I. Performance of Global Equity Indices (in US dollars)
Data source: Bloomberg, 2024/09/15-2024/09/19, compiled by Tiger Brokers
II. Our View
This week, the Federal Reserve's FOMC decided to cut interest rates by 50bps, officially opening the door to rate cuts. Contrary to the previous expectations of mainstream institutions, the Fed did not adopt the "25bps cut + dovish statement" approach, but instead used a "50bps cut + hawkish statement" to continue balancing expectations.
The market had already anticipated the start of the rate cut cycle with a 50bps reduction. Given that the current Federal Reserve's benchmark interest rate is significantly higher than the neutral rate (around 2.5%-3%), the initial 50bps cut demonstrates the Fed's determination to prevent an economic recession, mitigating potential future shocks to some extent. Therefore, we believe it was a wise choice.
Both the Fed's economic data projections (SEP) and Powell's remarks at the press conference conveyed the Fed's confidence in the growth of the U.S. economy. This is the main reason for the rise in U.S. stocks after the meeting and the decline in long-term U.S. bonds.
During the meeting, Powell emphasized that previous employment data had been significantly revised downward, and he reluctantly expressed that a rate cut in July was necessary. Considering the uncertainty surrounding the upcoming U.S. election, employment data will continue to influence market sentiment for a considerable period, bringing volatility and trading opportunities to U.S. stocks and long-term U.S. bonds.
We expect the next three months to remain a window for rapid rate cuts by the Fed, bringing the benchmark rate closer to the neutral rate by the end of the year to ease pressure on the economy and employment. If future economic data remain under the Fed's control, we believe a soft landing or even no landing is highly likely. Historically, if a 50bps rate cut is implemented without a subsequent recession, there could be significant opportunities for both U.S. stocks and bonds.
III. In-Depth Analysis
The Federal Reserve exceeded expectations by cutting rates by 50bps. What signal is Powell sending?
This week, the Fed's FOMC decided to cut interest rates by 50bps, officially opening the door to rate cuts. From the wording of the official statement, on the one hand, the Fed emphasized greater confidence in bringing inflation down to 2%; on the other hand, regarding employment, it noted that the growth rate has "slowed" rather than "moderated." Moreover, the Fed continues to stress its dual mandate of employment and inflation, but this time, it added the goal of "supporting full employment," placing it before inflation.
From the dot plot, there is a clear increase in the sentiment for rate cuts compared to June, but within the Fed, there remains significant debate over whether to cut rates by 25bps or 50bps this year. Of the 19 Fed officials, 7 believe there should only be one more rate cut by the end of the year, while 9 support two more cuts. However, the market has already priced in aggressive expectations, with trading pricing for year-end rates at 4.1%, much more aggressive than the Fed's dot plot projections. This has contributed to the recent decline in bond prices despite the rate cuts.
Data source: Bloomberg, compiled by Tiger Brokers
In terms of economic forecasts, the Fed has lowered this year's growth forecast from 2.1% in June to 2.0%, significantly raised unemployment expectations for the next two years, and also lowered inflation expectations for this year and next. We believe these changes align with the Fed's macroeconomic narrative since Q3, and Powell emphasized that "although unemployment expectations have increased, U.S. economic growth remains very robust."
Data source: federalreserve.gov, compiled by Tiger Brokers
In the Q&A session, Powell's stance was notably hawkish, summarized as a "triple denial":
Denial that the Fed is behind the market: Powell mentioned the significant downward revision in employment numbers and justified the 50bps rate cut as the correct decision. He noted that if July's FOMC had had the revised employment data, they might have cut rates then. However, Powell's response in this part of the interview was notably awkward and hesitant, suggesting discomfort. We believe he regrets the delay but is unwilling to publicly admit it.
Denial that a 50bps rate cut pace is the new norm: Powell explicitly stated, "No one should assume this is the new pace; we can accelerate, slow down, or pause." We believe Powell does not want to convey the impression of rapid rate cuts and repeatedly emphasized a "meeting by meeting" approach, attempting to project the Fed's ability to control the situation.
Denial of potential economic issues in the U.S.: Powell repeatedly stressed in both his speech and Q&A that the U.S. economy is growing steadily, and his confidence was very firm, consistent with the SEP results showing GDP growth over the next three years outpacing the long-term growth rate. This reflects the Fed's strong confidence.
As Powell said, this was a recalibration FOMC meeting. The Fed handed an unexpected rate cut on one side and hawkish rhetoric on the other. What is certain is that the Fed is very confident in the U.S. economy, reducing market concerns about a recession. We predict this round of rate cuts will proceed with a fast-then-slow pace, and if economic data remains stable, a soft landing or even no landing is very likely.
Data source: CICC Research Department, Bloomberg, compiled by Tiger Brokers
We have analyzed data from the past half-century and found that in instances where a 50bps or greater rate cut occurred early in the rate cut cycle, only in 1984 was a recession avoided, with all other periods experiencing one. If a recession does not occur, there could be significant upside for U.S. stocks and bonds. However, U.S. bonds remain a relatively safe choice regardless.
Data source: Bloomberg, compiled by Tiger Brokers
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