Fed begins a new round of interest rate cuts, asset prices may see changes

The Fed announced on September 19 that it would cut interest rates by 50 basis points, lowering the target range for the federal funds rate from 5.25%-5.50% to 4.75%-5.0%, officially starting a new round of rate cuts. This decision aligns with market expectations but exceeded the forecasts of many Wall Street investment banks.

Historically, the first 50 basis point rate cut usually occurs in times of economic or market emergencies, such as the tech bubble in January 2001, the financial crisis in September 2007, and the COVID-19 pandemic in March 2020. To alleviate market concerns about an economic recession, the Fed chairman emphasized in his speech that no signs of recession have been observed.

The Fed simultaneously provided a relatively hawkish dot plot, expecting to cut rates twice for a total of 50 basis points this year, four times for a total of 100 basis points in 2025, and twice for a total of 50 basis points in 2026, with an overall rate reduction of 250 basis points, leading to a terminal rate of 2.75%-3%. This pace of rate cuts is slower than the market's expectations. The Fed chairman emphasized that this 50 basis point cut should not be seen as a new benchmark, and future rate adjustments will depend on the specific circumstances of each meeting.

In terms of economic forecasts, the Fed has lowered this year's GDP growth expectation from 2.1% to 2.0%, significantly raised the unemployment rate expectation from 4.0% to 4.4%, and reduced the PCE inflation expectation from 2.6% to 2.3%. These data indicate that the Fed's confidence in controlling inflation has increased, while also paying more attention to employment conditions.

Looking back at the interest rate cut cycles since the 1990s, they can be divided into two types: recessionary rate cuts and preventive rate cuts. Recessionary rate cuts are typically implemented during periods of economic recession or financial crisis, such as the savings and loan crisis from 1989 to 1992, the burst of the internet bubble from 2001 to 2003, the financial crisis of 2007-2008, and the COVID-19 pandemic in 2020. Preventive rate cuts are implemented when economic growth is slowing but has not yet entered a recession, such as in 1995-1996, 1998, and 2019.

In a rate-cutting cycle, different assets perform variably. U.S. Treasury bonds show an overall upward trend before and after rate cuts, but the increase before the cut is more certain and greater in magnitude. Gold performs similarly to U.S. Treasury bonds, but its correlation with whether the economy is experiencing a "soft landing" is relatively unclear. The Nasdaq index performs poorly during recessionary rate cuts but shows a long-term upward trend after preemptive rate cuts.

Bitcoin experienced a downward channel after a brief rise during the interest rate cut cycle in 2019. Unlike the last interest rate cut cycle, this year Bitcoin's pullback came earlier due to the repeated expectations of rate cuts. From historical experience, the long-term outlook is bullish, but in the short term, there may be fluctuations or pullbacks. However, the magnitude and duration of the pullback may be smaller and shorter than in 2019.

Overall, the Fed has initiated a new round of interest rate cuts, and asset prices may experience varying degrees of changes. Investors need to closely monitor economic data and the Fed's subsequent policy adjustments to make informed investment decisions.