[FOMC Meeting] Results In-Depth Analysis, Market Outlook and Investment Deployment

In a sea of investment, every Fed decision is like a beacon signaling that guides the flow of funds. At the September FOMC meeting, the Fed announced a “substantial” 50 pips rate cut, ending the rate hike cycle since March 2022.

So what does the Fed's first 50bp rate cut mean? How will the future path of interest rate cuts evolve? As investors, what trading strategies can we adopt to win during the loss cycle?

September FOMC Meeting Interpretation

The biggest focus of this September FOMC meeting is the extent of the first rate cut. On the eve of the start of the meeting, influenced by the release of US non-farm employment data, retail and inflation data, the market has steadily strengthened expectations of a rate cut, the probability of a 50bp cut in September has been raised to around 50%, and the market has even once bet that it could be cut by 125bp over the year.

FOMC Meeting Results

The meeting announced a “substantial” rate cut of 50bp, in line with expectations for CME interest rate futures.

At the same time, Powell remained hawkish on the future path of rate cuts, stressing that this round of 50bp rate cuts was in response to the current employment market environment and could not serve as a benchmark for the extent of future rate cuts. This indicates that the Fed is managing the market by expectations to avoid excessive market optimism leading to a rebound in inflation.

We can look specifically at what key information this next session has released regarding the path of interest rate cuts and the economic outlook:

1. Amplitude of the first interest rate reduction

The rate cut of 50bp in September is a relatively large margin in the first rate cut in history. As always, the 50bp rate cut will only occur when the economy faces crisis situations, such as the tech bubble in January 2001, the financial crisis in September 2007, the pandemic in March 2020, and so on. Powell said the rate cut was a normal response to the current employment environment, illustrating the Fed's emphasis on achieving full employment and addressing the weakness of the US job market ahead of time, raising the likelihood of a smooth landing in the US economy.

2. Bitmap Expectations for Future Interest Rate Reductions

According to the latest bitmap forecast, there is still room for a 50bp cut in 2024 (interest rate cut twice), with a cumulative loss of around 100bp throughout the year, with the median interest rate reduced to 4.4%. Interest rate cuts are expected to be cut 4 times in 2025 totalling 100bp and 2 losses in 2026 totalling 50bp. Expectations for future rate cuts reflected in the bitmap are actually significantly lower than those of the pre-meeting CME rate futures, and the Fed is more conservative about the path of future rate cuts than market expectations, to some extent explaining the post-session bounce in US debt rates.

3. Economic Outlook Judgment

At the September meeting, the Fed lowered its unemployment rate forecast and lowered its inflation forecast by 0.4 and 0.2 percentage points for 2024, 2025, respectively, and lowered its PCE forecast by 0.3 and 0.2 percentage points respectively, anticipating higher unemployment and lower inflation risks in the future. But Powell stressed that while the labor market has cooled and the inflation issue has not been fully resolved, it has not seen any signs of an economic slowdown, easing market concerns about recession.

4. Powell Releases Eagles' Signals

Powell said in a press conference speech that the Fed is only in “calibrating its policy stance,” with no pre-set policy path, it can be accelerated, it can be slowed down, and even choose to pause rate cuts, the future rate reduction range will depend on the circumstances of each meeting, hitting the market with the expectation of a 50bp rate cut for the future Period.

Future Interest Rate Path Analysis

The future path of the Fed's rate cuts will be influenced by various macro factors such as the level of US inflation, the job market, the US election. From the current economic data, the US economy has shown no signs of recession and the economy is resilient, so the rate cut space for 2024 is basically in line with the Fed's expectations, with room for a 50bp cut in the year, with a single rate cut margin of around 25bp. The path to a rate cut in 2025 depends on post-rate economic growth, the warming of the real estate market, and the outcome of the US election. Let's see specifically:

• 1. Inflationary aspects

  Overall CPI in August slowed to 2.5% YoY, while core CPI growth of 3.2% YoY, excluding the higher volatility of food and energy prices, remained stable. The August PPI grew by 1.7% year-on-year, the lowest year-on-year increase since February, and the core PPI increased by 2.4% year-on-year, slightly higher than the 2.3% in July. Combining the recently released August CPI and PPI data, we can basically come to a conclusion that overall US inflation is indeed easing, but underlying inflation still has some stickiness.

• 2. Employment

  The number of first-time applications for unemployment benefits in the United States was 0.219 million in the week of September 14, the lowest since May, and below expectations of 0.23 million, and below expectations of 0.23 million. The previously announced US non-farm employment growth of 0.142 million in August fell short of the expected 0.165 million, significantly underperforming previous values. The unemployment rate in August fell to 4.2% from 4.3% in July. Labor market data showed that U.S. labor demand has moderated, but the unemployment rate has not continued to rise, and the wage-to-wage ratio also reflects a slowing but not a recession in the U.S. economy.

• 3. U.S. General Election

  The day of the US general election is on November 5, and the next FOMC meeting will be held on November 7 after the general election. Therefore, the meeting cannot have any influence on the outcome of the general election, nor can a significant reduction in interest rates be served in the general election, so the interference of the meeting will also be less.

As a result, combined inflation, employment, the US election, Powell's speech are more likely to remain at 25bp as long as the employment data do not deteriorate beyond expectations, and the margin of two rate cuts remaining in the year is more likely to remain at 25bp.

The path to a rate cut in 2025 is more difficult to predict, influenced by the results of the US general election, congressional elections, post-rate economic growth, and more. It requires close attention to economic and political events.

How to invest during the interest reduction cycle

With the start of this 50bp rate cut, the market may be concerned about the possibility of a recession in the short term, so close attention should be paid to the release of subsequent economic data. If the data does not deteriorate, if the latest unemployment figure is lower than expected, the economy is more likely to settle, and US equities and various interest-rate sensitive assets are expected to benefit, catalyzed by interest rate cuts. To be specific:

1. Fixed asset class

Given that the Fed's expectations for rate cuts in 2024 and 2025 are more conservative than market expectations, the current US debt phase is peak-even, but with the gradual progression of interest rate cuts, it is recommended to adopt a covercall investment strategy. Assuming that the subsequent rate cuts are in place, the economic environment remains stable and the Fed's interest rate reduction momentum weakens, we can consider phasing out investments in US debt assets. At the same time, assuming a smooth economic development after interest rate cuts, residential purchasing power and demand are stimulated by falling interest rates, property chains are expected to gradually repair, and Reits are also a good investment breed.

2. Safe Assets

With the gradual progression of rate cuts, the decline in US bond rates will lead to a depreciation of the dollar, and haven assets such as gold and bitcoin will continue to benefit.

3. Indices

In the short term, SME indices (such as Russell 2000) are more resilient because smallholder stocks are more sensitive to interest rates and perform better in the short term. In the long run, the performance of major indices such as the S&P 500 is more stable.

4. Equity assets

Against the backdrop of a stable economy, interest rate cuts will ease funding pressure on rate-sensitive enterprises and benefit the recovery of industry profits; while falling interest rates will favor higher asset prices and liquidity growth, increasing the activity of market transactions. From past historical data, the interest rate sensitivity and defensive sectors of U.S. stocks such as real estate, finance, healthcare, communications services, essential consumption, and utilities have performed well in interest rate sensitive and defensive sectors such as the interest rate sensitive and defensive sectors in the interest rate reduction cycle. Investors need to keep a close eye on the recovery of economic data.

Taken together, the decision to cut rates by 50 points in this round is not only a timely response to the current weakness in the jobs market, but also a cautious disposition to future economic uncertainty. Through a detailed analysis of the path of interest rate cuts, we can see the subtle considerations the Fed has made in balancing the twin goals of balancing inflation and employment. Looking ahead, as economic data continues to evolve, the Fed's policy path will remain full of variables, with the expectation that it is more likely to cut interest rates twice a total of 50bp over the year.

In terms of asset allocation, we recommend that investors keep a close eye on US inflation levels, job market conditions and the impact of political events as a basis for flexible investment strategy adjustments. Collateralized assets such as US bonds and REITs may provide stable returns during the interest-rate cycle, while hedge assets such as gold and bitcoin may show their value in market volatility. For equity assets, especially those sectors that are sensitive to interest rates, such as real estate, finance, etc., new development opportunities may come under the cataclysm of interest rate reductions.