Post-Rate Cut Era: Deep Dive into Economic & Market Shifts
At the FOMC meeting in September 2024, the Federal Reserve made a highly anticipated decision to cut interest rates, lowering the federal funds rate range by 2 basis points to 4.75%~5.00%.
This move indicates that the Fed has started to pay more attention to the signs of weakness in the job market.
Although the overall economic condition is still stable, it has shown a trend of slowing down.
This decision, combined with the gradual loss of strong growth momentum in the job market and the easing of inflation, makes future policy changes crucial to the market.
The expectation for interest rate cuts in 2024 has been raised from 1 cut to 4 cuts previously, with an expectation of two more rate cuts within the year.
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In addition, there may be another 4 cuts in 2025, and further reductions of 2 cuts in 2026.
This forecast suggests that the Federal Reserve has a strong intention to maintain economic growth and stabilize the labor market to prevent the intensification of economic slowdown through interest rate cuts in the next two years.
Although the interest rate cut this time is slightly lower than market expectations, the Fed has clearly stated that future policies will depend on the latest economic data.
This will prompt market participants to re-examine the Fed's policy pace and adjust the impact of interest rate adjustments on different asset categories.
According to the latest economic forecast, the Fed has slightly lowered its GDP growth expectation for 2024 to 2.0% and expects the growth rate to remain around this level in the next few years.
In addition, the unemployment rate is expected to rise to 4.3%~4.4% between 2024 and 2026, reflecting that the job market still needs to be rebalanced against the backdrop of the gradually slowing economy.
At the same time, the PCE inflation rate and core PCE inflation rate are expected to drop to 2.3% and 2.6% respectively, showing the Federal Reserve's optimistic expectation for future inflation relief.
This also provides room for further interest rate cuts, allowing the Fed to flexibly deal with economic risks without worrying too much about inflationary pressure.
Since May 2024, the Fed has slowed down the pace of its balance sheet reduction, with the current pace of reduction being a monthly reduction of $25 billion in U.S. Treasury bonds and a maturity scale of $35 billion in MBS.
By September, the Fed's balance sheet size has been reduced to $7.12 trillion.
However, market liquidity remains abundant, and the outflow of the reverse repo tool (ON RRP) has maintained liquidity stability.
As the Fed continues to reduce its balance sheet, the market's reaction will be closely watched, especially for the liquidity spillover effects and their impact on asset prices.
Fed Chairman Jerome Powell reiterated the Fed's commitment to economic stability at a press conference.
He pointed out that although the unemployment rate has risen, this is more due to the increase in labor supply, rather than a signal of economic recession.
He also emphasized the Fed's confidence in cooling inflation and stated that the pace of future interest rate cuts will be adjusted according to the data.
Such remarks mean that the Fed's flexibility will become the core feature of future policy direction, and the market will continue to pay attention to changes in economic data to predict its policy response.
The September FOMC meeting officially opened a preemptive interest rate cut cycle, aiming to deal with the risks of a slowing job market and support sustained economic growth.
Although this interest rate cut is lower than some market expectations, the Fed still shows its willingness to deal with economic challenges through a continuous interest rate cut policy path.
In the future, monetary policy will be mainly driven by changes in the job market, oil prices, and inflation.
Market participants should adopt a flexible strategy, pay close attention to key data, and especially in the context of increasing global economic risks, the flexibility of asset allocation is crucial.
The August 2024 non-farm employment report shows that the supply and demand of the U.S. job market have basically reached a balance, with the ratio of job vacancies to unemployed people being 1.07.
This indicates that almost every job seeker corresponds to a job vacancy, and the overheating phenomenon of the labor market in the past few years has weakened.
At the same time, the Fed has taken interest rate cuts to alleviate potential weakness in the job market.
The dynamic interest rate cut in the job market aims to reduce corporate borrowing costs to prevent further slowdown in the job market and stimulate the economy.
By boosting corporate financing willingness, interest rate cuts are expected to promote recruitment activities and help stabilize the consumer market.
As the ratio of job vacancies to unemployed people decreases, the fragility of the U.S. economy increases, and the risk of recession increases.
If the ratio continues to be below 1, historical data shows that the possibility of recession will increase.
For this reason, market participants need to adopt a diversified investment strategy to diversify risks.
Coping strategy: The U.S. economy faces high uncertainty, and interest rate cuts will become a key tool for the Fed to deal with the weakness of the job market.
Investors should adopt a diversified strategy, closely monitor employment data, balance the allocation of risk assets, and increase the holding of risk-averse assets to cope with future economic fluctuations.
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