Fed cuts interest rate suspense?

Since the introduction of the rate hike in July 2023, the Federal Reserve has kept the policy interest rate at the highest level in nearly 20 years. Of the 19 Fed officials who provided data on interest rate forecasts, 15 predicted rates would fall below 5.0% in 2024. There are forecasts that the Fed may raise rates by 25 basis points in July 2024, but it may cut rates by 25 basis points in November and December. At the same time, market data also supported the Fed's interest rate cut expectations. For example, the April CPI data in the United States showed that the market expected the pace of interest rate cuts by the Federal Reserve in 2024 to accelerate, and the bet that the Federal Reserve will cut interest rates in September and December increased sharply.

However, such forecasts do not form the basis for any investment decisions. But the Fed's "third in charge", New York Fed President John Williams, believes that the Fed's next move is likely to be lower interest rates. But after Fed Chairman Powell spoke at a press conference, Williams immediately said publicly that "it is too early to consider the timing of interest rate cuts." Dovish Atlanta Fed President Bostic said the Fed can't wait for inflation to hit 2 percent before cutting rates, which is the strategy behind the rate cuts, with two expected in the second half of 2024. Mr. Bostic is one of the few dovish officials to give a direct estimate of the number of rate cuts. By contrast, more opposing views are emerging. But in any case, the risk will spread to many areas.

First, the exchange rate impact, interest rate cuts will reduce the yield of the US dollar, at the same time, the US dollar relative to other high-yield currencies, attractiveness will be greatly reduced, which may lead investors to transfer funds to other high-yield currencies, which will lead to a rapid decline in the US dollar exchange rate, this year, the central bank of the relevant countries are also planning policies and measures to respond to the Federal Reserve may introduce interest rate cuts.

Second, the impact of the stock market, interest rate cut is usually considered as one of the factors favorable to the stock market, due to the decline in interest rates, may increase the liquidity of funds in the market, increase more financial support for the stability and income of the stock market, the return rate of fixed income assets may be significantly reduced, investors will turn to the stock market to seek a higher rate of return. It has greatly increased the attraction of the stock market for investors, thus greatly improving the profitability and profit space of the stock market.

The third is the impact of enterprises, interest rate cuts help reduce borrowing costs and difficulties, can greatly reduce the financing difficulties and costs of enterprises, encourage enterprises to expand production and investment, stimulate economic growth, thereby improving the level of consumption and investment, and promote the growth of corporate profits, further promote economic growth. At present, if the Federal Reserve does not introduce interest rate reduction policy, the impact on the economy will not have a good side, since entering the high interest rate, the competitiveness of some enterprises in the United States has shown a very obvious downward trend, under the pressure of high interest rates for a long time, the resistance of enterprises, especially corporate innovation, is very large.

Looking at the history of the Fed's interest rate cuts, it is an extremely complex economic decision-making process. To be sure, when the Fed decides whether to cut interest rates, it needs to take into account a number of factors and policy considerations to formulate a sound investment strategy. In addition, the Fed also needs to monitor global economic conditions and policy developments, as well as monetary policy coordination with other major central banks. Some economists worry that keeping U.S. interest rates at their highest level in more than two decades could weaken job growth and tip the economy into recession. So investors should pay close attention to the Fed's policy moves and market reactions, taking into account a number of factors, such as economic growth, inflation, employment, and financial market stability.