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in the early morning of september 19th, beijing time, the federal reserve announced that the target range of the federal funds rate would be reduced from 5.25%-5.50% to 4.75%-5.00%, a decrease of 50 basis points. this is the first interest rate cut by the federal reserve since march 2020, and it also means the end of this tightening cycle.

market participants said in an interview with securities times and china securities journal reporters that the federal reserve started this round of interest rate cuts with a large-scale 50bp move, which to a certain extent exceeded market expectations and reflected the federal reserve's determination to promote a "soft landing" of the us economy. there is still room for interest rate cuts of about 50bp within the year.

as for the domestic market, analysts generally believe that the federal reserve's initiation of a cycle of interest rate cuts will help converge the divergence between the economic cycles and monetary policies of china and the united states, ease the pressure of capital outflows and rmb exchange rate adjustments in china, broaden the autonomy of china's monetary policy, and further reduce external pressure on asset prices such as chinese stocks and bonds.

the federal reserve begins to cut interest rates beyond expectations

the federal reserve lowered the target range of the federal funds rate by 50bp to 4.75%-5.00% in its september meeting, which was more than most market expectations. a bloomberg survey before the meeting showed that only nine of the 113 analysts predicted a 50bp cut in interest rates.

in the statement, the fed's wording did not change much from july, that is, it believed that the us economy continued to expand steadily. in terms of employment, the fed believed that job growth slowed down, and the unemployment rate rose but remained low, which was the same as in july; the inflation level was adjusted, believing that the inflation rate was further moving towards the 2% target, but still slightly higher.

"the fed cut interest rates by 50bp this month, which is a big step to start the interest rate cut cycle and meet the market's expectations. however, from the perspective of economic resilience and historical comparison, the necessity of a 50bp interest rate cut is not high." li chao, chief economist of zheshang securities, said that this shows that it is still difficult to exclude political disturbances in the election year. at the same time, the fed is determined to protect the job market and is unwilling to return to its inflation target at the cost of "recession". it is unwilling to lag behind the curve against the backdrop of rising unemployment.

cicc also pointed out in its latest research report that this is the first interest rate cut since the outbreak of the epidemic in 2020, which also means the end of this round of tightening cycle after the current round of interest rate hikes starts in march 2022 and stops in july 2023. however, the extent of the interest rate cut partly surprised the market. the 50bp start is not common in history. since the 1990s, there have been only three such cuts in january 2001, september 2007 and march 2020.

"this meeting showed that the fed has indeed seen the weakness in the job market, otherwise it would not have taken the unconventional action of cutting interest rates by 50bp at the beginning, which to a certain extent responded to the market's call. at the same time, it is also trying to create an image of being 'ahead of the market' and being able to do more at any time, but does not want the market to worry that it will be forced to do more in a hurry due to pressure from a sharp recession." cicc research report said.

wang yi, chief economist of great wall securities, also said in an interview with securities times and china securities journal: "the fed has taken a more radical measure and lowered the interest rate by 50 basis points at one time. this decision exceeded previous expectations."

wang yi believes that this rate cut is mainly to respond to the recent weakness in the job market and can be seen as a timely adjustment to economic conditions. at the same time, the fed expressed a cautious attitude towards the possibility that inflation may remain stable or rebound in the future, which is reflected in the guidance at the press conference.

there are still two interest rate cuts possible this year

the september rate cut is just the beginning. the latest published interest rate dot plot shows that compared with the last updated dot plot released by the fed in june this year, the fed officials’ expectations for rate cuts in the past three years have increased significantly.

the updated "dot plot" predicts that there will be two more rate cuts totaling 50bp this year, four cuts of 100bp in 2025, and two cuts of 50bp in 2026. together with this 50bp cut, the overall rate cut will reach 250bp, and the end point of the interest rate will be 2.75%-3%.

federal reserve chairman powell also mentioned at a press conference that although the non-farm payroll data for july and august fell short of expectations, the cooling of the job market may have provided conditions for a rate cut.

"in the only two interest rate meetings left this year, the federal reserve will most likely continue to cut interest rates," said yu bo, head of the macro team at changjiang research.

however, powell also stressed that a 50 basis point rate cut should not be seen as the new standard for future rate cuts, suggesting that future rate cuts may be more cautious.

"looking ahead, the fed may continue to cut interest rates, but the magnitude may be more cautious. according to the latest forecast, there may be room for another 50 basis points of rate cuts this year, and perhaps 100 basis points of rate cuts in 2025. the market expects that the pace of rate cuts may slow down in the coming months," said wang yi.

wang yi believes that considering the persistence of core inflation in the united states, the federal reserve may remain vigilant about potential increases in housing prices and wages to avoid triggering a second round of inflation. therefore, it is expected that the federal reserve will be more cautious in future interest rate cut decisions.

"after the large-scale interest rate cuts, the resilience of the u.s. economy and inflation will be further enhanced, which will also constrain the subsequent room for interest rate cuts to a certain extent. against this background, the federal reserve will cut interest rates by 100bp this year, and by 25bp in november and december respectively, which is in line with the guidance of the current dot plot; but the room for interest rate cuts in 2025 may not be as large as the 100bp shown in the current dot plot." li chao said.

performance of major asset classes is tangled

after the fed cut interest rates, us stocks and gold rose first and then fell, while us treasury yields and the us dollar index fell first and then rose. as of the close of september 19, the s&p 500, nasdaq, and dow jones indexes all fell by 0.3%; the 10-year us treasury yield rose 6.2bp to 3.71%, the us dollar index fell 0.1% to 100.9, and spot gold fell 0.4% to $2,558.8 per ounce. to a certain extent, the market has more differences on whether the us economy can achieve the expected "soft landing" after the interest rate cut.

however, stock markets in many major markets around the world performed well after the fed cut interest rates. on september 19, the nikkei 225 index closed up 2.02% at 37,115 points. hong kong stocks continued to rise throughout the day, with the hang seng index up more than 2% and the hang seng technology index up nearly 4%; a-shares also rose across the board.

wang yi believes that the interest rate gap between china and the united states is expected to narrow further, which may prompt international capital to seek higher-yield investment opportunities, which may increase capital inflows into the a-share market, especially for those attractive stable high-dividend or growth stocks. the liquidity environment of a-shares is expected to improve, thereby improving the risk appetite of a-shares.

"china's room for monetary easing has further opened up, and we can closely observe china's recent monetary trends. if the monetary easing policy is strong or exceeds market expectations, the a-share market may be further boosted." wang yi said, however, that a 50bp interest rate cut may also reflect concerns about slowing global economic growth, which may affect the profit prospects of chinese export companies and have a certain indirect impact on the a-share market.

guan tao, global chief economist of boc securities, said in an interview with securities times and china securities journal that, given that other conditions remain unchanged, the federal reserve's start of a rate cut cycle in september will help converge the divergence between the economic cycles and monetary policies of china and the united states, ease the pressure of capital outflows and rmb exchange rate adjustments in china, and expand the autonomy of china's monetary policy.

however, guan tao also said that no matter what happens to the us economy, it will have both advantages and disadvantages for the chinese economy. in the face of external uncertainties including the direction of the us economy and the adjustment of the federal reserve's monetary policy, the key is to do china's own things well.

"we must fully implement a series of major arrangements since the 20th national congress of the communist party of china, adhere to the general working tone of seeking progress while maintaining stability, increase macro-control efforts, deepen innovation-driven development, deeply tap the potential of domestic demand, continuously enhance new momentum and new advantages, enhance the vitality of business entities, stabilize market expectations, enhance social confidence, and unswervingly complete the annual economic and social development goals and tasks. in particular, we must strengthen counter-cyclical regulation, accelerate the full implementation of determined policy measures, and reserve and launch a batch of incremental policy measures as soon as possible." guan tao said.