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Last week, the speech of Federal Reserve Chairman Powell made global stock markets celebrate. At the annual economic symposium of global central banks held in Jackson Hole, Wyoming, U.S., Powell delivered a moderate speech, clearly stating that the Federal Open Market Committee (FOMC) meeting in September will cut interest rates and said that "the time for policy adjustment has come."

Starting from March 17, 2022, the Federal Reserve started to raise interest rates to fight the high inflation after the epidemic, with a cumulative rate hike of more than 500 basis points. Today, the core PCE, the inflation indicator most favored by the Federal Reserve, has fallen to 2.6% year-on-year (close to the 2% target), and the unemployment rate has risen from 3.7% to 4.3% since the beginning of the year, which once triggered recession concerns. Goldman Sachs believes that the Federal Reserve will cut interest rates by 25 basis points (BP) three times in a row at the September, November and December meetings. If the August employment report is weaker than that in July, the interest rate may be cut by 50BP in September.

This shift is of great significance to the stock, bond and foreign exchange markets. The dollar accelerated its decline in August. After the meeting, the dollar index fell below the 101 mark. It had previously hit a new high for the year on June 28. Asian currencies, including the RMB, may be boosted. In the absence of a recession, interest rate cuts are also good for the stock market. It is expected that US stocks will continue to hit new highs, and US bonds may also be boosted by interest rate cuts. From 1989 to the present, in the six interest rate cut cycles of the Federal Reserve, in terms of the average performance of stocks and bonds in the first year after the interest rate cut, the Nasdaq index rose 9.7%, the S&P 500 index rose 5.8%, the total return of US Treasury bonds was 6.2%, and the total return of US composite bonds was 5.7%.

The Fed sends a clear signal

Powell sent a clear signal this time - "the time for policy adjustment has come", which also caused the US dollar and US bond yields to fall rapidly. The US interest rate market expects a 100BP cut in interest rates by the end of 2024, and another cut of slightly more than 100BP in 2025.