The Fed's interest rate cut: A Turning Point and New Game in the Global Financial Market

In September 2025, global financial markets are holding their breath, awaiting a crucial turning point - the Federal Reserve is set to finalize its interest rate cut decision at its meeting on September 17th and 18th. According to the latest data from CME's "FedWatch", the probability of a 25 basis point interest rate cut in September has soared to 99.4%, and international investment banks such as UBS predict that the Federal Reserve will embark on a "four consecutive rate cuts" cycle, with a cumulative rate cut of 100 basis points within the year. This policy shift, after a four-year gap, not only marks the shift of the US monetary policy from tight to loose, but will also reshape global capital flows, asset pricing and risk appetite, becoming the core variables of the global financial market in 2025.

I. The Economic Logic Behind the Interest Rate Cut: The "Double Game" between the Job Market and Inflation

The core driving force behind the Federal Reserve's interest rate cut this time stems from the dual signals of a slowdown in the job market and easing inflationary pressure. In July 2025, the number of non-farm jobs added in the United States was only 73,000, far below the market expectation of 110,000 to 130,000. Moreover, the data for May and June were significantly revised down by 258,000 positions, indicating that the deterioration of the labor market has exceeded expectations. Meanwhile, core PCE (Personal Consumption Expenditures) rose to 2.9% year-on-year in July, while overall PCE remained stable at 2.6%, both in line with the Federal Reserve's judgment that "inflation continues to return to the target". Although the tariff policy has led to an increase in the prices of some goods, Federal Reserve Chair Powell made it clear that the tariff effect is more of a "one-off price adjustment" rather than a long-term inflation driver.

This combination of "rising downside risks to employment and temporarily controllable inflation" has forced the Federal Reserve to tilt its policy balance towards employment. Ubs analysis points out that if the wave of layoffs intensifies, the unemployment rate may quickly exceed the natural unemployment rate (about 4.4%), thereby triggering an economic recession. Therefore, the interest rate cut in September is not only a preventive measure but also leaves room for adjustment in subsequent policies. If economic data deteriorates further, the Federal Reserve may need to continue cutting interest rates in December and January 2026 to avoid a "hard landing".

Ii. Global Capital Reallocation: The "Reversal of Offense and Defense" between Emerging Markets and US Dollar Assets

The Fed's interest rate cut will directly change the return-risk ratio of global capital and trigger a new wave of asset reallocation. From historical experience, once the interest rate cut cycle begins, the appeal of US dollar assets declines, and international capital tends to flow to emerging markets in search of higher returns. During the period from 2019 to 2020 when the Federal Reserve cut interest rates, the A-share market witnessed A structural bull market due to the global liquidity glut, with the chinext Index rising significantly. In the first half of 2025, foreign capital research targets have been concentrated in growth sectors such as China's electronics and medical and biological industries, indicating signs of early capital layout.

However, this round of capital flows is confronted with two major variables: one is geopolitical risks, and the other is the global trend of "de-dollarization". Recently, the Swiss National Bank, ASEAN, BRICS countries and other parties have sent out signals of reducing reliance on the US dollar, hedging against the risk of US dollar fluctuations through local currency settlement, diversification of gold reserves and other means. Sovereign wealth funds such as New Zealand's superannuity fund have shifted their investment focus from US stocks to European stocks, reflecting a cautious attitude towards the long-term prospects of US dollar assets. Against this backdrop, although the Fed's interest rate cut will push up asset prices in emerging markets, the sustainability of capital inflows will depend on the economic fundamentals and policy stability of each country.

Iii. Gold: The "Eternal Winner" in the Interest Rate Cut Cycle

Among all asset classes, gold may become the biggest beneficiary of the Federal Reserve's rate-cutting cycle. Its price-driven logic can be summarized as a "triple model" : First, the real interest rate declines. Cutting interest rates lowers the nominal interest rate, and at the same time, it may raise inflation expectations. The two jointly squeeze the real interest rate and reduce the cost of holding gold. Second, the depreciation of the US dollar. Gold is priced in US dollars, and a weaker US dollar will directly push up the gold price. The third is the demand for risk aversion. If the interest rate cut is triggered by an economic recession, the decline of risky assets such as stocks will prompt funds to flow into gold to hedge against risks.

Historical data shows that during the four interest rate cut cycles in 1995, 2001, 2007 and 2019, the average increase in gold prices reached 28.3%, and there was never a negative return. Currently, if the Federal Reserve cuts interest rates by a cumulative 100 basis points, the real interest rate may fall below 1.0%, corresponding to a gold price target of $2,250 to $2,300 per ounce. Ubs has maintained its forecast of $3,700 per ounce until the end of June 2026, highlighting institutional confidence in the long-term bullish outlook for gold.

The start of the Federal Reserve's interest rate cut cycle is not only a necessary measure to deal with the economic slowdown but also a catalyst for the reshaping of the global financial system. For investors, it is necessary to be vigilant against short-term fluctuations of "buying expectations and selling facts", while seizing the opportunities of medium and long-term asset reallocation. For China, it should seize the window of external easing, stabilize domestic demand through policy coordination, and avoid over-reliance on external liquidity. For the global market, how to balance growth and risk in a loose cycle will become the core issue in the next three years. In this new financial game, only by making dynamic adjustments and forward-looking layouts can one gain the upper hand in the transformation.