Fed's First 50bp Rate Cut: Navigating the New Investment Landscape | Moomoo Research

In the vast ocean of investments, every Federal Reserve decision acts like a lighthouse signal, guiding the flow of capital. At the September FOMC meeting, the Fed announced a "significant" rate cut of 50 basis points, marking the end of the rate-hiking cycle that began in March 2022.

So, what does the Fed's first 50bp rate cut mean? How will the future rate cut path evolve? As investors, what trading strategies can we adopt to succeed during this rate-cutting cycle?

The primary focus of the September FOMC meeting was the magnitude of the first rate cut. Ahead of the meeting, market expectations for a rate cut had been bolstered by the release of U.S. non-farm employment data, retail data, and inflation data, with the probability of a 50bp cut in September rising to around 50%. The market even speculated that there could be a total of 125bp of rate cuts by the end of the year.

Let's take a closer look at the key information released regarding the rate cut path and economic outlook from this meeting:

1. Magnitude of the First Rate Cut: A 50bp cut in September is historically significant for a first rate cut. Typically, a 50bp reduction at the outset only occurs during economic crises, such as during the tech bubble in January 2001, the financial crisis in September 2007, and the pandemic in March 2020.

Powell stated that this rate cut is a normal response to the current employment situation, reflecting the Fed's commitment to achieving full employment and proactively addressing the weakness in the U.S. job market to enhance the chances of a smooth economic landing.

2. Dot Plot and Future Rate Cut Expectations: According to the latest dot plot, there’s an expected 50bp of rate cut space within 2024 (two cuts totaling approximately 100bp), with the median rate projected to be reduced to 4.4%. For 2025, four rate cuts totaling 100bp are anticipated, and in 2026, two cuts totaling 50bp are expected.

The future rate cut expectations reflected in the dot plot are notably lower than the pre-meeting CME interest rate futures expectations, indicating that the Fed's outlook on the future rate cut path is more conservative than the market anticipated, which partly explains the rebound in U.S. Treasury yields after the meeting.

3. Economic Outlook Assessment: In the September meeting, the Fed raised its unemployment rate forecast while lowering its inflation forecast, increasing the unemployment rate projections for 2024 and 2025 by 0.4 and 0.2 percentage points, respectively, while reducing the PCE forecasts for 2024 and 2025 by 0.3 and 0.2 percentage points. This suggests that higher unemployment rates and lower inflation risks are anticipated.

However, Powell emphasized that while the labor market is cooling and inflation issues are not fully resolved, there are no signs of economic recession, alleviating market concerns about an economic downturn.

4. Powell's Hawkish Signals: During the press conference, Powell mentioned that the Fed is merely "calibrating its policy stance" and does not have a pre-set policy path; it can speed up, slow down, or even pause rate cuts. The future rate cut magnitude will depend on the circumstances of each meeting, countering market expectations for maintaining a 50bp rate cut.

The future rate cut path of the Federal Reserve will be influenced by several macro factors, including U.S. inflation levels, the employment market, and the U.S. elections. Based on current economic data, there are no signs of recession in the U.S. economy, which demonstrates resilience. Therefore, the expected rate cut space for 2024 aligns closely with the Fed's forecast, with a potential 50bp of cuts available within the year, likely in increments of around 25bp. In 2025, the path for rate cuts will depend on the economic growth situation post-rate cuts, the recovery of the real estate market, and the outcomes of the U.S. elections. Specifically:

1. Inflation: In August, the overall CPI year-on-year growth rate unexpectedly slowed to 2.5%. The core CPI, which excludes volatile food and energy prices, registered a year-on-year growth rate of 3.2%, remaining stable. The PPI year-on-year growth was 1.7%, the lowest since February, while the core PPI year-on-year growth was 2.4%, slightly above July’s 2.3%. Based on the latest August CPI and PPI data, we can conclude that overall inflation in the U.S. has indeed eased, but core inflation still exhibits some stickiness.

2. Employment: For the week ending September 14, the number of initial jobless claims was 219,000, the lowest since May and below the expected 230,000, with the previous figure also revised down. The non-farm payroll data for August showed an increase of 142,000 jobs, below the expected 165,000, with a significant downward revision of the previous month’s figures. The unemployment rate fell from 4.3% in July to 4.2% in August. Labor market data indicates that U.S. labor demand has weakened, but the unemployment rate has not continued to rise, and wages have rebounded month-on-month, reflecting that while the U.S. economy is slowing, it is not in recession.

3. U.S. Elections: The U.S. election voting day is November 5, and the next FOMC meeting will take place on November 7, after the elections. Therefore, the FOMC meeting cannot influence the election results, and significant rate cuts will not serve electoral purposes, which may reduce interference in the meeting.

Considering the various factors, including inflation, employment, the U.S. elections, and Powell's statements, as long as employment data does not deteriorate beyond expectations, the likelihood of two remaining rate cuts of 25bp each within the year appears strong.

The rate cut path for 2025 is more difficult to predict, as it will be influenced by the results of the U.S. elections, congressional elections, and the economic growth situation following the cuts, necessitating close attention to economic and political events.

With the initial 50bp rate cut, the market may be concerned about the possibility of an economic recession in the short term, so it is essential to closely monitor subsequent economic data releases. If the data does not worsen, such as if the latest initial jobless claims are below expectations, the likelihood of a smooth economic landing increases. Under the catalyst of rate cuts, U.S. stocks and various interest-rate-sensitive assets are likely to benefit. Specifically:

1. Fixed IncomeAssets: Considering that the Fed's rate cut expectations for 2024 and 2025 are more conservative than market expectations, U.S. Treasury bonds may have peaked temporarily, but as rate cuts proceed, they still hold value. It is recommended to hold TLT while adopting a cover call investment strategy or directly buying TLTW. If subsequent rate cuts are effectively implemented and the economic environment remains robust, the impetus for further rate cuts may diminish, leading to a gradual exit from U.S. Treasury investments.

Additionally, if the economy develops steadily post-rate cuts, increased purchasing power and demand stimulated by lower interest rates may gradually repair the real estate market, making REITs a good investment choice.

2. Safe-Haven Assets: As rate cuts progress, the decline in U.S. Treasury yields will lead to a depreciation of the dollar, benefiting safe-haven assets such as gold and Bitcoin.

3. Index Assets: In the short term, small-cap indices (such as the Russell 2000) are expected to show greater elasticity since small-cap stocks are more sensitive to interest rates and may perform better. In the long term, large-cap indices (such as the S&P 500) are expected to perform more steadily.

4. EquityAssets: In a stable economic environment, rate cuts will ease the financing cost pressures on interest-sensitive companies, benefiting industry profit recovery. Furthermore, lower interest rates will likely enhance asset prices and increase liquidity, boosting market trading activity. Historical data shows that sectors sensitive to interest rates and defensive sectors in the U.S. stock market, such as real estate, finance, healthcare, communication services, consumer staples, and utilities, tend to perform well during rate-cutting cycles. Investors should closely monitor the recovery of economic data.

In summary, the decision for a 50bp rate cut is not only a timely response to the current weakness in the job market but also a cautious layout for future economic uncertainties. Through a detailed analysis of the rate cut path, we can see the Fed's subtle considerations in balancing the dual goals of inflation and employment. Moving forward, as economic data continues to evolve, the Fed's policy path will remain uncertain, with a higher likelihood of two more rate cuts totaling 50bp within the year.

In terms of asset allocation, we recommend that investors closely monitor U.S. inflation levels, the state of the employment market, and the impact of political events, using these factors as a basis for flexibly adjusting their investment strategies. Fixed income assets such as U.S. Treasuries and REITs may provide stable returns during the rate-cutting cycle, while safe-haven assets like gold and Bitcoin may demonstrate their value amid market volatility. For equity assets, particularly those in interest-sensitive sectors like real estate and finance, new development opportunities may arise under the catalyst of rate cuts.