The Federal Reserve (FED) cuts interest rates by 50 basis points, a new round of easing cycle begins

At 2 AM Beijing time on September 19, The Federal Reserve (FED) announced a 50 basis point rate cut, lowering the target range for the federal funds rate from 5.25%-5.50% to 4.75%-5.0%, marking the official start of a new round of rate cuts. This reduction was in line with market expectations but exceeded the predictions of many Wall Street investment banks.

Historically, the first interest rate cut of 50 basis points usually occurs during emergencies in the economy or market, such as the tech bubble in January 2001, the financial crisis in September 2007, and the COVID-19 pandemic in March 2020. To alleviate market concerns about an economic recession, Federal Reserve Chairman Powell emphasized in his speech that no signs of recession have been observed so far.

The Federal Reserve simultaneously released a relatively hawkish dot plot, expecting two more rate cuts this year, totaling 50 basis points; four rate cuts in 2025, totaling 100 basis points; and two rate cuts in 2026, totaling 50 basis points. The overall rate cut is expected to reach 250 basis points, with the final interest rate level at 2.75%-3%. This rate cut path is slower than market expectations.

Powell emphasized that the 50 basis point rate cut should not be seen as a new benchmark, and that the pace of future rate cuts may accelerate, slow down, or even pause, depending on the circumstances of each meeting. This statement partially explains the rise in US Treasury yields after the meeting.

In terms of economic forecasts, The Federal Reserve (FED) has lowered its GDP growth expectation for this year from 2.1% to 2.0%, significantly raised its unemployment rate expectation from 4.0% to 4.4%, and reduced its PCE inflation expectation from 2.6% to 2.3%. These data and statements indicate that the FED has increased confidence in controlling inflation while paying more attention to employment conditions.

Overall, the Federal Reserve has once again demonstrated its ability to manage expectations through a significant first rate cut and a relatively hawkish pace of rate cuts.

A Review of the Federal Reserve's Rate Cutting Cycle Since the 1990s

June 1989 to September 1992 (Recessionary Rate Cuts)

In the late 1980s, rapidly rising interest rates in the United States led to a crisis in savings and loan banks, triggering the "Savings and Loan Crisis". Combined with the impact of the Gulf War, the U.S. economy fell into recession from August 1990 to March 1991. The Federal Reserve (FED) began a rate-cutting cycle in June 1989 that lasted more than three years, with a total reduction of 681.25 basis points, bringing the policy interest rate ceiling down from 9.8125% to 3%.

From July 1995 to January 1996 (Preventive Rate Cut)

In 1995, the U.S. economy slowed down, and employment was sluggish. To prevent potential economic downturn risks, The Federal Reserve (FED) began cutting interest rates. This round of rate cuts lasted for 7 months, with three cuts totaling 75 basis points, lowering the policy interest rate ceiling from 6% to 5.25%. Ultimately achieving a "soft landing" for the economy, it is regarded as a typical case.

September to November 1998 (Preemptive Rate Cuts)

The Asian financial crisis that erupted in the second half of 1997 affected the external demand of the United States. Although the overall U.S. economy remained stable, the manufacturing sector faced pressure, and the stock market experienced adjustments. To prevent the crisis from further impacting the U.S. economy, The Federal Reserve (FED) cut interest rates three times for a total of 75 basis points from September to November 1998, lowering the policy interest rate ceiling from 5.5% to 4.75%.

January 2001 to June 2003 (Recessionary Rate Cuts)

The bursting of the internet bubble led to an economic recession. The Federal Reserve (FED) began lowering interest rates on January 3, 2001, with a total of 13 cuts, amounting to 550 basis points, reducing the policy rate ceiling from 6.5% to 1.0%.

September 2007 to December 2008 (Recessionary Rate Cuts)

The subprime mortgage crisis erupted and spread to other markets. The Federal Reserve (FED) began a series of 10 consecutive interest rate cuts starting from September 18, 2007, reducing rates by a total of 550 basis points to 0.25% by the end of 2008. Subsequently, it introduced quantitative easing for the first time.

August to October 2019 (Preventive Rate Cut)

Due to geopolitical conflicts and trade frictions, U.S. external demand weakened, domestic demand slowed, and the inflation rate fell below 2%. The Federal Reserve (FED) continuously lowered interest rates 3 times from August to October 2019, totaling 75 basis points, with the upper limit of the policy interest rate dropping from 2.5% to 1.75%.

March 2020 (Recessionary Rate Cut)

The global spread of the COVID-19 pandemic. The Federal Reserve (FED) held two emergency meetings in March, significantly lowering the interest rate to a target range of 0-0.25%.

Asset Price Performance During Interest Rate Cut Cycle

The changes in asset prices after interest rate cuts are closely related to the macroeconomic environment at that time. Considering that the current U.S. economic data does not support a recession conclusion, under the premise of a soft landing for the economy, more attention should be paid to the trends in asset prices during the preemptive interest rate cuts in the period of 2019-2020.

US Treasury Bonds

Before and after the interest rate cut, U.S. Treasury bonds generally showed an upward trend, with the increase before the cut being more certain and greater in magnitude. The average increase rate for one, three, and six months before the rate cut was 100%, which decreased afterwards. The average increase in value for one, three, and six months prior to the cut was 13.7%, 22%, and 20.2%, respectively, while after the cut it was 12.2%, 7.1%, and 4.6%, indicating the market's anticipatory pricing behavior. Volatility increased in the initial month after the rate cut.

Gold

The probability and magnitude of gold rising before interest rate cuts are usually greater. As a safe-haven asset, its trend is not strongly correlated with whether the economy experiences a "soft landing." From a trading perspective, the best time to trade gold is before the interest rate cuts. After the interest rate cuts are realized, more attention can be paid to other assets that benefit from the boost of the rate cuts.

It is worth noting that after the U.S. SEC approved the first globally traded gold ETF in 2004, the correlation between gold and interest rate cuts became more apparent. During the interest rate cut cycle from August to October 2019, gold saw a significant rise after the first rate cut, followed by a volatile correction in the next two months, but still showed an upward trend in the long term.

Nasdaq Index

The performance of the Nasdaq index during a recessionary rate cut depends on the situation of fundamental recovery. After preventive rate cuts, the short-term performance of the Nasdaq may vary, but it is generally upward in the long term. During the 2019 rate cut cycle, the Nasdaq saw a pullback after the first two cuts, fluctuating overall for three months, and began to rise significantly around the third rate cut.

Bitcoin

During the interest rate cut cycle in 2019, Bitcoin briefly surged after the first rate cut, then entered a downward channel, retracing about 50% from its peak over a duration of 175 days. Unlike the last interest rate cut cycle, this year Bitcoin's retracement came earlier, having oscillated for 189 days with a maximum drawdown of approximately 33%. Based on historical experience, the long-term outlook remains bullish, but short-term fluctuations or retracements may occur, with both the magnitude and duration expected to be less than in 2019.