What impact will the Fed's overnight interest rate cut have?

On June 30th, Raphael Bostic, the president of the Atlanta Federal Reserve Bank, stated that tariffs might have a gradual impact on prices rather than a one-time shock, which could lead to more persistent upward pressure on inflation. Bostic said at an event: "This risk will permeate the psychology of consumers and business leaders." Chair Powell emphasized that "there is no rush to cut interest rates," and it is necessary to observe the potential impact of tariff policies on inflation; Richmond Federal Reserve Bank President Barkin pointed out that core inflation is still above the 2% target, the unemployment rate is at a low level, and there is no urgency for a rate cut; San Francisco Federal Reserve Bank President Daly believes that a rate cut in the autumn is more appropriate, unless there is a major recession in the labor market. On the evening of June 30th, the US stock market continued to rise, with the Dow Jones index rising by over 200 points, the Nasdaq and S&P 500 indices rising by approximately 0.3% on top of the record high set in the previous trading day. At 3:00 PM in New York, the Dow Jones index rose by 432 points, and the S&P 500 and Nasdaq indices simultaneously set new historical closing records. Nike's stock price soared by 15%, most technology stocks were red, and everything seemed to be improving.

The Fed's overnight major move has brought complex and multi-faceted impacts on the economy, finance and other fields. First, it has an impact on the US economy. The rate cut stimulates corporate investment and consumer spending by reducing financing costs. For example, after the Fed cut interest rates three times in 2024, although the GDP growth rate in the third quarter declined slightly, consumer spending remained resilient, real estate activity was weak but not collapsed, and the overall economy showed a "soft landing" feature. The scale of US Treasury bonds has reached 3.5 trillion US dollars, and the rate cut can reduce interest expenses and alleviate fiscal pressure. At the same time, the cost of corporate financing decreases, which helps improve balance sheets and promote capital flow back to industries. The rate cut may push up inflation, especially if the Trump administration implements tariff policies, it will exacerbate the input inflation pressure. The Fed needs to find a balance point between "cooling the job market" and "inflation stickiness". For example, after the Fed cut interest rates in December 2024, the Fed's dot plot showed that there would be only two rate cuts (50 basis points) in 2025, which was significantly reduced from the previous expectation, reflecting the Fed's vigilance against inflation rebound.

Second, it has an impact on the financial market. The rate cut usually leads to a depreciation of the US dollar and capital flowing to high-yield markets. After the Fed cut interest rates, the three major US stock indices all plunged, such as on December 18, 2024, the Dow Jones index fell for 10 consecutive trading days, setting a record for the longest consecutive decline since 1974, the Nasdaq plunged by over 3.5%, and the S&P 500 index experienced the largest Fed interest rate announcement day decline since 2001. However, if the rate cut pace slows down or pauses, the US dollar may rebound, exacerbating capital flow back to the US. In the early stage of the rate cut, US stocks rose due to the decline in financing costs, but if the rate cut expectation fails or economic data deteriorates, the stock market may correct. For example, after the Fed cut interest rates by 25 basis points in December 2024, US stocks plunged due to "hawkish signals," with the Dow Jones index falling by over 1.5%. US bond yields declined, but if inflation expectations rise, yields may rebound. After the Fed cut interest rates in December 2024, the 10-year US bond yield reached a four-week high, reflecting market concerns about future policy tightening. The rate cut usually pushes up the price of gold, but a stronger US dollar or rising real interest rates may suppress the rally. In addition, the Fed's rate cut cycle may accelerate the "de-dollarization" process. In 2024, BRICS countries expanded the scale of local currency settlement, and the internationalization of the RMB accelerated. In the long term, this may weaken the US hegemony, but in the short term, it is difficult to shake the dominant position of the US dollar.

In conclusion, the Fed's overnight rate cut is like a "deep water bomb" thrown into the financial market, causing ripples in multiple fields such as the stock market, bond market, foreign exchange market, commodity market and global capital flows. The subsequent trend of the financial market will be highly dependent on the subsequent policy pace of the Federal Reserve, the performance of US economic data, and changes in the global economic situation. Investors need to closely monitor the developments and flexibly adjust their strategies to move steadily in this volatile market.