Behind the Fed's Drastic 50bp Rate Cut
The Federal Reserve cut interest rates by 50 basis points (bp), slightly exceeding market expectations, but Powell's speech was hawkish, stating that the current rate cut is not the norm.
The dot plot indicates another 50bp cut within the year, while the market expects another 75bp cut.
It is inclined to believe that this substantial rate cut may reinforce the market's recession expectations, and with the election approaching, asset price volatility may be significant.
1.
The Federal Reserve cut interest rates by 50bp to 4.75%-5.0%.
Before the meeting, the market expected a 50bp cut with a probability of about 66%, so the rate cut was slightly more than expected.
However, Powell stated that the current rate cut is not the norm, and future decisions will be based on data, which may accelerate, slow down, or even pause rate cuts, with an overall hawkish stance.
2.
The Federal Reserve has revised down its expectations for the economy, employment, and inflation.
The dot plot indicates another 50bp cut within the year, another 100bp cut by 2025, and a final 50bp cut by 2026 to end the rate cut cycle.
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3.
After the meeting, U.S. stocks and gold initially rose then fell, while U.S. Treasury yields and the U.S. dollar index initially fell then rose.
The market's expectations for rate cuts have not changed significantly.
The market still expects a roughly 80% chance of another 75bp cut within the year, meaning rate cuts are likely in both November and December, with a high probability of another 50bp cut.
4.
Combining historical patterns and the performance of assets after this meeting, this substantial rate cut should have reinforced market concerns about a U.S. economic recession.
It is inclined to believe that considering the refutation of recession expectations takes time, and with the U.S. election on November 5th, large asset price volatility is likely in the short term.
Subsequent attention should be paid to whether U.S. economic, inflation, and employment data confirm or refute recession expectations, as well as the progress of the election.
1.
The Federal Reserve cut interest rates by 50bp, and the dot plot indicates another 50bp cut within the year, with Powell's speech being hawkish.
> Meeting Resolution: The Federal Reserve lowered the target range for the federal funds rate by 50bp to 4.75%-5.0%.
Before the meeting, the market expected a 50bp and 25bp cut with probabilities of 66% and 34%, respectively, so the rate cut was slightly more than expected.
Compared to the July statement, there are two significant changes: first, a clear increase in confidence in inflation, and second, a further increase in the emphasis on employment.
> Dot Plot: The expected rate at the end of 2024 was revised down from 5.0%-5.25% in June to 4.25%-4.5%, which means another 50bp cut within 2024; the expected rate at the end of 2025 was revised down from 4.0%-4.25% to 3.25%-3.5%, which means another 100bp cut in 2025; the expected rate at the end of 2026 was revised down from 3.25%-3.5% to 2.75%-3.0%, which means another 50bp cut in 2026; additionally, the dot plot added that the rate will remain unchanged in 2027, meaning the rate cut cycle will end in 2026.
> Economic Forecast: In terms of GDP growth, the forecast for 2024 was revised down from 2.1% to 2.0%, while the forecasts for 2025 and 2026 remain unchanged at 2.0%; in terms of unemployment, the forecasts for 2024-2026 were revised up from 4.0%, 4.2%, 4.1% to 4.4%, 4.4%, 4.3%, respectively; in terms of inflation, the forecasts for PCE and core PCE inflation for 2024 and 2025 were slightly revised down, while the forecast for 2026 remains unchanged.
Compared to the latest institutional survey results from Bloomberg, the Federal Reserve's forecast for GDP growth is slightly higher than market expectations, and its inflation forecast is slightly lower than market expectations.
> Powell's Speech: Powell indicated that the Federal Reserve is not in a hurry to act and that the current rate cut should not be considered the norm.
At the July meeting, there was no sign of weakening employment data; if there had been, a rate cut would have been implemented then.
The policy direction is moving towards a neutral stance, and future decisions will be made on a meeting-by-meeting basis based on data.
If necessary, rate cuts can be accelerated, slowed down, or even paused.
The neutral interest rate may be significantly higher than before the pandemic.
There are no plans to stop reducing the balance sheet in the short term.
The economy and employment remain strong, and there are no signs indicating an increased likelihood of recession.
2.
After the meeting, asset prices fluctuated significantly, and market expectations for rate cuts have not changed significantly.
> Asset Price Performance: After the meeting, U.S. stocks and gold initially rose then fell, while U.S. Treasury yields and the U.S. dollar index initially fell then rose.
As of the close on 9/19, the S&P 500, Nasdaq, and Dow Jones Industrial Average all fell by 0.3%; the 10-year U.S. Treasury yield rose by 6.2bp to 3.71%, the U.S. dollar index fell by 0.1% to 100.9, and spot gold fell by 0.4% to $2558.8 per ounce.
> Changes in Rate Cut Expectations: After the meeting, the expectations for rate cuts implied by interest rate futures did not change significantly.
The market still expects a roughly 80% chance of another 75bp cut within the year, and the probability of an additional 175bp cut by June 2025 is close to 100%.
3.
This rate cut should have reinforced recession concerns, and with the U.S. election, short-term assets may be more volatile.
> Historical Patterns: In previous reports, we have detailed the performance patterns of assets before and after each rate cut.
In summary: (1) U.S. stocks: mostly maintained an upward trend, with only a continuous decline in the "recessionary rate cut" scenario; (2) U.S. Treasury yields: maintained a downward trend; (3) U.S. dollar index: short-term weakness, with no consistent long-term pattern; (4) Gold: no consistent short-term pattern, mostly rising in the long term; (4) Crude oil & Copper: short-term weakness, with no consistent long-term pattern.
> Subsequent Outlook: From the asset prices and changes in rate cut expectations after this meeting, the market shows a risk-off pattern, partly due to Powell's hawkish speech and partly because this substantial rate cut should have reinforced market concerns about a U.S. recession.
Since refuting recession expectations takes time, large asset prices may be volatile in the short term, and attention should be paid to the actual performance of U.S. economic, inflation, and employment data.
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