Navigating the New Normal: What the Fed's Rate Cut Means for Investors

Amid worries about an economic recession and eager expectations for interest rate cuts, the Federal Reserve has initiated a rate cut as anticipated. This marks the first rate cut since the outbreak of the pandemic in 2020 and signals the end of the tightening cycle that began in March 2022 and paused in July 2023. However, the magnitude of the rate cut surprised the market, as an initial reduction of 50 basis points is historically rare, having only occurred in January 2001, September 2007, and March 2020 since the 1990s.

Key points from the meeting include: the first 50 basis point rate cut, with expectations of two more cuts within the year, totaling a reduction of 250 basis points; the emphasis that there are currently no signs of an economic recession and that the neutral interest rate has increased compared to pre-pandemic levels.

In conjunction with this unconventional 50 basis point cut, the Federal Reserve also adjusted its future rate cut expectations and economic data forecasts. Powell conveyed the following key messages in the post-meeting press conference:

1. The 50 basis point rate cut exceeded the expectations of many Wall Street investment banks, as such a significant cut typically occurs only in cases of economic or market emergencies.

2. Two more rate cuts are expected within the year, totaling 50 basis points, with four cuts amounting to a total of 100 basis points in 2025, and two cuts totaling 50 basis points in 2026, leading to an overall reduction of 250 basis points, with the terminal rate projected to be between 2.75% and 3%.

3. Powell emphasized that this rate cut should not be seen as a new baseline, as the neutral interest rate is significantly higher than pre-pandemic levels, implying that the final rate will be maintained at a higher position.

4. Powell noted that although the labor market has cooled, there are currently no signs of recession, and victory over inflation has not yet been achieved.

The market's reaction to this rate cut indicates that the Federal Reserve has indeed acknowledged the weakness in the labor market; the 50 basis point cut is a response to the market's calls. Additionally, the Federal Reserve is striving to project an image of being ahead of the market, indicating its readiness to take further action without wanting the market to feel uneasy due to concerns about a severe economic downturn.

In terms of trading strategy, it is recommended to focus on trading opportunities arising from the easing policy rather than recession trades. Investors should gradually shift from denominator assets (such as U.S. Treasuries and gold) to numerator assets (such as copper, U.S. stocks, and cyclical sectors). Short-term bonds, real estate chains, and industrial metals may be areas worth monitoring. The impact on China will depend on whether the rate cut policy can be effectively transmitted.

Historical experience shows that asset performance during a rate cut cycle can vary, so historical patterns cannot be simply applied to the current situation. In the current environment, U.S. Treasuries and gold may still have holding opportunities, but the upside potential is limited. If subsequent economic data shows minimal pressure, the market may shift towards recovery trades after the rate cuts, at which point short-term bonds, real estate chains, and copper may become focal points.