The Fed cuts interest rates by 25 basis points. Future market trends under this risk-management rate cut

Jessy, Golden Finance

In the early morning of September 18th, Beijing time, the Federal Reserve announced a 25 basis point reduction in the target range for the federal funds rate from 4.25%-4.50% to 4.00%-4.25%. This was the first rate cut since December 2024.

The magnitude of this rate cut was largely in line with expectations, and Fed Chairman Powell's subsequent remarks clearly stated that this was a risk-management cut.

Summarizing Powell's remarks, in the short term, US inflation risks are tilted upward, while employment risks are tilted downward. The US economy faces a complex situation, with a weakening labor market and still-high inflation posing challenges for monetary policymaking.

Following the interest rate meeting, various views and predictions were expressed regarding the frequency of subsequent rate cuts. The Fed's "dot plot" of interest rate projections showed that officials' median forecast for the federal funds rate at the end of the year was 3.6%, implying the need for two more rate cuts (a total of 50 basis points). However, among the 19 officials who wrote interest rate forecasts, there was significant disagreement regarding the number of subsequent rate cuts. One advocated for another 125 basis point cut before the end of the year, nine favored two more cuts, and another nine favored only one or no cuts at all. Excluding extreme predictions, officials were nearly evenly split. According to CME's "FedWatch" data as of the 18th, the probability of the Fed keeping interest rates unchanged in October was 12.3%, and the probability of a 25 basis point cut was 87.7%. The probability of keeping interest rates unchanged in December was 0.9%, the probability of a cumulative 25 basis point cut was 17.6%, and the probability of a cumulative 50 basis point cut was 81.6%. In other words, the overall market expectation is that the Fed will continue to cut interest rates this year. A 25 basis point rate cut: a risk-management move. The Federal Reserve chose a modest 25 basis point rate cut primarily to implement a "gradual, exploratory, and data-driven" policy adjustment amidst a complex economic landscape. The US currently faces the dual pressures of still-high inflation and a marginally weakening labor market. A hasty and significant rate cut could trigger a resurgence in inflation, while a complete standstill could lead to a further deterioration in employment. Therefore, a small rate cut can provide some relief to market and financial conditions without leading to excessive policy easing. A "risk-management" rate cut means the primary purpose of this action is to address downside risks to the economy, rather than to fully ease policy. The Committee's limited adjustment provides room for future adjustments, allowing for flexible decisions on the next path based on economic data. Powell emphasized that the rate cut is intended to mitigate the impact of an economic slowdown on employment, not to signal that inflation has been resolved. This approach demonstrates that the Fed will continue to adopt a data-driven, meeting-by-meeting approach. Meanwhile, there is disagreement within the FOMC regarding the number of future rate cuts. The median forecast suggests the federal funds rate could fall to 3.6% by the end of the year, requiring two more rate cuts. However, opinions vary widely among members, with some advocating for deeper cuts and others more cautious. This divergence further reinforces the exploratory nature of this rate cut. Market interest rate futures pricing also suggests that investors generally expect the Fed to implement a series of small rate cuts, but are not yet convinced of a long-term easing policy. Investors can draw lessons from the similarities between the 2019 rate cuts and the historical performance of market assets. This rate cut shares a clear pattern with the Fed's 2019 rate-cutting cycle. In 2019, the Fed implemented several small, 25 basis point rate cuts in response to slowing global growth and trade uncertainty. The goal was to manage downside risks to the economy rather than a single, large-scale easing shift. Both strategies embody a gradual adjustment strategy from tightening to easing, and both emphasize the market's high sensitivity to the subsequent path. Following the 2019 interest rate cut cycle, the performance of various asset classes has shown a pattern. In the stock market, the S&P 500 saw an overall upward trend, driven by multiple rate cuts, rising steadily from its early-year lows. Bitcoin rebounded sharply from its early-year lows in the first half of 2019. In 2020, following the pandemic, Bitcoin experienced a longer and larger bull run, driven by massive monetary easing and fiscal stimulus. Experience shows that in the initial stages of rate cuts, risk assets, including cryptocurrencies, may rebound due to improved sentiment and restored liquidity, but truly sustained gains often require stronger liquidity injections or large-scale quantitative easing. Therefore, a simple 25bp rate cut may not immediately trigger a long-term crypto bull market unless monetary and fiscal policies are further amplified. Cryptocurrencies and Bitcoin rebounded in the initial stages of rate cuts, but the formation of a long-term bull market depends on further monetary easing and support from a strong macroeconomic environment. Gold, on the other hand, performed well in 2019, benefiting from uncertainty and the interest rate cut environment. Non-ferrous metals and industrial commodities, on the other hand, are more dependent on fundamentals and real demand, leading to divergent price trends. Overall, while interest rate cuts are generally a short-term positive for risky assets, they are not without risk. When faced with a single, small rate cut, investors should pay more attention to the subsequent policy path and changes in economic fundamentals. For crypto assets and Bitcoin, a single rate cut may bring about a short-term improvement in sentiment, but a true long-term bull market requires the combined efforts of multiple factors, including liquidity, inflation expectations, and institutional demand. For investors, gold remains the most stable investment target going forward. If the Federal Reserve indeed cuts interest rates twice more this year as expected, crypto assets as a whole will experience volatile upward movements this year.