and after the rate cut.

This may be because, on the one hand, the rate cut is beneficial for easing the valuation pressure on technology growth stocks, and on the other hand, it also helps to alleviate the financing and financial pressure on small and medium-sized companies and cyclical value companies.

Statistically speaking, unless it is a market situation similar to the 2001 internet crisis, the probability of technology growth stocks outperforming cyclical value stocks is higher; even during the internet crisis period, technology stocks also warmed up within 1 month after the Fed's first rate cut.

4.

**Gold: Rise first, then consolidate** - The probability of gold rising before the rate cut is relatively high, but the trend after the rate cut is unclear.

From 2 months before the first rate cut to the day before, the spot price of gold rose 4 times, with an average increase of 1.8%; within 2 months after the first rate cut, gold rose 5 times; within 3 months after the first rate cut compared to the day before the first rate cut, gold fell 5 times.

Moreover, there is no clear correlation between the trend of gold and whether it is a "soft landing."

For example, in the "hard landing" of 2007 and the "soft landing" of 2019, gold rose significantly after the rate cut, benefiting from the demand for safe-haven assets triggered by the subprime crisis and trade tensions, respectively.

However, in 1984 and 1989, gold prices fell, possibly mainly due to falling crude oil prices, inflation, and expectations of inflation.

5.

**Crude Oil: Likely to decline** - The probability of crude oil declining after the rate cut is relatively high, but not absolute.

In 7 cycles, the probability of WTI crude oil futures prices fluctuating and rebounding 1-2 months before the rate cut is relatively high.

From 2 months before the rate cut to the day before the rate cut, prices rose 5 times, with a median increase of 2.8%.

After the first rate cut, the probability of crude oil prices falling is greater, with 5 declines within 3 months after the rate cut compared to the day before the rate cut, with an average and median decline of 6.0%.

The decline in oil prices may be mainly attributed to economic weakness and market concerns about demand.

**Implications for the present:** Firstly, based on the economic performance before the Fed starts cutting rates, it is difficult to determine whether the U.S. economy can achieve a smooth "soft landing" afterwards.

For example, before the rate cut in 1995, the ISM manufacturing PMI declined rapidly and fell into contraction, and the actual private consumption growth rate also experienced a phase of decline, but the U.S. economy recovered rapidly after the rate cut, achieving a textbook "soft landing."

On the other hand, before the rate cut in 2007, the ISM manufacturing PMI basically maintained expansion before the rate cut, and there was no significant weakening trend, performing the best among the other 6 cycles, and the private consumption growth rate was at a mid-level, but the U.S. economy eventually fell into a severe crisis.

Interestingly, when the Fed cut rates in 2007, there was also no shortage of market concerns about its premature rate cut leading to repeated inflation.

From this perspective, we need to fully realize the limitations of market and policy cognition, as well as the unpredictability of economic development.

Secondly, if there are no serious economic or financial market shocks in the future, this round of rate cuts is more likely to achieve a "soft landing."

In fact, since the early 1980s when Volcker raised interest rates sharply to "create a recession," the U.S. has not experienced another recession directly caused by rate hikes themselves without serious economic or financial market shocks.

The three "hard landings" since 1982 have encountered the savings and loan crisis (combined with the oil crisis), the internet crisis, and the subprime crisis.

This made the Fed's rate cuts unable to prevent the economic recession.

In addition to these, the four "soft landings" have achieved the effect of preventing recessions with appropriate rate cuts by the Fed.

Thirdly, this round of Fed rate cuts started relatively late, with strong signals of economic and job market weakness before the rate cut.

This round of Fed rate cuts was largely constrained by inflation risks, especially the rebound of inflation in the first quarter of 2024, which greatly delayed the Fed's rate cuts.

Compared to 1984-1986, 1998, and 2019, the Fed had more reasons for rate cuts, not only based on employment and inflation situations but also to prevent the appreciation of the U.S. dollar and to prevent imported economic and financial risks for various reasons.

Compared to 1995, when U.S. inflation was around 2%, the resistance to the Fed's rate cuts was relatively small.

This also made the signals of economic and job market weakness stronger before this round of rate cuts: first, the ISM manufacturing PMI was at a lower level compared to previous cycles (Chart 18); second, the pressure of a weakening job market was greater, with the first occurrence of triggering the "Sam Rule" before the rate cut (Chart 21).

Fourthly, after this round of rate cuts, the economy and job market may also continue to decline for a period of time.

Based on the economic performance after 7 rounds of rate cuts, key production and consumption indicators, as well as job market indicators, are likely to continue to decline within a quarter after the first rate cut, and only bottom out and warm up in the second quarter after the rate cut.

Fifthly, the performance of major asset classes in previous rate cut cycles is expected to provide clues for the trend of this round of assets, and it is also necessary to combine the special macro backgrounds such as the U.S. election and Japanese rate hikes for a comprehensive judgment.

Specifically: the 10-year U.S. Treasury rate may rebound temporarily within 1-2 months after the first rate cut, and then continue to decline.

Before this round of rate cuts, the 10-year U.S. Treasury rate has already declined, but the extent is still at a historical median level (Chart 24).

Looking forward, if the Fed delivers on the rate cut and economic data remains resilient, market concerns about a recession ease, and rate cut expectations weaken, it may cause the U.S. Treasury rate to bottom out and rebound temporarily.

Later on, since there is a large space for this round of rate cuts, the current CME futures market expects the Fed to cut rates by about 2 percentage points over the next year, and the Fed's latest dot plot suggests that the rate cut cycle will continue at least until 2026.

If the Fed continues to cut rates, then the U.S. Treasury rate may continue to decline.

The U.S. Dollar Index may not fall due to rate cuts, but it may be dragged down by the appreciation of the yen.

Before this round of rate cuts, due to factors such as Japanese rate hikes, the pace of the U.S. Dollar Index's decline was relatively fast, which is similar to 1998, that is, the trend of the U.S. Dollar Index is more influenced by the external environment.

Looking forward, there is uncertainty in the trend of the dollar.

If the Bank of Japan is restrained in raising rates, the dollar may stabilize or even rebound; but if the Bank of Japan continues to raise rates, the U.S. Dollar Index may also be in a similar "inertia" of decline as in 1998.

We tend to believe that the Bank of Japan may be more cautious on the issue of rate hikes in the next 1-2 quarters to control the impact of the rapid appreciation of the yen on the Japanese and global financial markets; but the direction of Japan's monetary policy normalization remains unchanged, and the yen still has a large appreciation space, and the U.S. Dollar Index may gradually face the drag of yen appreciation.

The adjustment risk of U.S. stocks is relatively high within 1 month before and after the first rate cut, but the overall direction remains positive.

In this round, U.S. stocks have already experienced some fluctuations 1-2 months before the rate cut, including: 1) adjustments in the stock prices of large semiconductor and technology companies, as investors worry about weakening demand and dual risks of policy (antitrust); 2) there is a significant divergence in the prospects for the economy and rate cuts, and investors are currently more concerned about the risk of an unexpected economic downturn and the Fed's insufficient rate cuts (unable to avoid a recession).

Looking forward, referring to the patterns of previous rate cut cycles, it is necessary to be vigilant about the volatility risk of U.S. stocks within 1 month before and after the first rate cut.

However, by the end of the year or the beginning of next year, as the results of the U.S. election are finalized and the direction of the U.S. economy is expected to be clearer, U.S. stocks are expected to resume their upward trend.

The style of U.S. stocks needs to be comprehensively judged in combination with rate cut expectations and the situation of the election.

(Note: Some terms and phrases may have been adjusted for clarity and context in English.

)Gold had already risen significantly before the interest rate cut, and it is more likely to consolidate after the cut.

Two months prior to this round of rate cuts, the price of gold had already increased considerably, performing second only to 1998 in the past seven cycles.

Similar to 1998, since July of this year, the key driver for the rise in gold prices has been the weakening of the US dollar index.

Looking ahead, after the first interest rate cut, if both US Treasury yields and the US dollar index face the risk of a phased rebound, gold prices may be under pressure in a phased manner.

Further down the line, if US Treasury yields and the US dollar index continue to fall, gold prices may resume their upward trend.

Additionally, this round of gold prices has also been influenced by "non-dollar factors," including global central banks increasing their gold holdings and the growth of speculative demand.

For instance, the People's Bank of China has not increased its gold holdings for four consecutive months, which may also limit the upward momentum of gold prices in the near future.

Crude oil prices may remain volatile after the rate cut.

After previous rate cuts, due to the economy still weakening, the probability of oil prices falling is relatively high.

However, it should be noted that after the US shale oil revolution in 2010, the production of crude oil in the United States has increased, and oil companies have been able to adjust their production more flexibly, weakening the correlation between international oil prices and demand.

After the shale oil revolution, there was only one rate cut cycle, which was in 2019, when the WTI oil price remained volatile before and after the rate cut, without a significant downward trend.

Before this round of rate cuts, oil prices had already adjusted to some extent amid demand concerns, limiting the space for further decline.

Looking ahead, the impact of demand concerns on oil prices may weaken, and if US oil companies or oil-producing countries such as OPEC+ appropriately reduce production, oil prices are more likely to remain volatile at recent levels.