Editor's note: The Federal Reserve announced a 50 basis points rate cut last week. Chairman Jerome Powell stated that the 50 bps cut is a "strong action," and emphasized that the Fed does not believe that "the rate cut was delayed" , but rather sees it as a "timely measure." So, what impact will the formal initiation of the rate-cut cycle have on the world economy?
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. The Federal Reserve announced a 50 basis points rate cut last week. Chairman Jerome Powell stated that the 50 bps cut is a "strong action," and emphasized that the Fed does not believe that "the rate cut was delayed" , but rather sees it as a "timely measure." So, what impact will the formal initiation of the rate-cut cycle have on the world economy? To discuss this topic, we have invited Hong Hao, Chief Economist of the GROW Investment Group,
Feng Jianlin, Chief Economist of FOST, and Guo Hanbing, researcher of the Institute of Finance & Banking, CASS (Chinese Academy of Social Sciences), to provide their insights. Welcome, everyone!
【Anchor】First, I would like to ask Mr. Feng, What's your view on this 50 bps cut? The market sees it as a more aggressive cut than consensus, what do you think?
The 50 bps cut should not be considered as having exceeded market expectations. There are three aspects to be considered: First, prior to the rate cut, there was already considerable debate about the extent of the cut, with the FedWatch tool indicating a 50-50 probability for both a 25 and a 50 bps cut. Second, during this meeting, only Bowman opposed the 50 bps cut, while all others supported it, which indicates a strong consensus. Third, after the rate cut, while the dollar index showed some fluctuations, it did not significantly adjust. The 50 bps cut is primarily driven by the gradual cooling of the U.S. economy, and the Fed』s aim to steady employment in order to prevent an economic recession.
【Anchor】Yes. Historically, almost every rate cut cycle has been accompanied by a recession in the U.S. Ms. Guo, how do you assess the risk of a recession in the U.S. after this rate cut?
This rate cut does not necessarily mean that the U.S. economy is headed toward a recession. It may serve as a means to mitigate economic risks as a preventative action. The impact on the global economy is also quite complex, potentially triggering capital flows and currency fluctuations. Regarding further rate cuts in the future, our judgment is that the Fed will continue to cut interest rates, but the specific timing and extent of these cuts will depend on future economic data and risk assessments. Chairman Powell stated at the press conference that the goal of the rate cut is to maintain stable economic growth and to support the labor market, he also expressed confidence in the reduction of inflation. Therefore, we anticipate that there will be continued rate cuts in the future.
【Anchor】Besides the Fed, the European Central Bank also announced a rate cut on September 12th. How do you view this rate cut and the recent actions of central banks globally?
In light of the Fed's rate cut decision, many central banks may follow suit to avoid excessive appreciation of their currencies against the dollar, as that would further impact export competitiveness. It is highly likely that a series of rate cuts will be initiated globally, but each central bank will determine the specific policy paths based on its own economic conditions and inflation targets. For instance, the Swiss National Bank, the Bank of Canada, and the Swedish Riksbank are expected to continue cutting interest rates, while the Norges Bank and the Reserve Bank of Australia may maintain their current interest rate levels or take a wait-and-see approach. The recent "Super Central Bank Week" has shown diverse strategies amongst global central banks in response to U.S. rate cuts, slowing economic growth, and inflation pressures.
【Anchor】OK. From a global perspective, Mr. Feng, how do you think the Fed's rate cut decision will influence the monetary policies of other major economies? How do you view the policy decisions of central banks during the recent "Super Central Bank Week"?
The Fed's decision to cut rates will certainly influence the monetary policies of other countries. Kuwait, Bahrain, the UAE, and Qatar all announced rate cuts on September 19th. However, monetary policies will mainly depend more on their own economic conditions for larger economies. The European Central Bank cut interest rates as early as on the 12th, ahead of the Fed. Brazil's central bank raised interest rates on the 18th, while the Bank of England maintained its interest rate on the 19th, unchanged since June. The People's Bank of China also kept its rate unchanged since June. The Bank of Japan is still yet to announce their decision but is likely to maintain its June rates as well. Going forward, we believe major economies are likely to adjust their monetary policies primarily based on their own circumstances.
【Anchor】Good. Mr. Hong, do you believe that the Fed's recent rate cut will have a significant impact on the monetary policies of other economies? Do the rate cuts of multiple central banks indicate a shift towards a more accommodative global monetary policy?
The Bank of Japan is still likely to raise interest rates, while the U.S. has just started to cut rates. This indicates a shift in the overall global monetary policies of central banks. However, Japan is still likely to raise their interest rates once again. We do not expect further inflation as of now, so there is also a lot of room for raising interest rates as well for China. We initially expected the Chinese central bank to possibly lower its loan rates this year, but mortgage rates have still yet to see any decline, so everyone is still waiting. Ultimately, the central bank will raise rates in the end.
【Anchor】Yes. For investors, the financial market's reaction to the Fed's rate cut is often complex and volatile. Mr. Hong, which asset classes do you believe will be most directly affected by the rate cut? How should investors deal with it?
I think we should be a bit more optimistic in the short term. We believe that China has opened the door for potential interest rate hikes. As a result, the RMB will likely to strengthen with the recovery and growth of the current economic cycle, which will benefit undervalued risky assets denominated in RMB. The Hong Kong stock market has already seen consecutive days of significant gains in the past few days. Overall, I believe it still has a good supporting effect on risky assets.
【Anchor】The Fed's aggressive rate cut has a huge impact on the market. Mr. Feng, which types of assets do you think will be significantly affected? How should investors allocate their assets?
Since the dollar is the pricing currency for many global assets, a lot of assets will be influenced by the Fed's rate cut. Investors may tend to refer to the historical performance of various asset classes during past rate cut cycles, but they should do so with caution. During the Fed's six most recent rate cut cycles, the dollar strengthened in three of them and weakened in three. Similarly, oil prices also experienced growth in three cycles and decline in three. Therefore, we cannot simply look at historical trends as indicators. Investors should also consider the fundamentals of each asset class before making their investment decisions.
【Anchor】OK. Currently, the U.S. stock market remains at an elevated level. Mr. Feng, how do you see the stock market's trend after the rate cut, and what ripple effects might it have on the Hong Kong stock market?
The Fed's rate cut helped to alleviate concerns over a recession caused by high interest rates, and lowered the cost of capital for the stock market, improving monetary liquidity. Therefore, the U.S. stock market reacted positively, and other countries' stock markets have also shown a positive response, including the Hong Kong stock market. Once short-term effects of the rate cut wear out, the stock market is likely to revert to fundamentals. Overall, the fundamentals of the U.S. economy remain relatively robust, especially with technology companies expected to continue their strong growth trajectories. We estimate that the U.S. stock market will maintain a healthy growth trend.
【Anchor】Since March 2022, when the tightening cycle began, the U.S. stock market has kept on rising. Mr. Hong, do you think the U.S. stock market will continue to climb after this rate cut?
To be honest, after the recent rise in the U.S. stock market, I think it's time to consider reducing exposure. The economic risks in the U.S. remain substantial, but they have not been reflected in the current prices; therefore, I believe the market is too optimistic. Generally speaking, such market optimism tends to lead to rises in stock prices, but I think these rises would serve better as exit points rather than further buying opportunities. The recent rate cut primarily serves to prevent and mitigate potential economic risks, especially in the employment market. While it is certainly good for the capital market that U.S. stocks are rising, we should not be overly excited just because stock prices are rising. The higher the prices, the higher the risk becomes.
【Anchor】Yes. What are your views on the future policy direction of the Fed, Ms. Guo?
Although the Fed has consistently indicated that its rate-cut actions will be cautious, many professional institutions and market analysts believe that the Fed is likely to continue cutting rates to support economic growth and the labor market. Some financial institutions project a total cut of approximately 250 bps between 2024 and 2026. We believe that projection is quite probable. The initiation of a rate-cut cycle depends on many factors. If inflation remains above target or if economic data shows a rebound, there is a possibility that the Fed will reconsider its policy stance.
【Anchor】Good. According to the median projections in the Fed's dot plot, an accumulation of 100 bps of cuts is likely to take place in 2024. Mr. Feng, what do you think about that? Does the initiation of the rate cut cycle indicate that the U.S. economy will achieve a soft landing?
As the U.S. enters into its rate cut cycle, I anticipate that the Fed will cut rates by 25 bps, in both November and December. However, predicting the longer-term trajectory of rate cuts may involve considerable uncertainty and unknown factors. For instance, if commodity prices rise after the rate cut, then that could lead to increased inflation, which would in turn impact the rate-cutting process.
【Anchor】Alright, thank you. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
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