Fed Chief Hints at Two More Rate Cuts This Year

Local time on September 30th, Federal Reserve Chairman Jerome Powell delivered a speech at the annual conference of the National Association for Business Economics in Nashville, Tennessee. In his speech, he stated that the recent policy of cutting interest rates by 50 basis points should not be interpreted as a sign that future actions will be equally aggressive. In fact, it indicates that the scale of the next move will be smaller. If economic data remains consistent, there may be two more rate cuts this year, totaling 50 basis points.

Powell's latest remarks

During the Q&A session after his speech, when asked about the Federal Reserve's actions at the upcoming November FOMC meeting, Powell responded that if the economy performs in line with current forecasts, the Federal Reserve will cut rates twice this year, each time by 25 basis points.

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Comments pointed out that while this merely restates the content shown in the latest dot plot released after the September meeting, Powell's mention of this may imply that he is telling the market that the total amount of rate cuts for the remainder of the year should be 50 basis points, rather than the current market expectation of around 75 basis points.

In his speech, Powell expressed confidence in the U.S. economy and believes that inflation will continue to cool down. He stated that U.S. economic conditions provide the possibility for further slowing of inflation, and the policy stance will become more neutral over time.

Powell referred to the GDP and personal income of consumers revised by the U.S. Department of Commerce last week. Both of these figures were revised upwards, with Powell describing the income revision as "very large," which has eliminated "downside economic risks."

He stated that looking ahead, if the U.S. economy develops roughly as expected, the policy will move towards a more neutral stance over time.

Powell said, "Although the task is not yet complete, we have made significant progress towards the goal of a soft landing."Powell also stated that the U.S. labor market is robust, but the situation has indeed "cooling noticeably over the past year," and "we believe that it is not necessary to see further cooling of the labor market to achieve the 2% inflation target."

Regarding the market's focus on a 50 basis point rate cut in September, his latest interpretation is that "the decision to cut rates by 50 basis points in September reflects our growing confidence that, with appropriate adjustments to our policy stance, the strength of the labor market can be sustained in an environment of moderate economic growth and persistently declining inflation towards our target."

Two weeks ago, the Federal Reserve announced a 50 basis point rate cut, lowering the target range for the federal funds rate from 5.25%-5.5% to 4.75%-5%. This is also the first rate cut by the bank since March 2020, signifying the start of an easing monetary cycle.

Alongside the interest rate decision, the Federal Reserve's published interest rate forecast "dot plot" showed that the median of the long-term interest rate expectations of the 19 policymakers was at 2.75%-3%, which is 200 basis points lower than the current level.

Policymakers also collectively expected that the Federal Reserve would cumulatively cut rates by another 50 basis points within 2024. However, Powell pointed out that "we have not set any predetermined path," and policymakers will continue to make decisions on a case-by-case basis based on the latest economic data.

Additionally, this year's voter and President of the Atlanta Federal Reserve Bank, Bostic, expressed openness to another 50 basis point rate cut if the U.S. labor market weakens.

Market reacts sharply

After Powell's speech, the market quickly re-priced the expectations for a rate cut at the Federal Reserve's November interest rate meeting.Traders have quickly reduced their bets on the overall magnitude of interest rate cuts by the Federal Reserve. The market expects that the probability of a 50 basis point rate cut by the Fed in November has plummeted from 53.3% to 36.2%.

Futures market pricing suggests that the Federal Reserve is more likely to proceed cautiously at the meeting on November 6th to 7th, with a 25 basis point rate cut. However, traders believe that the rate cut in December will be more aggressive, with a 50 basis point reduction.

The market generally believes that Powell did not make any remarks to stimulate market bets that the Federal Reserve will cut rates by 50 basis points again, but he clearly stated that the Fed will act based on data.

U.S. stocks were down across the board at one point, but near the end of the day, the three major indices collectively lifted and turned red. By the close, the Dow Jones Industrial Average rose by 0.04%, with a cumulative increase of 1.85% in September; the Nasdaq Composite rose by 0.38%, with a cumulative increase of 2.68% in September; the S&P 500 Index rose by 0.42%, with a cumulative increase of 2.02% in September. Most popular tech stocks rose, with Apple rising by more than 2% and Google by more than 1%. Freight and logistics, consumer electronics, and internet content and information sectors led the gains, with Yingxi Group rising by more than 9%, Trump Media Technology Group rising by nearly 9%, FedEx rising by more than 2%, and United Parcel Service rising by more than 1%. Precious metals and solar energy sectors led the declines, with Cordell Mining falling by more than 3%, First Solar, Southern Copper, and Freeport-McMoRan Copper & Gold falling by more than 2%.

In terms of Chinese concept stocks, the NASDAQ Golden Dragon China Index rose and fell, closing up by 0.45%, with a cumulative increase of 29.60% in September, reaching the highest level in nearly a year. Among them, Fangdd soared by 146%, Happy Auto rose by 117.11%, Futu Holdings surged by 11.64%, New Oriental rose by 9.63%, NIO rose by 2.45%, and JD.com rose by 0.25%; Pinduoduo fell by 0.42%, Li Auto fell by 0.50%, Alibaba fell by 1.13%, Tencent Music fell by 1.87%, and XPeng fell by 4.25%.

CICC previously analyzed that, for now, the "unconventional" rate cut starting at 50 basis points by the Federal Reserve will still cause the market to worry about whether the future growth of the United States will face greater pressure in the short term.

Therefore, with U.S. Treasuries and gold still unable to refute this expectation, there may still be some holding opportunities but limited short-term space. If subsequent data confirm that economic pressure is not significant, then these assets should be exited in a timely manner. In comparison, what is more certain is the short-term debt that directly benefits from the Federal Reserve's rate cuts, the gradually repaired real estate chain (even driving China's related export chain), and copper, but it is still necessary to wait for subsequent data to verify.