Just moments ago, at 2 a.m. on September 19th Beijing time, the Federal Reserve announced a rate cut of 50 basis points!

After the rate cut, the target range for the federal funds rate is between 4.75% and 5.00%.

This rate cut exceeds the predictions of most economists!

It also implies that the Federal Reserve is more resolutely standing on the side of the Democratic candidate, He Jinli.

This is the first rate cut by the Federal Reserve in four years.

The Federal Reserve's FOMC statement indicated that confidence in inflation has increased, and inflation is moving towards 2%; the risks to employment and inflation targets are in a balanced state.

The Federal Reserve's dot plot shows that the median expectation for the federal funds rate at the end of 2024 is 4.4%, implying that there will be another rate cut of 25 basis points before the end of the year.

Advertisement

The Federal Reserve has raised its expectation for the U.S. unemployment rate in 2024 to 4.4% and lowered its expectation for the U.S. GDP growth in 2024 to 2.0%.

Affected by the news of the rate cut, the three major U.S. stock indices have seen an increase in their rise, gold prices have reached new highs, and the offshore RMB exchange rate has hit a recent high.

Below, we will understand this rate cut through 10 paragraphs.

1.

This rate cut signifies that the U.S. has entered a new round of the rate-cutting cycle.

The chart below shows the trend of the U.S. dollar interest rate over the past 60 years, which has been continuously declining.

The rebound in recent years was caused by the massive monetary easing after the COVID-19 pandemic, with the Federal Reserve raising interest rates 11 times in a row.

In the next few years, U.S. interest rates will gradually decline, returning to the era of ultra-low interest rates before the pandemic.

2.

The U.S. has started a new round of the rate-cutting cycle, breaking the ceiling of China's monetary policy, giving us a greater space for rate cuts.

In the past few years, there has been a rare inversion of interest rates between China and the U.S., with China's 10-year government bond yield being about 200 basis points lower than that of the U.S. To reduce capital outflows from China, China's rate cuts have been small and limited in scope.

After the dollar starts the rate-cutting cycle, China will have a greater space for rate cuts in the next few years, and the era of low interest rates is coming.

3.

The Federal Reserve's rate-cutting cycle is a positive for China.

It increases the space for China's monetary policy, which is beneficial for the real estate market, stock market, and economy.

However, whether A-shares have bottomed out depends on the real estate market; whether the real estate market has bottomed out depends on the economy; and whether the economy has bottomed out depends on whether the monetary and fiscal policies are strong enough.

China needs to issue more government bonds, invest in effective large infrastructure, encourage consumption, and also needs to have a larger scale of rate cuts and reserve requirement ratio cuts.

4.

In the next two to three years, China's LPR (Loan Prime Rate) has a rate-cutting space of 80 to 100 basis points.

We must first pay attention to whether China's LPR will cut interest rates at 9:15 a.m. tomorrow (September 20th).

China has at least one opportunity to cut interest rates and reserve requirements before the end of the year.

After the LPR rate cut, the public fund loan interest rate may also be cut.

5.

Will China's existing housing loan interest rates be comprehensively reduced (beyond the loan contract agreement)?

The chances are relatively high, and there may be news in the next two months.

Recently, the "Securities Daily" hosted by the "Economic Daily" has openly discussed the possibility in the reporter's review.

Bloomberg has also published several short essays.

Let's wait for the official announcement.

6.

Recently, the RMB has appreciated significantly against the U.S. dollar.

How will the exchange rate go after the dollar is cut?

Will the RMB break 7?

I believe that around the U.S. election, the RMB will continue to maintain strength with the help of factors such as the dollar rate cut, and it is not ruled out that the RMB exchange rate against the U.S. dollar will break 7.

The RMB exchange rate is currently undervalued, and as long as China and the U.S. do not break, the RMB exchange rate will most likely maintain strength and stability in the future.

7.

In the next two years, the dollar has a greater rate-cutting space than the RMB.

This is conducive to maintaining the strength of the RMB exchange rate.

In addition, the official has proposed to prevent "involution" vicious competition, which means that if there are no major changes in the international situation, the RMB exchange rate will also maintain stability, and the practice of stimulating exports through devaluation will not appear in the short term.

8.

How will the U.S. election affect the RMB exchange rate and China's economic recovery?

If Trump is elected, he will intervene in monetary policy, and the Federal Reserve will speed up the pace of rate cuts; He Jinli will let the Federal Reserve decide for itself.

Trump has already threatened to impose a comprehensive 60% tariff on Chinese goods after taking office, which will trigger a new round of Sino-U.S. trade war, and may cause the RMB to fluctuate abnormally and depreciate; if He Jinli takes office, the RMB exchange rate will most likely maintain stability and strength.

9.

The latest financial data, investment data, consumption data, real estate data, etc., all indicate that the economy needs to "rev up" again.

After the Federal Reserve's rate cut until the end of the year, it will be a stage for China's macro policy to exert force to sprint to complete the annual target.

As for China's real estate market, there may be big news on September 30th and a few days before.

10.

After the dollar is cut, how will the U.S. stock market, U.S. bonds, and the dollar exchange rate go?

Historically, the performance of these assets after each rate cut is different, depending on what stage the U.S. economy is in at the time.

If it is after a technological revolution and is in a vibrant period, the rate cut will allow the stock market to continue to rise, and the dollar to appreciate; on the contrary, the rate cut confirms that the economy is not good, and within half a year or one year after the first rate cut, the stock market will fall back, safe-haven funds will flow into the bond market, and the dollar will depreciate.

The market's view on the trend in the next half to one year is quite divided.

My view is that the U.S. economy seems to be in a period of excitement after a new round of technological revolution (such as artificial intelligence), and there is no obvious sign of recession.