Fed Cuts Rates, Surprising Scale! Understand It in 10 Points
At 2 a.m. on September 19th Beijing time, the Federal Reserve announced a rate cut of 50 basis points!
After the rate cut, the target range for the federal funds rate is between 4.75% and 5.00%.
This rate cut exceeded the predictions of most economists!
This is the first rate cut by the Federal Reserve in four years.
The Federal Reserve FOMC statement indicated that confidence in inflation has increased, and inflation is moving towards 2%; the risks to employment and inflation targets are in a balanced state.
The Federal Reserve's dot plot shows that the median expectation for the federal funds rate at the end of 2024 is 4.4%, which means there will be another rate cut of 25 basis points before the end of the year.
The Federal Reserve has raised the 2024 U.S. unemployment rate forecast to 4.4% and lowered the 2024 U.S. GDP growth forecast to 2.0%.
Affected by the rate cut news, the three major U.S. stock indices increased significantly, the price of gold hit a new high, and the offshore RMB exchange rate reached a recent high.
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Below, we will understand this rate cut through 10 paragraphs.
1.
This rate cut means that the United States has entered a new round of the rate cut cycle.
The following chart shows the trend of the U.S. dollar interest rate over the past 60 years, which has been continuously declining.
This rebound in recent years was caused by the massive monetary easing after the COVID-19 pandemic, and the Federal Reserve had raised interest rates 11 times in a row.
In the next few years, U.S. interest rates will gradually decline and return to the ultra-low interest rate era before the pandemic.
2.
The United States has started a new round of the rate cut cycle, breaking the ceiling of China's monetary policy, giving us more room for rate cuts.
In the past few years, there has been a rare inversion of interest rates between China and the United States, with China's 10-year government bond yield about 200 basis points lower than that of the United States.
To reduce capital outflows from China, China's rate cuts have been small and limited in scope.
After the dollar starts the rate cut cycle, China's room for rate cuts will increase in the next few years, and the era of low interest rates is coming.
3.
The Federal Reserve's rate cut cycle is good for China.
It has increased the space for China's monetary policy, which is beneficial to the real estate market, stock market, and economy.
However, whether A-shares have bottomed out depends on the real estate market; whether the real estate market has bottomed out depends on the economy; whether the economy has bottomed out depends on whether the strength of monetary and fiscal policies is sufficient.
China needs to issue more government bonds, invest in effective large infrastructure projects, encourage consumption, and also needs a larger scale of rate cuts and reserve requirement ratio reductions.
4.
In the next two to three years, China's LPR (loan prime rate) has a rate cut space of 80 to 100 basis points.
First, we need to pay attention to whether China's LPR will cut interest rates at 9:15 a.m. tomorrow (September 20th).
China has at least one opportunity to cut interest rates and reduce the reserve requirement ratio before the end of the year.
After LPR cuts interest rates, the public fund loan interest rate may also cut interest rates.
5.
Will China's existing mortgage interest rates be fully reduced (beyond the loan contract agreement)?
The probability is relatively high, and there may be news in the next two months.
6.
Recently, the RMB exchange rate against the U.S. dollar has appreciated significantly.
What will happen to the exchange rate after the U.S. dollar cuts interest rates?
Will the RMB break 7?
I believe that around the U.S. election, the RMB will continue to maintain strength with the help of factors such as the U.S. dollar rate cut, and it is not ruled out that the RMB exchange rate against the U.S. dollar will break 7.
The RMB exchange rate is currently undervalued, and as long as China and the United States do not break up, the RMB exchange rate is likely to remain strong and stable in the future.
7.
In the next two years, the U.S. dollar's interest rate cut space is greater than that of the RMB.
This is conducive to maintaining the strength of the RMB exchange rate.
In addition, the official proposal to prevent "involution" vicious competition means that if there are no major changes in the international situation, the RMB exchange rate will remain stable, and the practice of stimulating exports through devaluation will not appear in the short term.
8.
How will the U.S. election affect the RMB exchange rate and China's economic recovery?
If Trump is elected, he will intervene in monetary policy, and the Federal Reserve will speed up the pace of rate cuts; Harris will let the Federal Reserve decide for itself.
Trump has already threatened to impose a 60% tariff on all Chinese goods after taking office, which will trigger a new round of Sino-American trade war, and may cause the RMB to fluctuate abnormally and depreciate; if Harris takes office, the RMB exchange rate is likely to remain stable and strong.
9.
The latest financial data, investment data, consumption data, real estate data, etc., all indicate that the economy needs to "step on the gas" again.
After the Federal Reserve cuts interest rates until the end of the year, it will be a stage for China's macroeconomic policy to exert force to sprint to complete the annual target.
As for China's real estate market, there may be big news on September 30th and a few days before.
10.
After the U.S. dollar cuts interest rates, how will U.S. stocks, U.S. bonds, and the U.S. dollar exchange rate go?
Historically, the performance of these assets varies after each rate cut, depending on what stage the U.S. economy is in at the time.
If it is after a technological revolution and a vibrant period, the rate cut will allow the stock market to continue to rise, and the U.S. dollar to appreciate; on the contrary, the rate cut confirms that the economy is not good, and within half a year or one year after the first rate cut, the stock market falls back, safe-haven funds flow into the bond market, and the U.S. dollar depreciates.
The current market has a big difference in the trend of the next half to one year.
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