The Fed's interest rate policy is undoubtedly the most important factor affecting the price of assets on everyone's hands at present.
At 2 a.m. today, Powell announced that the Federal Reserve would cut interest rates by 50 basis points, while also hinting that future rate cuts would not come too quickly.
Hints are hints, but how the market interprets them is another matter. After all, there are many cases where plans cannot keep up with changes, and the world is just a makeshift team.
The rate cut is indeed good news, at least it indicates that the suffering since the rate hike in March 2022 is over. A new economic cycle has begun.
But my interpretation of the first 50 basis point cut may not be so optimistic.
Judging from the market alone, after the announcement of a 50 basis point interest rate cut, the bitcoin price only rose by 2%.
The interest rate cut has been implemented, but the buying is so weak, and more and more funds are even tending to wait and see, which is really despairing.
Let’s first talk about why the Federal Reserve wants to cut interest rates?
⑴The current global environment is one of interest rate cuts, and cutting interest rates now is in line with the trend.
⑵From a political perspective, except for the Bank of Japan which is going to raise interest rates, other places in the world are lowering interest rates. More importantly, other places have experienced recession to varying degrees. Both government bonds and other financial markets have performed very generally. Even if the Federal Reserve cuts interest rates now, capital has no better place to go and there will not be large-scale capital outflows.
Since there will not be a large-scale capital outflow, everyone is lowering interest rates.
So, can the Federal Reserve's direct 50 basis point interest rate cut really avoid possible subsequent problems?
I don't think so!
The Federal Reserve's interest rate decisions have a history of being strikingly similar, even down to the mistakes.
In recent years, the Fed has routinely raised and lowered interest rates. It lowered interest rates in response to crises, and then, when the industrial revolution came and economic growth and inflation exceeded expectations, it started raising interest rates again. The rate hikes led to an economic slowdown, and the Fed lowered interest rates again...
Does the script look familiar to you? Do you think I'm talking about the operations in recent years?
Then you are wrong, I was actually talking about the Fed’s operations in the 1990s.
Let's take a look at the data from the last 30 years:
1. 1989-1992: Dealing with the recession
- The United States experienced a savings and loan crisis and recession.
- The Fed has made significant interest rate cuts, 24 times in 40 months, a cumulative reduction of 681 basis points.
2. 1994-1995: Economic recovery and interest rate hikes
- Strong economic recovery and rising inflationary pressures due to interest rate cuts, globalization and the Internet revolution.
- The Federal Reserve started a cycle of interest rate hikes, with seven rate hikes in one year, a cumulative increase of 300 basis points.
- The federal funds rate increased from 3.50% to 6.00%.
3. Second half of 1995: Short-term interest rate cut
- The economic growth slowed down and the Fed took precautionary measures.
- A cumulative rate cut of 75 basis points in 7 months.
Up to this point, it feels like the script from more than 20 years ago is so similar to this one, doesn’t it?
Let’s continue reading:
4. 1997: Small rate hike
- The economy continues to grow and inflationary pressures re-emerge.
- The interest rate was raised by 25 basis points in March, intending to start a new round of interest rate hikes.
5. 1998: Responding to the Asian financial crisis
- The Asian financial crisis breaks out, threatening the global economy.
- The Fed cut interest rates three times in two months, a total of 75 basis points.
6. 1999-2000: The end of the economic boom
- The economy continued to grow strongly and a bubble in technology stocks formed.
- The Fed begins its rate hike cycle again.
If we were to summarize the macroeconomic and Fed policies from the 1990s to 2000, in simple terms, under the multiple influences of globalization and the Internet industry revolution, the economic momentum was strong, and short-term corrections did not affect the long-term trend. The Fed only responded to short-term macro signals and adjusted relevant policies. Some believe that it was this short-sightedness of the Fed that became one of the reasons for the Internet bubble.
History and reality are strikingly similar, which may not be a coincidence. We cannot expect Federal Reserve officials to be macro-political experts and technical trend masters at the same time. They are still doing what they are good at very professionally: responding to short-term macro signals.
The background of the industrial revolution is also extremely similar. In the 1990s it was the Internet revolution, and now it is the AI revolution.
The difference is that the breadth, depth and length of the AI revolution may far exceed the Internet revolution.
It is foreseeable that the Fed’s policy will most likely not be as most people expect, there will most likely be reversals, and the Fed will most likely make mistakes.
The Fed’s interest rate cuts were mostly initiated when the U.S. stock market plummeted. The first rate cut was 50 basis points, which was the third time in the Fed’s history.
The first two times: On January 3, 2001, the Fed cut interest rates by 50 basis points, from 6.5% to 6.0%. At that time, it was a famous economic recession - the "Internet bubble".
On September 18, 2007, the Fed cut interest rates by 50 basis points, reducing the federal funds rate from 5.25% to 4.75%. At that time, it was the famous economic recession - the "subprime mortgage crisis".
The same thing as now is that interest rates continued to be high in 2001 and 2007. One difference is that there was no quantitative easing tool at that time. QE is a monetary policy that was started after the subprime mortgage crisis spread in 2008. Therefore, after the continued high interest rates, the interest rate cuts were relatively large. Now, the Federal Reserve can cut interest rates + appropriate QE for comprehensive regulation, so there is no need to cut interest rates drastically in the early stage.
The first interest rate cut is 50 basis points, which is equivalent to admitting the economic recession and even the economic crisis. A 50 basis point interest rate cut is likely to create anxiety in the market, which will not only affect speculative markets such as the currency market and US stocks, but also have a certain impact on the real economy. The expectation of economic recession will cause consumers to reduce spending, and producers will not dare to expand production too vigorously, which may further aggravate the economic recession.
So how will the financial market, which follows economic trends, perform? Let us wait and see!
