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[text/observer network columnist jin zhong]

on september 18, 2024, after three years of high inflation and substantial interest rate hikes, the federal reserve finally began its path of cutting interest rates, with the first cut being 50 basis points.

after the public opinion preparation in the past few weeks, this is actually not a surprise. looking at the history of macroeconomics, the added interest rate will always come down, which is an important factor in the formation of economic cycles.

however, there are indeed some key issues that deserve our attention when the fed cuts interest rates at this point in time.

one

the first is the scale of the rate cut.

the information revealed in the speeches of federal reserve officials in the past few months has fully confirmed that there will be a rate cut in september, but what the financial market has been uncertain about is the scale of the rate cut: 25 or 50 basis points?

a few days ago, a reporter from the wall street journal who is closely connected with the federal reserve published an article suggesting that a 50 basis point rate cut is more suitable for the current economic situation. as a result, the expectations of the financial market have gradually changed from the mainstream 25 basis point rate cut to more than 50% chance of a 50 basis point rate cut.

when the decision to cut interest rates by 50 basis points was announced today, financial markets naturally shifted their focus to the question of why the federal reserve chose 50 basis points.

of course, the fed's reason is to preventeconomic crisis, a 50 basis point cut was chosen out of prudence. however, the market's interpretation of this will be divided, and quite a few people doubt whether the fed has seen some signs of economic instability before starting to cut interest rates. at the same time, another group of people will continue to chase financial assets due to the lower cost of funds caused by the lower interest rate, causing the stock market and housing market bubbles to expand in the short term. the clash of these two views will lead to the recent amplification of financial market volatility and increased risks.

here is a digression: in the past, the clash of these two views would be judged by the economic data released later. however, in the past two years, the accuracy of many us economic data has greatly decreased, especially employment data, which was adjusted downward significantly a few months after release. most of the employment growth in 2023 has been "corrected" and disappeared. especially now that it is the election season, the reliability of these economic figures may have to be discounted again.

for other major economies in the world, although the 50 basis point interest rate cut in the united states has not changed the reality that the us market interest rate is higher than that of other major economies, the fed's own forecasts and market expectations have already suggested that the fed will continue to cut interest rates in the coming months rather than stop there.

therefore, the expectation of lower us interest rates in the coming months will put pressure on the dollar to continue to weaken, which is very important for china.developing countryfor the u.s., the rise in currency exchange rates in the past few weeks has already reflected this pressure, and the trend of other countries' currencies strengthening against the u.s. dollar will continue for some time in the future, promoting the return of international capital from the u.s. after the short-term financial market risks have passed, the expectation of continued interest rate cuts in the next few months and the seasonality of the u.s. stock market at the end of the year will increase the probability of further gains in u.s. stocks in the last few months of this year.

two

the second question is what will happen if the us cuts interest rates?real economyhow big is the effect.

i think the effect of interest rate cuts may not be as great as in previous economic cycles.

one important reason is that when the fed raised interest rates in the past two years, the impact of the rate hike was limited to a limited range for various reasons. for example, in the case of home loans, a large number of homeowners in the united states obtained ultra-low fixed-interest home loans during the epidemic. the fed's rate hike had no negative impact on the spending of this large group of homeowners, and the rate cut certainly would not have any positive effect. therefore, consumption, which accounts for 70% of the u.s. economy, will not be significantly stimulated by the rate cut.

therefore, the corporate sector is the obvious beneficiary of this round of interest rate cuts, while the banking system, which is suffering from paper losses, has survived the 2023 financial crisis with the support of the federal reserve.silicon valley bankbank run crisis, now that interest rates have been lowered, the banks' book losses will decrease.

non-financial real enterprises have obtained a large amount of cash by borrowing at ultra-low interest rates during the epidemic. in the next two or three years, they will need to borrow new debts to repay old debts. the fed's interest rate cut will relatively improve their future financing costs. however, in general, these effects will not be very obvious. based on the experience after 2008, the stimulus to the real economy, especially the us manufacturing industry, which has been shrinking continuously, will not be very large.

as for government spending, the official interest rate cut will certainly reduce the federal government's interest expenses, but the us government's overspending deficit is originally supported by the hegemony of the us dollar. when the hegemony is still there, the interest rate is just an accounting issue and is not enough to affect government behavior. government spending, which accounts for an increasing proportion of the us economy, will eventually be affected by the results of the november presidential election.

three

so, with the u.s. presidential election approaching and the federal reserve starting to cut interest rates less than two months before the vote in early november, will this have an impact on the presidential election?

this issue is more important than the impact of the interest rate cut itself on the economy. because the impact of interest rate cuts on the macroeconomy will have a delay, and usually it will take several months for it to have a substantial effect on the real economy. however, the impact of interest rate cuts on financial markets and the confidence of ordinary people is immediate, which is why the democratic party generally welcomes the interest rate cut at this time, believing that it is a positive publicity for the democratic party’s economic policy, while the republican party opposes the interest rate cut at this time, because the decision to cut interest rates will weaken the republican hype.inflationthe effect of the topic.

the result of this presidential election will have a huge impact on the us economic policy in the next four years. not only will the presidential candidate have a major impact on policies in trade, energy, finance, technology, etc., but the composition and control of congress will also affect the content and efficiency of us policies. whether it is the democratic party or the republican party, as long as one party controls the presidency and both houses of congress, there is a high probability that a large-scale fiscal deficit policy will be adopted to significantly increase government spending. on the other hand, if the presidency and both houses of congress are controlled by the two parties respectively, the increase in government spending will be relatively limited.

the biggest question now is whether the federal reserve's loose policy before the vote can allow ordinary voters to overcome the negative memories of high inflation in the past two years and thus have an impact on the final vote.

given the current extreme polarization in american politics, this possibility is still relatively small, but for the decisive swing states where the election is extremely close, perhaps every piece of good news will give the democratic party more of an advantage.

four

for china, the lessons learned from the us macroeconomic experiment in the past three or four years are worth our careful analysis.

fiscal policy is still the fastest economic intervention method in the short term, especially the fiscal expenditure method that bypasses the intermediate links and directly faces the masses. however, the side effect of the stimulus policy is that it is very easy to cause inflation, which will seriously affect social stability. although the rate of price increase in the united states has slowed down, the actual price level is still rising slowly. for ordinary people with middle and low incomes, the actual living standard has regressed a lot compared with the previous two years.

during the interest rate hike, who will bear the negative impact of rising financing costs? in the past three years, the united states has basically borne the cost by banks and some companies. the emergency measures taken by the federal reserve after the silicon valley bank run crisis in 2023 also indirectly borne this part of the cost (of course, it was passed on to the world through the hegemony of the us dollar). other countries are not yet able to pass on the costs to other countries. therefore, when deciding internally on the apportionment of debt costs among various economic sectors, they should get rid of the small interests of the sectors, calculate more about the overall interests, and choose the most beneficial apportionment plan for the national economy to formulate corresponding fiscal and monetary policies.

the last point is the old-fashioned technology investment. the starting point of the ai ​​trend happened to occur at the same time as the outbreak of the silicon valley banking crisis. perhaps this is a coincidence, but it does provide a continuous source of topics for driving the rise of the us stock market. even though many people today have begun to question how much impact ai will have on productivity in the short term, this does not prevent large-scale ai-related investments from supporting the macro economy.

domestic science and technology is still in the stage of making up for its shortcomings, but domestic substitution investment in key technical equipment has begun to see the light of day. structural reforms in the science and education sectors and further exploration of the potential of domestic industry-university alliances are china's greatest hope for success in future scientific and technological competition. this will help domestic science and technology development to a higher level and promote the increase of long-term domestic economic competitiveness better than simply increasing investment.

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