On the early morning of September 19th Beijing time, the Federal Reserve announced that it would lower the target range of the federal funds rate by 50 basis points, to a level between 4.75% and 5.00%.

The dot plot indicates that 10 policymakers expect at least a 25 basis point rate cut at each of the remaining two FOMC meetings this year.

At the same time, the Fed slightly lowered this year's GDP growth forecast to 2.0%, PCE to 2.3%, and unemployment rate to 4.4%.

The market performance was somewhat entangled: after the resolution was announced, the three major U.S. stock indices first rose and then fell, the dollar first fell and then rose, U.S. Treasury yields all closed higher, and gold hit a historical high during the session and then fell.

Advertisement

This is the first rate cut by the Fed in nearly four years, marking the official start of a new round of easing cycle globally.

However, does the Fed's unexpected operation mean that the Fed has seen a "devil" that the market cannot see, implying that the U.S. economy will fall into recession?

How will global asset prices go?

How should investors operate?

This article analyzes the Fed's resolution, the trend of asset prices, and investment strategies.

The logic of this article is as follows: 1.

Unexpected rate cut 2.

Cyclical trend 3.

Investor strategy 1 Unexpected rate cut: A simple review of the Fed's monetary policy in the past four years: In March 2020, impacted by the global public health event, the U.S. stock market successively plummeted and triggered circuit breakers, and the unemployment rate soared.

The Fed responded rapidly, lowering interest rates to zero and implementing unlimited quantitative easing; the federal government adjusted fiscal policy, and passed a relief bill to distribute $2.1 trillion (9.8% of that year's GDP) in cash to ordinary families.

This policy combination worked wonders, saving the market, and the U.S. stock market rebounded rapidly, with demand recovering quickly.

In 2022, impacted by the flood of liquidity, the global supply chain crisis, the world oil crisis, and other shocks, the U.S. experienced the most severe inflation in nearly 40 years.

American families quickly transformed cash subsidies into purchasing power, and the recovery of employment and supply was seriously lagging, wages and prices rose rapidly, and CPI once exceeded 9%.

The Fed decisively adopted the most aggressive interest rate hike policy in nearly 40 years, pushing the federal funds rate to the highest level in nearly 20 years, and maintained it at a high level for 14 months.

During this period, the financial market experienced the Silicon Valley Bank crisis, and the Fed took structural operations to stop the crisis from spreading in the regional bank market.

At the same time, there was also a wave of content-generating artificial intelligence, with seven giants represented by Nvidia leading a big bull market, pushing the three major U.S. stock indices to repeatedly hit historical highs in the high-interest-rate cycle.

Starting from November 2023, the financial market began to bet on a U.S. economic recession, which would force the Fed to cut interest rates.

I predicted at the beginning of this year that the Fed would cut interest rates in June.

However, the stickiness of inflation in the first quarter delayed the expectation of rate cuts, and many people believe that the Fed will not cut interest rates this year.

However, I believe that inflation will continue to fall in the second half of the year, and I firmly believe that the Fed will cut interest rates in September.

Now, inflation continues to fall, and the Fed has cut interest rates accordingly.

However, there is a difference in the market about the magnitude of the rate cut - 25 basis points or 50 basis points, and I have always bet on 25 basis points.

Until two days before the FOMC meeting, the expectation of a 50 basis point rate cut quickly took the lead.

On Tuesday, the closing of the U.S. time, the CME's tool showed that the futures market expected the Fed to cut interest rates by 50 basis points this week from 34% a week ago to 63%, and the probability of a 25 basis point rate cut from 66% a week ago to 37%.

Based on the market expectations at the time, I revised my rate cut forecast from 25 basis points to 50 basis points.

Generally, the Fed's decision will not deviate too much from the market expectations that are close at hand.

This resolution statement shows that 11 people in the committee voted in favor of a 50 basis point rate cut, and only Michelle Bowman opposed, supporting a 25 basis point rate cut, becoming the first Fed governor to vote against since 2005.

Despite the rare dissenting vote, the 50 basis point rate cut reached a basic consensus within the Fed.

How to understand a 50 basis point rate cut?

Traders bet on 50 basis points at the last moment, but when the interest rate decision was announced, the market performance was somewhat at a loss.

Generally, an unexpected rate cut will stimulate the rise of stocks, but this may also send an ominous signal to the market: the Fed has seen a "devil" that the market does not have.

The Fed's job is a kind of risk management, and monetary policy and expectation management must maintain a balance between inflation risks and unemployment risks.

The market and the Fed are in a mutually competitive relationship, and traders also put pressure on the Fed when approaching rate cuts.

Of course, my understanding is that the Fed is not "yielding" but "complying" with the market this time.

As the first rate cut in four years, at least it shows that the Fed governors are worried about the risk of intensifying unemployment and are trying to prevent a U.S. economic recession.

The economic forecast released at this FOMC meeting shows that the Fed has lowered this year's U.S. GDP forecast from 2.1% to 2.0%, and the unemployment rate forecast from 4.0% to 4.4%.

Among them, the rapid cooling of the job market may have alerted the Fed.

Data shows that the U.S. unemployment rate rose to 4.3% in July (4.2% in August), and the Sam Index recorded 0.49%, close to the 0.5% warning line.

The "Sam Rule" believes that when this index reaches the warning line, it will trigger concerns about a recession.

In the history of the United States, the Sam Rule has been verified in all 9 U.S. economic recessions since 1960.

Although the unemployment rate between 4.2% and 4.3% is still at a relatively low level, the unemployment rate is a lagging indicator.

When the unemployment rate rises rapidly, it indicates that economic pressure has been transmitted to the deep field, that is, companies are forced to lay off employees due to revenue and cost pressure.

Of course, I think that although the current Sam Index is close to the warning line, the U.S. economy has not entered a recession, and the 50 basis point rate cut reflects the Fed's cautious attitude towards the trend of the U.S. economy.

Perhaps, as I predicted at the beginning of the year, perhaps the Fed should have cut interest rates in June, and this 50 basis points is just a "compensation" for the previous mistake.

At the press conference, Powell's expectation management made "two-handed preparation": on the one hand, he attacked the market's radical sentiment, emphasizing that the 50 basis point cut is not a "new pace".

According to the latest dot plot, at least a 25 basis point rate cut at each of the remaining two FOMC meetings this year, and a total of 100 basis points next year.

On the other hand, he boosted the market, insisting that there are no signs of a recession in the U.S. economy, nor does he think that a recession is imminent, trying to eliminate the concerns caused by the 50 basis point rate cut.

In short, the 50 basis point rate cut announced the Fed's start of a new round of rate cuts, and the world officially entered a new round of easing cycle.

In just four years, the U.S. economy and financial markets have experienced great fluctuations and shocks, but the Fed's operations have made it land smoothly.

This reflects the efficiency of the Fed's monetary system and policy, and also reflects the resilience of the U.S. economy.

After the Fed's rate cut, the external constraints on the People's Bank of China's rate cut have decreased, which is conducive to the opening of the reserve reduction and interest rate cut channel.

Moreover, the Chinese economy is currently facing downward pressure, liquidity is declining, prices are persistently low, and monetary policy needs to be more proactive, ahead of the market, to take unexpected rate cuts to reverse market expectations, while fiscal policy should directly increase residents' income to protect family balance sheets and promote macroeconomic balanced growth.

2 Cyclical trend: After the Fed's rate cut, how will the U.S. dollar, U.S. Treasury bonds, U.S. stocks, Hong Kong stocks, A-shares, gold, and oil prices go?

It is not difficult to deduce logically, under the condition that other factors remain unchanged, just considering the Fed's monetary policy factor, the U.S. dollar, as the pricing currency of the global financial market, the Fed's rate cut promotes the increase of dollar liquidity, and then promotes the rise of global asset prices.

In fact, after the "Black Monday" on August 5th, the financial market has bet on a rate cut in September and has already priced in advance.

Exchange rates are sensitive to interest rate performance, and the U.S. dollar index has fallen from 106.05 in July to the current 101.33; the offshore yuan (U.S. dollar against the yuan) has appreciated from 7.31 to the current 7.06.

The three major U.S. stock indices all rose in August, among which the Dow Jones Index and the S&P 500 Index have recently hit historical highs again.

The two-year U.S. Treasury bond yield has continued to fall, and the New York gold has continued to rise to a historical high of 2627.

When the rate cut is finally in place, the asset price trend that has been priced in advance is entangled, rising after the interest rate decision is announced, and falling after Powell's press conference suppresses expectations.

We focus on the future trend of asset prices.

First, we need to predict the Fed's interest rate trend this year and next year.

Combining the latest dot plot, I believe that there will be consecutive rate cuts in November and December this year, with a total of at least 50 basis points, and possibly 75 basis points.

Next year, considering the slowdown in the decline of inflation, assuming that the core PCE drops to 2% by the end of the year, then the Fed may cut interest rates 5 times in 8 FOMC meetings, each by 25 basis points, with a total of 125 basis points for the year.

In other words, by the end of next year, the federal funds rate will drop to about 3.25%.

Based on the above judgment of the pace of rate cuts, during the cycle of continuous rate cuts by the Fed, the U.S. dollar will weaken against non-U.S. dollar currencies.

However, considering that the European Central Bank, the Bank of England, and the People's Bank of China are all in a rate cut cycle, the decline in the U.S. dollar index will not be too large.

Non-U.S. dollar currencies will rise, the euro and the pound will rise slightly, and the yen will continue to appreciate with the Bank of Japan's rate hike.

The yuan will also appreciate, and it may break through 7.0 during the peak period of year-end settlement.

However, affected by the People's Bank of China's rate cut and the decline in potential economic growth, the China-U.S. interest rate spread will always exist, and the appreciation of the yuan in this round is limited, and it may present a trend of rising first and then depreciating.

U.S. Treasury bonds, especially short-term U.S. Treasury bonds, are sensitive to interest rates and inflation rates.

According to historical experience, since 1982, U.S. Treasury bonds have all risen within one year after the Fed's rate cut.

During the Fed's rate cut cycle, the financing cost of U.S. Treasury bonds will decrease, and its yield will decrease and prices will rise.Here is the English translation of the provided text: The current U.S. stock market is at a historical high.

After the Federal Reserve's rate hike, will the U.S. stock market reach new highs?

Since 1982, except for these two instances of U.S. economic recession (the 2000 Nasdaq bubble crisis and the 2008 financial crisis), every round of rate cuts by the Federal Reserve has propelled the U.S. stock market to rise within the next year.

Economic recession is the biggest gray rhino for the U.S. stock market; in these two crises, the Federal Reserve's rate cuts did not manage to turn the tide in the short term.

According to historical experience, excluding the condition of economic recession, the U.S. stock market has risen within a year after the Federal Reserve's rate cuts.

Among them, the 1987 "Black Monday" and the 2020 stock market crash, both times under the condition that the fundamentals did not deteriorate, the Federal Reserve implemented emergency rate cuts, and the effects were quite evident, with the U.S. stock market rebounding rapidly.

Therefore, it is crucial to judge whether the U.S. economy is likely to enter a recession (GDP falling for two consecutive quarters on a quarter-over-quarter basis).

Based on my prediction of the balance sheet status of American households and businesses, as well as market liquidity after the rate cut, the fundamentals of the U.S. economy will not deteriorate to a state of recession, and the Federal Reserve's rate cut paves the way for a soft landing of the U.S. economy.

Another factor to pay attention to is this year's U.S. election.

According to historical experience, financial market volatility increases and the U.S. stock market falls before the U.S. election, and within a year after the election, regardless of whether the Democrats or Republicans are in power, the U.S. stock market rises.

This indicates that the capital market treats the presidential election merely as a risk event.

In summary, after the dust settles on the November election this year, and the fundamentals of the economy do not deteriorate, the U.S. stock market is likely to rise next year, with the Dow Jones Industrial Average potentially seeing a larger increase than the Nasdaq, the latter of which is also affected by the uncertainty of AI performance.

The Federal Reserve, the European Central Bank, and the Bank of England, the world's three major central banks, usually drive the U.S., European, and Hong Kong stock markets, and other major global stock markets to rise when they cut rates in sync.

The Hong Kong stock market is forming a bullish trend, and the Hang Seng Index will break through 20,000 points, but its growth is not as strong as that of the U.S. stock market, and its momentum can be easily interrupted by uncertain events between China and the U.S. Japanese stocks may be suppressed by the slow rate hikes of the Bank of Japan and the appreciation of the yen.

A-shares are less affected by the Federal Reserve's policies and follow an independent trend.

The trend of gold prices is influenced by multiple factors such as inflation, geopolitical issues, and the Federal Reserve's monetary policy.

Declining inflation is bearish for gold, while the Federal Reserve's rate cuts are bullish for gold.

This unexpected rate cut has stimulated the international gold price to reach a historical high during the trading day.

In the future, gold prices will continue to remain high.

The trend of crude oil prices is influenced by the production limiting policies of oil-producing countries, the Federal Reserve's monetary policy, global economic demand, and fossil energy policies.

Generally, the Federal Reserve's rate cuts will drive up demand in the U.S., thereby driving up oil prices.

However, there is a transmission process involved.

It is expected that by the end of this year, crude oil prices will still be weak and will gradually rise next year along with the recovery of demand in the U.S.

In addition, the U.S. election may have an impact on oil prices.

If the Democratic Party's Harris takes office and suppresses crude oil extraction, it will be more conducive to the rise in oil prices.

If the Republican Party's Trump takes office and adopts encouraging policies, it is more likely to suppress oil prices.

The impact of the Federal Reserve's rate cut on China's real estate market is almost negligible.

Currently, the real estate market is influenced by short-term factors such as real estate policies, macro policies, market liquidity, macroeconomic trends, market confidence, and developer debt risks, and is also limited by long-term factors such as demographic trends and urbanization, with external factors not being the main factor.

The Federal Reserve's rate cut will indirectly benefit China's bond market.

After the Federal Reserve's rate cut, the external constraints on the People's Bank of China's reserve requirement ratio reduction, interest rate cuts, and bond purchases have narrowed, which will promote the continuous rise in bond prices.

However, the central bank is quite entangled, not wanting the bond yield to fall too quickly, even resorting to shorting the bond market through government bonds.

Nevertheless, the decline in bond yields is a major trend.

As the global easing cycle approaches, what should investors do?

This year, market interest rates have fallen rapidly, and the yield on major asset prices has continued to decline.

The yield on 10-year government bonds has fallen from 2.71% at the end of last year to 2.03%, and it is expected to break through 2% soon.

The interest rate on bank fixed deposits has basically fallen below 2%, and the insurance preset interest rate has been adjusted down to 2.5%.

The yield on funds based on bonds and certificates of deposit, as well as bank wealth management, has also continued to decline.

In the past three years, the real estate market has declined comprehensively, with investment, financing, sales, and price declines ranging from 30% to 60%, and the return on real estate investment in first-tier to fourth-tier cities has turned negative.

A-shares have steadily declined, and investors have had to rebuild the goal of climbing to three thousand points on the Shanghai Composite Index.

The market is facing an "asset shortage," so how should it be invested?

After years of market education, most people's risk preferences have decreased, some are eager to repay loans early to deleverage, some are deeply trapped in real estate, and some are extremely cautious.

First of all, real estate prices will continue to decline, and it is expected to take more than a year to stabilize; after stabilizing, the housing prices in most cities will continue to be sluggish, and only the high-quality properties in the core areas of first-tier cities and a few large cities may slowly rebound.

The era of real estate is over, and households need to reduce their holdings in real estate to below 40%, and they can consider selling investment properties in third and fourth-tier cities, non-core areas, and old, dilapidated, and small properties, including residential, commercial, factory, and office buildings.

If you choose to hold, you can measure the investment value by the rental yield ratio (referencing government bond, fixed deposit, and mortgage interest rates).

After this round of housing prices stabilizes, the investment logic of real estate will shift from asset investment (speculative housing) to rental yield ratio.

Stable housing prices will drive some funds to be allocated to cities with high population inflow and higher rental yield ratios.

Secondly, the decline in interest rates will drive the yield on major assets to continue to decline, and investors need to lock in yields in advance during the interest rate decline process.

You can increase the allocation of government bonds, insurance, and fixed deposits, these three types of risk-free and low-risk assets to lock in yields.

Among them, bonds are ushering in a bull market, of course, this also reflects the market's weakening expectations.

In the past two years, commercial banks have purchased 80 to 90 percent of the government's new bonds.

Next, the central bank will personally enter the market to buy bonds.

This means that the yield on government bonds will fall further, and prices will continue to rise.

Individual investors lack experience in buying bonds and are not sensitive to this.

In fact, in the economic growth downturn cycle, family bond purchases are the main way to hedge risks.

In the era of economic downturn and aging, insurance is also an important asset to hedge risks.

Starting in September, the insurance preset interest rate has been reduced from 3% to 2.5%, and it is expected to be further reduced next year.

Investors can lock in yields in advance by increasing their holdings of insurance.

However, it should be noted that the continuous decline in interest rates poses a great impact on the balance sheets of insurance companies, and it is best to choose stable products from large insurance companies.

Third, when the world enters a new round of the easing cycle, investors need to join the global asset allocation, adopting a multi-currency, multi-variety, and multi-market investment portfolio and risk hedging.

From the end of 2012 to now, the global market has been in an easing cycle for most of the time, and global asset prices have generally risen sharply, with U.S. stocks, European stocks, and Japanese stocks experiencing a major bull market.

Among them, the Dow Jones Industrial Average has tripled by 3.1 times, the S&P 500 has tripled by 3.9 times, and the Nasdaq has quintupled by 5.8 times.

Investors in open economies have generally participated in this round of global liquidity dividends, and financial assets have generally increased significantly.

Individual investors in Europe, Japan, Singapore, and Hong Kong can directly participate, and more are indirectly involved through financial institutions.

For example, after the bubble crisis, Japanese families significantly reduced their holdings of real estate, with the proportion of real estate holdings dropping from over 40% to over 20%, while significantly increasing their holdings of financial assets.

Among financial assets, Japanese families hold the most cash, followed by insurance and pensions.

By holding insurance and other financial institution assets, Japanese families indirectly shared in this round of global asset feast.

When potential growth rates decline, especially when facing a decline in real estate and an asset shortage, investors need to seize the new round of the easing cycle and find a stable economy, a liquid market, and a stable currency for hedging.

Global asset allocation must control risks well.

U.S. Treasury bonds (U.S. sovereign bonds), U.S. dollar deposits, and U.S. dollar insurance policies (large insurance companies) are risk-free and low-risk assets, which can be increased in allocation.

U.S. stocks, U.S. real estate, gold, and crude oil futures are risky assets, and should be allocated cautiously.

Among them, U.S. stocks should be mainly operated in the medium term, not in the short term or long term, with the Federal Reserve's rate cut cycle as the operation cycle, entering before the rate cut and selling before the next round of rate hikes.

Regarding global asset allocation, this Saturday (September 21st) in the afternoon, I have a small closed-door sharing session at the HSBC Bank in Huaqiang North, Shenzhen, where I will explain the allocation strategy in detail.

Friends in the community who have this need can rush to sign up with the customer service.

When allocating global assets, many people are entangled: when to exchange currency?

First, it is important to be clear about the purpose of currency exchange.

If it is just speculation, focus on the trend of the U.S. dollar against the renminbi.

According to the above speculation, the renminbi will strengthen slightly at the end of the year, which is a good time to exchange currency.

If the purpose of currency exchange is to purchase U.S. dollar assets, it is important to focus on the trend of U.S. dollar asset prices.

There is a certain seesaw relationship between the U.S. dollar exchange rate and the price of U.S. dollar assets.

When the U.S. dollar weakens, U.S. dollar assets strengthen.

If you wait until the U.S. dollar weakens to exchange currency, the price of U.S. dollar assets has already risen, and the yield naturally decreases.

When the U.S. dollar is strong, exchanging currency may result in some loss of exchange rate, but the yield on U.S. dollar deposits, U.S. dollar insurance policies, and U.S. Treasury bonds is higher, and the price of U.S. stocks is relatively low.