The Fed has started a new round of interest rate cuts, how will asset prices unfold?

After a four-year hiatus, the Fed has once again initiated an accommodative monetary policy. On September 19, the Fed announced a reduction in interest rates by 50 basis points, lowering the federal funds rate target range to 4.75%-5.0%. This rate cut was in line with market expectations but exceeded predictions from many Wall Street investment banks.

Historically, a 50 basis point rate cut typically occurs during periods when the economy or markets are facing significant challenges, such as the tech bubble in 2001, the financial crisis in 2007, and the COVID-19 pandemic in 2020. To alleviate market concerns about an economic recession, Fed Chairman Powell emphasized in his speech that no signs of recession are currently observed.

The Fed simultaneously released a relatively hawkish dot plot for interest rate expectations. It is expected that there will be two more rate cuts this year totaling 50 basis points, four cuts in 2025 totaling 100 basis points, and two cuts in 2026 totaling 50 basis points, for a cumulative reduction of 250 basis points, with a terminal rate of 2.75%-3%. This rate-cutting path is slower than the market's expectations.

Powell emphasized that the 50 basis point rate cut should not be seen as a benchmark for future rate cuts. The Fed will determine its interest rate policy based on the specific circumstances of each meeting, potentially accelerating or slowing the pace of rate cuts, or even choosing to pause rate cuts. This partly explains the rise in U.S. Treasury yields following the announcement of the rate cut decision.

In terms of economic forecasts, the Fed has lowered its GDP growth expectation for this year from 2.1% to 2.0%, significantly raised its unemployment rate expectation from 4.0% to 4.4%, and reduced its PCE inflation expectation from 2.6% to 2.3%. This indicates that the Fed has increased confidence in controlling inflation while paying more attention to employment conditions.

Looking back at several rounds of interest rate cuts since the 1990s, they can be divided into two categories: preventive rate cuts and recessionary rate cuts.

Preventive interest rate cuts from July 1995 to January 1996: The Fed cut interest rates by a total of 75 basis points to guard against the risk of economic downturn. This ultimately achieved a "soft landing" for the economy, with recovery in employment and manufacturing indicators, while inflation remained stable.

From September to November 1998, the preemptive interest rate cuts: In response to the potential impact of the Asian financial crisis on the U.S. economy, the Fed cut interest rates by a total of 75 basis points.

Recessionary rate cuts from January 2001 to June 2003: The bursting of the internet bubble led to an economic recession, with the Fed cutting rates by a cumulative 550 basis points.

The recessionary rate cuts from September 2007 to December 2008: With the outbreak of the subprime mortgage crisis, the Fed cumulatively cut interest rates by 550 basis points and introduced quantitative easing for the first time.

From August to October 2019, the Fed implemented a series of preventive rate cuts: In response to economic downward pressure caused by trade frictions and other factors, the Fed cumulatively cut rates by 75 basis points.

The recessionary interest rate cut in March 2020: As the COVID-19 pandemic spread globally, the Fed urgently cut interest rates to near zero.

Analyzing the performance of asset prices during a rate cut cycle, it can be found:

U.S. Treasury bonds showed an overall upward trend before and after the rate cut, but the increase before the rate cut was more certain and larger in magnitude. About a month after the rate cut, volatility increased, and the long-term trend depends on the economic recovery.

The probability and magnitude of gold rising before interest rate cuts are usually greater. Since the launch of gold ETFs in 2004, the correlation between gold prices and interest rate cuts has strengthened. During the interest rate cut cycle in 2019, gold surged significantly after the first rate cut, followed by a period of oscillation and correction over the next two months.

The Nasdaq index performed poorly during recessionary rate cuts, but showed a long-term upward trend after preventive rate cuts. During the 2019 rate cut cycle, the Nasdaq experienced a pullback after the first two rate cuts and began to rise significantly around the time of the third rate cut.

In the interest rate cut cycle of 2019, Bitcoin experienced a brief surge after the first rate cut, then entered a downward channel, with a maximum retracement of about 50%. In contrast, before the current round of rate cuts, Bitcoin had already retraced in advance. In the future, it may experience fluctuations or slight retracements, but the magnitude and duration may be less than in 2019.

Overall, the key to judging the trend of asset prices lies in accurately grasping whether the economy is entering a recession. In the case of a soft economic landing, investors can pay more attention to the performance of asset prices during a preventive interest rate cut cycle, especially the recent experience of the 2019-2020 rate cut cycle.