Historical Echoes of the Fed's Rate Cut Cycle

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On September 18, 2024, the Federal Reserve announced a 50 basis point rate cut, a decision that came amid significant fluctuations in market expectations regarding the extent of the cut. Compared to historical preemptive rate cuts, this round's expected magnitude and duration are notably longer, resembling the rate-cut cycle from 1984 to 1986, during which the cut reached 562.5 basis points and lasted over two years.

The market discussion about rate cuts shifted from whether they would occur to the specifics of how much they would be. In early August, the market was more inclined to bet on a 50 basis point cut in September, but as economic data was released, expectations fluctuated between 25 and 50 basis points. Ultimately, in the week leading up to the Federal Open Market Committee (FOMC) meeting, market expectations shifted back to a 50 basis point cut.

The impact of rate cut cycles on asset prices is significant, especially in the early stages of the cut when changes in market expectations tend to be more pronounced. As the effects of the rate cuts become evident, market expectations will stabilize, thereby influencing the main trends in asset prices.

Similar to the 1984 rate cut cycle, this round sees the Federal Reserve adjusting monetary policy based on conditions in financial markets, inflation, and credit. The path of rate cuts is highly uncertain. At that time, the U.S. economy was slowing but remained relatively resilient; after a period of significant rate hikes to combat high inflation, the Fed chose to cut rates to address a high fiscal deficit and a strong dollar as inflation cooled.

In historical rate cut cycles, the short-end U.S. Treasury yields tend to move with more certainty, while long-end yields are generally lower at the end of the cycle than at the beginning. U.S. equities have risen across the board during preemptive rate cut cycles, and gold prices have generally increased during such periods. The U.S. dollar index has mostly declined during preemptive cut cycles.

Looking ahead to this round of rate cuts, it is expected that U.S. Treasury yields will likely decline with high certainty, while the U.S. dollar index presents greater uncertainty; gold is expected to trend positively. Additionally, it is important to note that the future path of rate cuts is highly uncertain, with risks associated with the U.S. economy and monetary policy exceeding expectations, as well as geopolitical risks that may also exceed expectations.