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on september 18, local time, the federal reserve decided to cut interest rates by 50 basis points, choosing to start with a bolder move for the first rate cut in four years to guard against a further slowdown in the labor market.

the last time the fed cut interest rates was four years ago in response to the pandemic, during which it cut interest rates by 150 basis points, and the u.s. interest rate was close to zero. since march 2022, in response to the highest inflation in 40 years, the fed has started a strong interest rate hike cycle, raising interest rates by 75 basis points four times in a row, keeping the federal interest rate at a high level for more than 20 years.

whether the us economy can get rid of monetary tightening and avoid stalling will affect the future of the global economy. in this regard, phoenix finance interviewed hong hao, chief economist of si rui, to discuss the trends of the global capital market during this round of interest rate cuts.

it’s too late for the fed to cut interest rates

before this fomc meeting, the fed's interest rate cut was considered a high probability event. however, market participants had different views on whether the rate cut would be 25 basis points or 50 basis points.

hong hao believes that the fed's decision is mainly based on changes in economic data. although the us economy is still in a relatively stable state, inflation data has begun to decline rapidly, especially the core inflation rate excluding housing. at the same time, the job market has also shown signs of slowing down. these factors have jointly prompted the fed to make a decision to cut interest rates by 50 basis points.

fed chairman powell also explained the sharp rate cut at the press conference, saying that it "demonstrated our determination to avoid being passive (in dealing with worsening employment)". he said that the path of future rate cuts also depends on the data, and there is no need to accelerate rate cuts.

however, hong hao specifically pointed out that the fed’s interest rate cut was too late and the policy was lagging. previously, the us non-farm payrolls report in july showed that the us labor market was weak and the unemployment rate rose to 4.3%, triggering the recession warning signal of the "sam rule". before the fed’s july interest rate meeting, some former fed officials publicly called for a rate cut that month, but the fed did not take immediate action.

although powell argued at the press conference that the timing was right for the rate cut, that he did not believe the action lagged behind the interest rate curve, and that he had not observed an increased likelihood of a downturn in the u.s. economy, his words revealed a sense of regret.

“if we had gotten the july jobs report before the meeting, would we have cut rates? probably, but that decision was not made at the time,” powell said.

the closely watched dot plot forecast shows that 10 of the 19 policymakers are inclined to cut interest rates by at least another 50 basis points in the last two interest rate meetings of the year, and another one percentage point cut is expected in 2025. interest rate market traders currently expect the fed to cut interest rates by another 75 basis points by the end of this year.

looking ahead to the future path of interest rate cuts, hong hao predicts that if the non-farm payroll data deteriorates further, the federal reserve may cut interest rates by 50 basis points at each of the next two interest rate meetings (a total of 100 basis points).

us stocks will peak, gold is the winner

faced with the sharp drop in the us interest rate, the market reaction was calm. after the interest rate decision was announced, the market reaction was: the us dollar and us bond interest rates fell, us stocks rose, and gold surged. however, after powell's speech, all the trends reversed, and the overall volatility was not obvious.

when talking about the impact of interest rate cuts on the global capital market, hong hao said that due to the time lag of interest rate cuts, the market may still maintain an upward trend in the short term. however, in the long run, signs of a us economic recession may gradually emerge, putting pressure on the capital market. hong hao expects that us stocks may peak in the next few months, and the us dollar has no basis for a significant strengthening.

hong hao further analyzed that if the weakening trend of the us dollar continues, the rmb exchange rate is expected to regain the 7 mark or even appreciate to the 6-digit level.

since the hong kong stock market is very sensitive to changes in external liquidity and hong kong stocks are rmb assets denominated in us dollars, hong hao believes that hong kong stocks will usher in a wave of rising prices, especially low-valued technology stocks. in this round of market, the performance of a shares will be slightly worse than that of hong kong stocks, and the market trend is affected by multiple factors such as domestic policies.

as a safe-haven asset, gold usually rises when economic uncertainty increases. hong hao pointed out that regardless of whether the federal reserve cuts interest rates or not, or whether the economy is in recession, gold has the momentum to rise. the interest rate cut reduces the cost of holding gold, providing room for gold prices to rise.

as the us election approaches, the market is likely to become more volatile. however, no matter who comes to power, the fiscal deficit will continue to be high. "so in such an environment, gold is always the winner. gold will rise when trump comes to power, and gold will also rise when harris comes to power," said hong hao.