On March 18th local time, the Federal Reserve of the United States (hereinafter referred to as "the Fed") announced that it would lower the target range for the federal funds rate by 50 basis points to 4.75%-5%, marking the first rate cut since 2020.

This unexpected rate cut comes as a surprise to the market, especially against the backdrop of the Fed's consecutive 11 rate hikes from March 2022 to July 2023, with a cumulative increase of 525 basis points, which makes it particularly abrupt.

However, looking at macroeconomic data, the Fed's move is not without precedent.

The latest data shows that inflationary pressures have eased, with the U.S. Consumer Price Index (CPI) rising by 2.5% year-on-year in August, reaching a new low since February 2021, close to the Fed's 2% inflation target.

Advertisement

Although the inflation rate has fallen, the core inflation rate remains at a relatively high level, indicating that price pressures have not completely disappeared.

However, considering the uncertainty of the global economic environment, especially the potential impact of geopolitical tensions on energy and commodity prices, the Fed chose to act during the window of easing inflationary pressures to avoid greater fluctuations that may arise in the future.

The momentum of economic growth has weakened.

The main driver of U.S. economic growth, personal consumption expenditure growth, is slowing down.

According to data released by the U.S. Department of Commerce, the growth in personal consumption expenditure in August was only 0.1% month-on-month, far below the market expectation of 0.3%.

In addition, manufacturing activity has been in a contraction range for several consecutive months, with the ISM Manufacturing PMI index remaining below the 50 threshold for four consecutive months, indicating a continued contraction in manufacturing activity.

In terms of the labor market, although the unemployment rate remains at a low level, the number of new jobs in the private and non-farm sectors has declined significantly month by month.

The number of new non-farm jobs in August was only 187,000, below the expected 200,000.

These data reflect that the U.S. economy is facing multiple challenges, and the momentum of growth has clearly weakened.

The uncertainty of the global economic environment is also an important factor that prompts the Fed to cut interest rates.

Recently, the International Monetary Fund (IMF) has lowered its global economic growth forecast for 2023, expecting the global GDP growth rate to drop from 3.2% in 2022 to 2.9% in 2023.

Major economies such as Europe and Japan are facing varying degrees of economic downward pressure.

Against this background, as the world's largest economy, the United States' policy adjustments have significant global impact.

The Fed's interest rate cut is conducive to stabilizing the global financial market, easing international trade tensions, and promoting the recovery of the global economy.

Despite the Fed's intention to stimulate economic growth through interest rate cuts, the market response has not been positive.

After the announcement of the rate cut, the three major U.S. stock indexes all fell, with the Dow Jones Industrial Average falling by more than 300 points, and the S&P 500 and the Nasdaq Composite Index falling by 1.2% and 1.6% respectively.

This phenomenon seems contradictory, but from an economic perspective, there is a reasonable explanation.

Interest rate cuts are usually seen as a signal of economic weakness, and market participants may lower their expectations for future economic growth as a result, leading to a decline in risk appetite.

Investors, facing an uncertain environment, tend to take shelter, reduce investment in high-risk assets, and increase the allocation of low-risk assets such as bonds.

This behavior pattern will put pressure on the stock market in the short term, especially high-value stocks such as technology stocks are more susceptible to impact.

The effect of monetary policy has a certain lag, and the stimulating effect of interest rate cuts on the economy needs time to be reflected.

In the short term, the market pays more attention to the performance of current economic data rather than the future policy effects.

Therefore, even if the Fed has taken interest rate cut measures, the market may still worry about the current economic situation, leading to a fall in the stock market.

The Fed's interest rate cut beyond market expectations may lead market participants to reassess the future interest rate trend.

If the market expects an increased possibility of further interest rate cuts in the future, long-term interest rates may fall, which is detrimental to industries sensitive to interest rates such as bank stocks.

In addition, interest rate cuts may lead to the devaluation of the U.S. dollar, which is beneficial to export-oriented companies but has a negative impact on import-dependent companies.

This complex transmission mechanism makes it difficult for the market to form a consistent expectation in the short term, leading to stock market fluctuations.

The impact of the Fed's interest rate cut on the global financial market is not only on the U.S. domestic financial market but also has a broad impact on the global financial market.

Interest rate cuts usually lead to the devaluation of the local currency.

After the Fed's interest rate cut, the exchange rate of the U.S. dollar against other major currencies may fall.

This will be beneficial to U.S. exports, but it may also trigger competitive devaluation by other countries, intensifying global trade frictions.

At the same time, the devaluation of the U.S. dollar will reduce the price of commodities priced in U.S. dollars, which is detrimental to resource-exporting countries.

Interest rate cuts may lead to capital outflow from the United States in search of higher-yield investment opportunities.

Emerging market countries may benefit from capital inflows, but they also need to be alert to the risk of asset bubbles brought by capital inflows.

In addition, capital outflows may exacerbate the liquidity tension in the U.S. domestic financial market, having a negative impact on the credit market and the real estate market.

The Fed's interest rate cut may trigger a chain reaction of global central banks.

Some central banks may follow the Fed's interest rate cut to maintain the competitiveness of their own currencies.

This global easing of monetary policy is conducive to easing the downward pressure on the global economy, but it may also increase the global debt level and increase the fragility of the financial system.

The impact of the Fed's interest rate cut on China's A-shares and the RMB exchange rate is more complex.

In the short term, the interest rate cut may boost market sentiment, especially benefiting export-oriented industries and industries sensitive to interest rates (such as real estate, finance, etc.).

However, in the medium and long term, the performance of the A-share market depends more on domestic economic fundamentals and policy environment.

If China's economy can maintain robust growth, the A-share market is expected to usher in more investment opportunities.

The Fed's interest rate cut will lead to the devaluation of the U.S. dollar and the appreciation of the RMB.

The appreciation of the RMB is not conducive to export enterprises, but it is beneficial to import enterprises and consumers.

At the same time, the appreciation of the RMB will attract more foreign capital inflows, enhancing the attractiveness of China's financial market.

However, the fluctuation of the RMB exchange rate also needs to consider domestic economic conditions and policy adjustments, and cannot rely solely on external factors.

In summary, the Fed's unexpected interest rate cut this time is a decision made on the basis of comprehensively considering factors such as easing inflationary pressures, weakening economic growth momentum, and the uncertainty of the global economic environment.

Although the interest rate cut has not boosted the U.S. stock market in the short term, its positive impact on the global economy cannot be ignored.

For China, the Fed's interest rate cut brings both opportunities and challenges.

China should continue to adhere to the general tone of steady progress, strengthen the coordination and cooperation of macro policies, and promote high-quality economic development.