the fed cut interest rates by an unexpected amount! 10 paragraphs to understand it
2024-09-21
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(the author of this article is liu xiaobo, a well-known chinese economic commentator and financial new media operator)
at 2:00 a.m. beijing time on september 19, the federal reserve announced a 50 basis point interest rate cut! after the rate cut, the target range of the federal funds rate is 4.75% to 5.00%.
this rate cut exceeds the predictions of most economists!
this is the first rate cut by the fed in four years. the fed's fomc statement said that confidence in inflation has increased and inflation is continuing to move toward 2%; the risks facing employment and inflation targets are in balance. the fed's dot plot shows that the median forecast for the federal funds rate at the end of 2024 is 4.4%, which means that there will be another 25 basis point rate cut before the end of the year.
the federal reserve raised its forecast for the u.s. unemployment rate in 2024 to 4.4% and lowered its forecast for u.s. gdp growth in 2024 to 2.0%.
influenced by the news of interest rate cut, the three major u.s. stock indexes increased their gains, gold prices hit a new high, and the offshore rmb exchange rate hit a recent high.
below we use 10 paragraphs to understand this interest rate cut.
1. this interest rate cut means that the united states has entered a new round of interest rate cuts.
the following figure is a chart of the us dollar interest rate over the past 60 years, and the trend is constantly falling. the rebound in recent years was caused by the massive money supply after the covid-19 pandemic. the federal reserve has raised interest rates 11 times in a row. in the next few years, us interest rates will gradually decline and return to the ultra-low interest rate era before the pandemic.
2. the united states has started a new round of interest rate cuts, breaking the ceiling of china's monetary policy and giving us greater room for interest rate cuts.
in the past few years, the interest rates between china and the united states have experienced a rare inversion, with china's 10-year treasury bond yield being about 200 basis points lower than that of the united states. in order to reduce capital outflows from china, china has cut interest rates in small steps and with limited scope. after the u.s. dollar started its interest rate cut cycle, china will have more room to cut interest rates in the next few years, and the era of low interest rates has arrived.
3. the fed has started a cycle of interest rate cuts, which is good for china. it has increased the space for china's monetary policy, which is good for the property market, stock market and economy.
but whether the a-share market has bottomed out depends on the property market; whether the property market has bottomed out depends on the economy; whether the economy has bottomed out depends on whether the monetary and fiscal policies are strong enough. china needs to issue more treasury bonds, invest in large and profitable infrastructure, encourage consumption, and also needs to cut interest rates and reserve requirements by a larger margin.
4. in the next two to three years, china's lpr (loan benchmark rate) has room for interest rate cuts of 80 to 100 basis points.we should first pay attention to whether china's lpr will be cut at 9:15 am tomorrow (september 20). china has the opportunity to cut interest rates and reserve requirements at least once before the end of the year. after the lpr is cut, the interest rate of provident fund loans may also be cut.
5. will the interest rates on existing mortgage loans in china be reduced across the board (beyond the loan contract)? the chances are relatively high, and there may be news in the next two months.
6. recently, the rmb exchange rate against the u.s. dollar has appreciated significantly.how will the exchange rate go after the us dollar cuts interest rates? will the rmb break 7? i think that before and after the us election, the rmb will continue to remain strong with the help of factors such as the us dollar interest rate cut, and it is not ruled out that the rmb exchange rate against the us dollar will break 7. the rmb exchange rate is currently undervalued. in the future, as long as china and the united states fight but do not break, the rmb exchange rate will most likely remain strong and stable.
7. in the next two years, the room for the us dollar interest rate cut is greater than that for the rmb interest rate cut.this is conducive to maintaining the strength of the rmb exchange rate. in addition, the authorities have proposed to prevent "involutionary" vicious competition, which means that if there is no major change in the international situation, the rmb exchange rate will remain stable, and the practice of stimulating exports through devaluation will not appear in the short term.
8. how will the us election affect the rmb exchange rate and china’s economic recovery?if trump is elected, he will intervene in monetary policy, and the fed will accelerate the pace of interest rate cuts; harris will let the fed decide for itself. trump has threatened that he will impose a 60% tariff on all chinese goods after taking office, which will trigger a new round of sino-us trade war and may cause abnormal fluctuations and depreciation of the rmb; if harris takes office, the rmb exchange rate is likely to remain stable and strong.
9. the latest financial data, investment data, consumption data, real estate data, etc. all indicate that the economy needs to "step on the gas" again.after the fed cuts interest rates, until the end of the year, china will launch its macroeconomic policies to sprint to achieve its annual goals. as for the chinese property market, there may be big news on september 30 and the days before.
10. after the us dollar interest rate cut, what will happen to us stocks, us bonds and the us dollar exchange rate?historically, the performance of these assets after each rate cut has been different, depending on what stage the u.s. economy was in at the time. if it is in a period of vitality after a technological revolution, a rate cut will allow the stock market to continue to rise and the dollar to appreciate; on the contrary, a rate cut confirms that the economy is not doing well. within six months or one year after the first rate cut, the stock market will fall back, safe-haven funds will flow into the bond market, and the dollar will depreciate. at present, the market has a large divergence in the trend of the next six months to one year. my view is that the u.s. economy seems to be still in the excitement period after a new round of technological revolution (such as artificial intelligence), and there is no obvious sign of recession.
this article only reflects the author’s views.
