The Fed Cuts Interest Rates, What Should Investors Buy?

The Federal Reserve's decision on how much to cut interest rates has finally been unveiled today, causing significant market fluctuations. Without further ado, let's delve into the details of this watershed meeting. At 2 PM, the Fed released its statement and the dot plot for September. In the statement, the Fed announced a rate cut of 50 basis points, rather than the 25 basis points many had anticipated. Moving forward, it's essential to dissect some of the nuances in the Fed's report to gain a deeper understanding of this pivotal policy shift.

Firstly, in the opening paragraph, the Fed noted that job growth has "slowed," as opposed to the previous term "moderated." Although similar in meaning, "slowed" conveys a more definitive stance. In the second paragraph, the Fed indicated that the committee has greater confidence in inflation's sustained return to 2%, with risks to employment and inflation targets being broadly balanced. Previously, there was no such expression of confidence in inflation, and the risks were described as "tilting toward balance." This reflects a more resolute policy shift by the Fed. In the third paragraph, the Fed reiterated the progress on inflation and the two-sided risks, and in the final sentence, added that the committee would support full employment. Notably, this decision was not unanimously agreed upon; Governor Bowman cast the dissenting vote, preferring a 25 basis point cut. This marks the first disagreement in the voting on a meeting in over two years.

On the dot plot, officials projected that by the end of this year, the interest rate would fall to 4.4%, implying a total rate cut of 100 basis points within the year. However, there is still a clear divergence, with nine officials above 4.4% and ten officials at or below 4.4%. This means that we cannot entirely rule out the possibility of three rate cuts by the end of the year. For next year, officials forecast that interest rates would drop to 3.4%, suggesting another 100 basis point cut. This part is more optimistic, as more officials are below the median, indicating a higher likelihood of a cut exceeding 100 basis points next year. Given the uncertainty before the meeting, this outcome has exceeded market expectations.

In addition to the interest rate levels, officials also projected that the unemployment rate would rise to 4.4% by the end of the year, 0.4% higher than in June, and would remain so until the end of next year, with a slight decrease of 0.1% in 2026. The PCE is expected to fall to 2.3% within the year, and the core to 2.6%, both 0.2% lower than in June. Given these results, the market's focus has shifted to why Powell and his team decided on a 50 basis point cut. Should we expect more substantial rate cuts in the future? What will the Fed be watching?

Let's look at what Powell said in the subsequent press conference. In summary, the key word in Powell's speech was "Recalibration," readjusting. In his prepared remarks, Powell addressed why this decision was made, stating that based on the latest data, the August PCE had already fallen to 2.2%. The decision to cut rates by 50 basis points was to recalibrate policy, as only then would the committee have more confidence in maintaining the current labor market and the process of inflation falling.

The Fed's stance this time is more dovish than expected, and its attitude in supporting the economy is more resolute, which is good news for our future economic and US stock market trends. Combined with the current economic environment and guidance, we believe that a "soft landing" in the US remains the base case, and the subsequent path is more likely to show a gradual rate cut.

In terms of US stocks, rate-sensitive assets such as small and medium-sized stocks, cryptocurrencies, and others are expected to benefit first and can be traded in waves. The subsequent performance will need to track future economic data releases. If economic data show continuous improvement, risk assets are expected to perform better.