**Introduction**: The Federal Reserve Lowers Interest Rates Again After Four Years, Over Ten Public Mutual Funds Provide Interpretations
After a four-year hiatus, the Federal Reserve has once again cut interest rates by 50 basis points (bp), garnering widespread attention in the market. Does this decision align with expectations? What specific impacts will it have on global asset prices? What about its effects on the A-share and bond markets? What is the future trajectory of the Federal Reserve's interest rate policy? Is there still a possibility of further rate cuts?
In response to these questions, China Fund News interviewed over ten fund companies, including Nanfang, China Merchants, Bosera, Central European, Guotai, Huaan, Xinde OY, HSBC Jinxin, Chuangjin Hexin, Xingyin, Hang Seng Qianhai, Debon, Furong, Great Wall, and Hongde.
The interviewed public mutual funds believe that this rate cut is both in line with market expectations and somewhat aggressive, driven by multiple factors. The rate cut will have a profound impact on global asset prices, requiring investors to adjust their strategies flexibly. At the same time, the A-share and bond markets will also be affected to some extent, and there are still uncertainties regarding the future interest rate policy of the Federal Reserve.
The rate cut is basically in line with expectations but somewhat aggressive.
The Federal Reserve's decision to cut interest rates by 50 bp to some extent aligns with market expectations, but it is also somewhat aggressive. Through this rate cut decision, the Federal Reserve aims to balance the risks to employment and inflation targets and to help the U.S. economy achieve a soft landing.
"Firstly, from the perspective of market expectations, Bosera Fund's Macro Strategy Department pointed out that the market has been vacillating between expectations of a first cut of 25 bp or 50 bp, and this 50 bp cut is slightly beyond market expectations," said He Si Yao, QDII Multi-Asset Investment Manager at HSBC Jinxin Fund. Although there were market fluctuations after the rate cut decision was announced, the overall situation was relatively stable, which can be considered as the Federal Reserve's actions being in line with the market. This indicates that the Federal Reserve's rate cut decision is to some extent in line with market expectations but also somewhat aggressive.
Gan Jingyun, Chief Macro Analyst at Chuangjin Hexin Fund, also stated bluntly: "The 50 BP rate cut this time is a big step beyond our expectations."
When discussing the logic behind the Federal Reserve's rate cut, many institutions mentioned the recent performance of the U.S. economic data. Gan Jingyun pointed out that recent U.S. GDP and retail sales data show resilience, and core inflation in August has picked up, seemingly making a significant rate cut unnecessary. However, Powell's speech at the press conference revealed an operational mindset of "trading space for time," which means using a larger rate cut to correct the timing of the Fed's lagging behind the curve, helping the U.S. economy to achieve a soft landing. This indicates that when weighing the balance between inflation and economic growth, the Federal Reserve is more inclined to take proactive measures to address potential economic risks.Wang Lize analyzed the reasons for the Federal Reserve's interest rate cut from three aspects. First, some economic data indicators have recently declined, and the 50BP rate cut in September can be understood as a "compensation" for not cutting rates in July. Second, the Federal Reserve is determined to protect the job market and is unwilling to pay the price of "recession" in exchange for the return of inflation targets. Third, the front-running pricing in the financial market has to some extent forced the Federal Reserve's decision-making. Hongde Fund also stated that the 50BP rate cut this time exceeded market expectations but was in line with the expectations of some more aggressive market participants.
Nanfang Fund analyzed the Federal Reserve's rate cut decision from the perspective of the degree of monetary policy tightening. It believes that under the expectation of a soft landing, the 50BP rate cut this time appears to be too "aggressive". However, from the perspective of quickly adjusting the degree of monetary policy tightening, this rate cut helps the Federal Reserve catch up with the curve and better cope with the current economic environment.
Tian Peiyuan, a financial market analyst at the Market Analysis Center of Cinda AoYa Fund, provided a detailed analysis of the three major factors behind the Federal Reserve's rate cut. First, the risk of the labor market cooling down has increased, and the U.S. non-farm data for August was significantly lower than market expectations. Second, the growth momentum of the U.S. economy has slowed down, with the ISM manufacturing PMI remaining in the contraction range for five consecutive months. Third, the progress in fighting inflation is in line with expectations, with CPI data falling continuously. Based on these factors, the Federal Reserve made the decision to cut rates by 50bp this time.
Xia Jintao, General Manager of the Fixed Income Research Department of Debon Fund, emphasized the hints from the Federal Reserve at the Jackson Hole meeting and the information shown by the dot plot. He stated that Powell had already hinted at the timing of the rate cut at the Jackson Hole meeting, and the dot plot showed that there is still a 50Bp rate cut space within the year. This indicates that the Federal Reserve has a certain degree of foresight and continuity in its rate cut decisions.
Song Fang, General Manager of the Fixed Income Department and Fund Manager of Furong Fund, pointed out that according to the meeting statement, the Federal Reserve has begun to gradually pay attention to the weakness in the labor market, with the risk of employment weakening increasing, and also considering the gradual cooling of the risk of inflation rising, so monetary policy needs to be rebalanced.
Beneficial to U.S. Treasury bonds
Limited bullish effect on U.S. stocks
The Federal Reserve's rate cut will have a profound impact on the prices of various global assets. Investors should closely monitor market dynamics and changes in economic fundamentals, and flexibly adjust their investment strategies to cope with the challenges and opportunities brought about by these changes.
Xu Zhiyan, Assistant General Manager of Huaan Fund and Senior Director of the Index and Quantitative Investment Department, believes that the Federal Reserve's rate cut has a significant impact on global assets because the U.S. dollar is the world's most important reserve currency. The rate cut leads to a decline in the risk-free interest rate of the U.S. dollar, prompting investors to seek higher-yielding assets, which may push up the prices of stocks, bonds, and real estate, among other assets. At the same time, the possibility of the U.S. dollar depreciating increases, attracting international capital to flow to emerging markets and other high-yield areas, which may drive up asset prices in these areas. In addition, rate cuts usually boost market confidence and increase investors' risk appetite, with more funds flowing into risk assets such as stocks.
From historical data, before and after rate cuts, the stock market often performs well, especially growth stocks and cyclical industries; bond prices usually rise, and yields fall; the real estate market may also benefit from a low-interest-rate environment; assets such as gold are also favored when economic uncertainty increases. However, due to different reasons for historical rate cuts, investors should also consider the current cycle of the U.S. economy (for example: soft landing/hard landing) when making investment decisions.Song Fang also clearly stated that, overall, the interest rate cut is beneficial for U.S. Treasuries. For investors, not frequently adjusting strategies and going with the flow can be a good investment strategy by following market trends. This interest rate cut has opened the curtain on the interest rate cut cycle. If future interest rate cut expectations are more intense, with both the number and magnitude exceeding market expectations, or if future economic data further soften, even posing a risk of stalling, and the neutral interest rate begins to be revised downwards, U.S. Treasury rates may significantly decline.
He Si Yao emphasized that the performance of major asset classes is highly correlated with the actual economic fundamentals. In the absence of an economic recession, a decrease in interest rates is beneficial for risk assets, such as stocks. At the same time, if economic activity picks up again and demand increases, pro-cyclical commodities will also benefit. However, if the Fed's interest rate cut fails to successfully lead to a soft landing and the economy falls into a recession, then stocks and pro-cyclical commodities will face pressure. Gold and U.S. Treasuries usually benefit from interest rate cuts, but these assets may also be under pressure in the case of an unexpected acceleration of the economy and rising inflation.
Li Zhan, Chief Economist of the Research Department of China Merchants Fund, said that in the short term, the Fed's interest rate cut is marginally beneficial for the performance of the global stock market. Due to the downward movement of U.S. Treasury rates affected by the interest rate cut, and the role of U.S. Treasuries as the "anchor of pricing" for global risk rates, it is beneficial for U.S. stocks and global equity assets from the denominator end.
Li Wei Kang, Fund Manager of Hang Seng Qianhai Bond Fund, reminded investors to pay attention to the rebound of U.S. economic data after the interest rate cut and the release of rate-sensitive demand. He believes that the probability of a soft landing for the U.S. economy after the interest rate cut is increasing, and it is possible to see a rebound in U.S. economic data in the short term, with rate-sensitive demand such as real estate expected to be released.
Gan Jing Yun analyzed the impact of the Fed's interest rate cut from multiple perspectives. She believes that the U.S. dollar remains weak under the background of the Fed's interest rate cut, but the room for depreciation is limited. In terms of U.S. Treasuries, the interest rate cut drives the yield of U.S. Treasuries downwards, which is beneficial for U.S. Treasuries. In terms of U.S. stocks, the interest rate cut supports the valuation of U.S. stocks, but the positive effect is limited, and it is more important to pay attention to whether the interest rate cut can help the U.S. economy achieve a soft landing. In addition, the Fed's interest rate cut is also beneficial for precious metals, non-ferrous metals, crude oil and other bulk commodities, as well as the performance of domestic assets.
Wang Li pointed out that under the Fed's interest rate cut cycle, stocks, bonds, real estate, and bulk commodities are relatively beneficial. However, investors should pay more attention to whether the U.S. economy will show signs of recession in the future, which will determine different trading strategies. Against the background of the U.S. macroeconomic soft landing, the interest rate cut helps to increase market liquidity and reduce corporate financing costs, and risk assets are expected to perform well. But if the economic growth slows down or there is a risk of recession, the trading strategy may need to completely shift to a recession trade.
Nanfang Fund believes that U.S. Treasury yields are expected to start a downward trend, gold pricing returns to the framework of being negatively correlated with the actual interest rate of the U.S. dollar, and the U.S. dollar may fall stage by stage.
Bo Shi Fund's Macro Strategy Department also mentioned that the current U.S. economy is still far from recession, but the market's expectation of economic weakness has not been completely eliminated. It may take about 3 to 7 months from the start of the interest rate cut to the economic stabilization and rebound, and the interest rate cut trade and recession trade may still switch repeatedly.
The impact of this Fed interest rate cut on the domestic stock and bond markets is slightly favorable.
Regarding the impact of this interest rate cut on the A-share and bond markets, Xu Zhiyan, Assistant General Manager of Huaan Fund and Senior Director of the Index and Quantitative Investment Department, believes that under the background of the Fed's interest rate cut, the renminbi exchange rate is relatively strong, which is expected to attract foreign capital to rebalance its global market allocation and increase investment in A-shares, thus forming a certain benefit for the A-share market. At present, the valuation of the A-share market is already in a relatively low range, and positive factors are gradually accumulating. With the corporate profit cycle expected to bottom out and rebound, and the continuous promotion of high-quality development of the capital market, investors can hold a moderately optimistic attitude towards the A-share market.Central European Fund stated that for the equity market, the Federal Reserve's interest rate cut and the U.S. stock market's return to a soft landing trade are expected to accelerate the rebalancing among industries and drive the rise of sectors with risk premiums below the mean water level. However, the current expectations for economic fundamentals have hardly changed, and the impact of fundamental factors on the rebalancing trade is relatively weak, with the market being more dominated by the capital side. In the medium to long term, against the backdrop of a flat economy without the effect of total stimulus policies, the domestic equity market is expected to continue to reflect structural market trends.
Cathay Fund indicated that the Federal Reserve's interest rate cut of 50bp is a preemptive rate cut, and it is expected to have a greater impact on Hong Kong stocks than on A-shares. In terms of A-shares, the Federal Reserve's rate cut is not a core factor. Although it slightly relaxes the constraints on domestic monetary policy, the core of the trend stability of A-shares still lies in the domestic fundamentals and the intensification of counter-cyclical policies. In terms of specific sectors, the export chain in A-shares may benefit relatively, as the valuation has been adjusted earlier, but the mid-term report still reflects a relatively strong prosperity of the sector, and it also benefits more clearly from overseas interest rate cuts.
Tian Peiyuan stated that the Federal Reserve's unexpected interest rate cut this time is favorable for the domestic stock market, bond market, and the RMB exchange rate. On the one hand, the Federal Reserve's rate cut has made overseas liquidity marginally looser, and with the appreciation of the exchange rate, it is overall beneficial for overseas funds to flow back into the Chinese stock market, forming incremental funds. For A-shares, growth sectors represented by technology may benefit the most. On the other hand, the alleviation of exchange rate stability pressure opens up the room for domestic monetary policy operations, which may drive bond yields down, benefiting the Chinese bond market.
Xingyin Fund's fixed income team stated that, combined with the social financing and economic data announced before the Mid-Autumn holiday, the expectations for domestic interest rate cuts and reserve requirement ratio cuts are continuously strengthening. It is expected that after the short-term tax period, the bond market will show a phased strong trend. However, the current 10-year Treasury bond is close to the 2.0 pressure position, which implies the market's expectation of a 10bp interest rate cut on the monetary policy side. If the subsequent domestic interest rate cut does not exceed expectations, there will also be certain restrictions on the downward space of long-term interest rates.
Wang Li estimated that the current pattern of the bond market and A-shares may not undergo particularly significant changes. Under the influence of interest rate cut expectations, it is expected that the overall yield level of the bond market will continue to decline. Moreover, in a low-interest-rate environment, dividend assets, due to their higher dividend rates, are more in line with the needs of asset allocation, and A-share dividend assets may benefit to some extent.
This round of interest rate cuts may come to an end in 2026.
Regarding the future space and pace of the Federal Reserve's interest rate cuts, Nanfang Fund stated that the deduction of the Federal Reserve's subsequent policies: it is expected to cut another 75BP within the year. Inflation is the biggest constraint on the Federal Reserve's interest rate cuts. From a macro model perspective, U.S. inflation will continue its downward trend within the year, which means the Federal Reserve has room to continue cutting interest rates. Starting from the fundamental data, the Federal Reserve has a large room for interest rate cuts. It is expected that in the remaining two FOMCs within the year (November, December), the Federal Reserve is expected to cut interest rates by 75BP.
Gan Jingyun stated that the dot plot announced this time still has differences in the interest rate cut space within the year, and the central interest rate at the end of 2024 is 4.4%, which is a significant decrease from 5.1% in June. After the current interest rate cut of 50BP, the subsequent interest rate cut space is between 50-75BP. By the end of 2025, the median of the interest rate forecast is between 3.25% and 3.5%, which implies that the interest rate cut space for next year is around 100BP, and the interest rate cut space for this round is not large.
Tian Peiyuan stated that the latest dot plot shows that the Federal Reserve expects a cumulative interest rate cut of 75-100bp in 2024, that is, after the 50bp interest rate cut in September this year, there is still a total interest rate cut of 25-50bp. After this meeting, there have been significant fluctuations in major asset classes, reflecting that a large interest rate cut may have strengthened the expectation of recession, and as the labor market continues to cool down, the Federal Reserve may still have a 50bp interest rate cut in the remaining two FOMC meetings within the year.
He Si Yao believes that according to the Federal Reserve's latest dot plot, this round of interest rate cuts will continue until 2026, with the long-term terminal interest rate at the level of 2.875%, which is about 200bps of interest rate cuts. From the latest market pricing, it is basically priced to cut interest rates until 2026, and the terminal interest rate level is roughly within the Federal Reserve's range. The neutral interest rate should be the end point of this round of interest rate cuts.Hongde Fund pointed out that, looking at the September dot plot, the interest rate expectation for the end of 2024 was reduced from the June range of 5.0% to 5.25% to 4.25% to 4.5%, which implies an additional rate cut of 50 basis points (bp) within 2024; the interest rate expectation for the end of 2025 was reduced from the range of 4.0% to 4.25% to 3.25% to 3.5%, which implies an additional rate cut of 100bp in 2025; and the interest rate expectation for the end of 2026 was reduced from the range of 3.25% to 3.5% to 2.75% to 3.0%, which implies an additional rate cut of 50bp in 2026. In addition, the dot plot introduced a new projection for 2027, with interest rates remaining unchanged, suggesting that this cycle of rate cuts will come to an end in 2026.