Fed Cuts Rates Sharply, US Stocks Rise; Market May See Big Swings
Over the past week, the three major U.S. stock indices have collectively risen.
The Dow Jones Industrial Average has accumulated a 1.62% increase, closing at 42,063.36 points; the Nasdaq Composite has accumulated a 1.49% increase, closing at 17,948.32 points; the S&P 500 has accumulated a 1.36% increase, closing at 5,702.55 points.
One of the reasons affecting the stock market performance is the Federal Reserve's decision to cut interest rates by 50 basis points, marking the first rate cut in four years.
Zhang Yugui, director of the Center for Financial Innovation and Development at Shanghai International Studies University, pointed out that the Fed's decision to cut rates by 50 basis points is a "re-calibration" of existing monetary policy from a decision-making perspective, which is conducive to stabilizing the fundamentals of the U.S. economy.
Advertisement
At the same time, as the U.S. is about to enter a critical window period for the presidential election, the market has been sent a positive signal, indicating that the U.S. monetary authorities maintain a keen market intuition for the operation of their own economy.
He emphasized that the discretionary adjustment of monetary policy is not only imperative but also leaves a certain degree of flexibility.
In fact, judging from the relatively positive response of the capital market to the rate cut, the Fed's rate cut to some extent meets the market's expectations.
Looking ahead, Yang Zirui, a researcher at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, told the 21st Century Economic Report that historical experience shows that within a few months after the Fed starts to cut rates, U.S. stocks usually experience significant fluctuations and adjustments.
This is mainly due to the market's divergent judgments on policy and economic prospects.
Looking at the longer period after the rate cut, the trend of U.S. stocks depends on whether the U.S. economy experiences a "hard landing" or a "soft landing."
If the economy has a "hard landing," U.S. stocks will experience a prolonged period of decline; if the economy has a "soft landing," under the impetus of the Fed's rate cut, U.S. stocks will experience a significant rise.
In Zhang Yugui's view, after the Dow Jones Industrial Average has reached 42,000 points, the market should remain cautiously optimistic about whether the next target will move towards 45,000 points.
After all, U.S. stocks have long been in a precarious position.
The global economy, under the battering of economic nationalism and protectionism, is not optimistic in terms of development trends and strategic direction.
Last Wednesday, the Fed announced that it would lower the target range for the federal funds rate by 50 basis points to 4.75% to 5.00%.
This is the first rate cut by the Fed since March 2020, marking a shift from a tightening monetary policy cycle to an easing cycle.
The Federal Open Market Committee of the Fed issued a statement saying that the committee has "greater confidence" that the inflation rate can move sustainably towards the 2% target and believes that the risks to achieving full employment and price stability are roughly balanced.
Fed Chairman Powell said that the 50 basis point rate cut is a "strong action," and also indicated that the Federal Open Market Committee does not think the rate cut action is slow, but considers it a timely measure.
Yang Zirui told the 21st Century Economic Report that the Fed's decision to cut rates by 50 basis points is mainly based on three considerations: First, the weakening employment data.
In August 2024, the U.S. unemployment rate rose to 4.2%, touching the Sum Rule for two consecutive months.
Historical experience shows that since 1960, the Sum Rule has a 100% success rate in warning of U.S. economic recessions.
The Fed hopes to boost consumption and investment through a preemptive rate cut strategy, maintain the relative strength of employment, and avoid a hard economic landing.
Second, inflation continues to fall back towards the 2% policy target.
In August 2024, the U.S. CPI rose by 2.5% year-on-year, and the core CPI rose by 3.2% year-on-year, with inflationary pressures greatly alleviated.
Third, this significant rate cut has a "calibration" connotation.
The Fed believes that the impact of the pandemic on employment and inflation has ended, and it is no longer appropriate to maintain a "restrictive" high interest rate level, and it needs to move towards a "neutral" level as soon as possible.
The Fed had considered a rate cut at the July interest rate meeting, but due to the release of the July employment data and the U.S. Department of Labor's significant downward revision of the non-farm employment data for the period from April 2023 to March 2024, which both occurred in August, the Fed missed the last rate cut timing.
Therefore, the magnitude of this rate cut also has a "compensation" for the last non-rate cut.
According to the Fed's economic forecast, under the baseline scenario, it is expected that there will be another 50 basis point rate cut by the end of this year, and a 100 basis point rate cut next year.
In addition, according to the FedWatch tool of the Chicago Mercantile Exchange, it is expected that there will be another 75 basis point rate cut by the end of this year, and a 125 basis point rate cut next year.
Yang Zirui said that the market's expected rate cut margin is slightly higher than that of the Fed, but the divergence between the two has obviously converged.
At present, the U.S. presidential election has a relatively small impact on the Fed's monetary policy decision-making, but the uncertainty of U.S. domestic and foreign policies after the election may have an impact on the Fed's monetary policy decision-making.
For example, if the new U.S. president adopts measures to impose a relatively large tariff on global goods, this will push up U.S. inflation and limit the Fed's room for rate cuts.
"So far, the fundamentals of the U.S. economy are still the best among the major developed economies, although some sectors have shown signs of recession.
However, in the election year, the ruling team first considers stability, after all, the core inflation rate is close to the 2% target level."
Zhang Yugui estimates that this year and next year, the Fed will follow up on monetary policy adjustments according to changes in the economic fundamentals, and is more likely to adopt a relatively moderate pace of rate cuts.
Given that the target range for the federal funds rate is currently 4.75% to 5.00%, the U.S. still has a relatively ample room for rate cuts under normal circumstances.
Live a Comment