Fed Cuts Rates: Global Low-Rate Era Begins, Capital Fleeing!

The Fed's interest rate hike era "comes to an end"!

In the early morning of September 19th, Eastern Time, the Federal Reserve's interest rate decision meeting was concluded.

At this interest rate decision meeting, the Federal Reserve voted to lower the target range for the federal funds rate by 50 basis points to 4.75%-5%.

It now seems to fulfill the signal released by Jerome Powell, the Chairman of the Federal Reserve, in August, that the "time has come" to adjust monetary policy.

Since the rate hike in March 2022, the cumulative increase in the Fed's interest rate has reached 525 basis points.

Over the past year, the Federal Reserve has maintained the target range for the federal funds rate at 5.25% to 5.5%, the highest level in 23 years.

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On that day, the three major U.S. stock indexes all closed lower, with the Dow Jones falling 0.25% to 41,503.10 points; the Nasdaq falling 0.31% to 17,573.30 points; and the S&P 500 falling 0.29% to 5,618.26 points.

COMEX gold futures fell 0.3%, reporting $2,584.6 per ounce.

Market expectations for rate cuts and a big game before the Fed's interest rate decision meeting.

However, most people have significantly raised the basis points for rate cuts.

Xinhua News Agency cited a report from the British Financial Times on the 16th, predicting that the chances of the Federal Reserve lowering interest rates by 50 basis points this week are about 64%.

"New Bond King" Jeffrey Gundlach believes that on the eve of the Fed's meeting, the market's bets are usually very clear, and such indecisive situations rarely occur.

After the data released last week once dispelled the market's hope for a 50 basis point rate cut, now the market expects a 50 basis point rate cut hope to be even greater (65%).

A week ago, 25 basis points was the market's consensus expectation.

50 basis points or 25 basis points, each has its own considerations!

Former Fed economist Sam supports the Fed taking a bigger action at this interest rate decision meeting.

She pointed out, "Since last July, the labor market has become weak, so part of it is recalibration.

We have more information.

Fed officials need to make this 50 basis point cut and be ready for further action."

However, some market participants are cautious about the possibility of the Fed cutting rates by 50 basis points.

Subhadra Rajappa, head of Societe Generale's U.S. interest rate strategy department, said: "Since the 13th, the market has tended to expect the Fed to cut rates by 50 basis points, but we believe the Fed will cut rates by 25 basis points."

More cautious market participants believe that a 25 basis point rate cut is more conducive to policy and economic buffering.

The Pudong New Area News cited the view of Bai Xue, senior deputy director of the Research and Development Department of Orient Securities, that from the current data performance, the U.S. economy still has a certain resilience and has not shown obvious signs of recession.

At the same time, the core inflation has fallen relatively slowly.

Under the Fed's gradual rate cut policy framework, a 25 basis point rate cut is sufficient to achieve its short-term policy goals.

If the first rate cut is a large cut of 50 basis points, it is equivalent to releasing a pessimistic signal of an economic "hard landing" to the market, which carries the risk of rapidly easing financial conditions and inflation rising again.

In fact, looking at the Fed's previous policy interest rate of 5.25%-5.5%, the subsequent rate cuts already belong to high-level rate cuts.

Not to mention that the Fed's inflation has not yet reached the set core value.

Coupled with the fact that the U.S. domestic economy has not shown signs of a sharp decline.

A sudden large-scale rate cut would bring more than rational explanations to the economy and the market.

Therefore, in the author's view, the call for a 50 basis point rate cut is more of a market expectation, or a rational game reason for asset speculation.

The dollar falls, and assets take the lead.

Before the Fed's interest rate decision, the market's expectations for the Fed's rate cut prospects, and even a large rate cut, have boosted the demand for speculative assets in a short time, such as Bitcoin.

On September 17th, Bitcoin's intraday increase was the largest in more than a month.

However, after the Fed started the rate cut cycle, whether Bitcoin can become popular again has a lot of factors intertwined, and it is not as easy to judge as traditional assets.

At that time, in March 2020, after the United States announced a reduction in the federal funds rate, the prices of traditional assets such as stocks and houses were pushed up, and Bitcoin also became an important reservoir.

The price increase during this period was not entirely due to the rate cut, but more reflected the result of the change in the attitude of the U.S. regulatory authorities towards Bitcoin.

In addition, if the new economic momentum of artificial intelligence develops smoothly and the application level makes good progress, and funds flow to emerging fields, it will also form a diversion from Bitcoin.

U.S. dollar deposits enter the "rate cut channel".

Previously, against the backdrop of a round of domestic deposit rate cuts, benefiting from the Fed's high benchmark interest rate, domestic U.S. dollar time deposit products have formed a supplement to low-interest RMB time deposits.

According to central bank data, at the end of August, the balance of foreign currency deposits was $853.1 billion, a year-on-year increase of 7.3%.

In the first eight months, foreign currency deposits increased by $55.3 billion.

According to data disclosed by Puyi Standards, as of July 18th, the scale of U.S. dollar wealth management products reached 233.941 billion yuan, a year-on-year increase of 66.68%.

Fixed income products accounted for the highest proportion, reaching 76.12%.

The annualized yield of U.S. dollar wealth management products is about 4.72%, and some products yield up to 5%.

However, ahead of the Fed's rate cut, in August this year, according to multiple media reports, the interest rates of most domestic institutions' U.S. dollar deposit products were lowered by 10 basis points, and the largest annualized interest rate reduction was 50 basis points, mainly involving some joint-stock banks and small and medium banks.

In order to find high-yield time deposit products, a large amount of funds had previously crossed the sea to Hong Kong to find opportunities.

However, the expectation of the Fed's rate cut has hit the interest rate differences everywhere.

According to the financial magazine, since the middle and late August, offshore banks have intensively lowered the interest rates of U.S. dollar deposits.

Taking Hong Kong's "note-issuing banks" as an example, the current interest rates for U.S. dollar deposits at HSBC and Standard Chartered Bank are mostly between 3.30% and 4.6%.

Even some small and medium-sized foreign banks' U.S. dollar structured products have interest rates not exceeding 4.9%.

Since Hong Kong's interest rates usually follow U.S. interest rates, as the expectation of the Fed's rate cut has surged, in order to avoid high interest rate lock-in deposits affecting the interest spread, Hong Kong banks have chosen to lower the fixed deposit interest rates.

It is reported that recently, the 1-year HIBOR (Hong Kong Interbank Offered Rate) has slightly fallen to a 2-year low of 4.07351%.

Looking around the world, except for Japan, which still has the possibility of raising interest rates, almost all mainstream countries' interest rates are in a downward channel.

The global low-interest rate era is coming again, and investors who hope to obtain returns through fixed interest rates may face greater uncertainty.