Fed initiates a new round of rate cut cycle. How will asset prices change?

The Fed announced a 50 basis point rate cut on September 19, lowering the target range for the federal funds rate to 4.75%-5.0%, officially starting a new round of rate cuts. This rate cut exceeded the expectations of most Wall Street investment banks but aligned with the forecasts from CME interest rate futures. Historically, the first 50 basis point cut usually occurs when the economy or markets face significant challenges, such as during the 2001 tech bubble, the 2007 financial crisis, and the 2020 COVID-19 pandemic.

The Fed simultaneously released a relatively hawkish dot plot, expecting to cut interest rates twice this year for a total of 50 basis points, four times in 2025 for a total of 100 basis points, and twice in 2026 for a total of 50 basis points, resulting in an overall reduction of 250 basis points, with a terminal rate of 2.75%-3%. This rate-cutting path is slower than the CME interest rate futures trading expectation of reaching the 2.75%-3% level by September 2025.

The Fed has lowered its GDP growth forecast for this year from 2.1% to 2.0%, significantly raised its unemployment rate forecast from 4.0% to 4.4%, and downgraded its PCE inflation forecast from 2.6% to 2.3%. These data adjustments indicate that the Fed is more confident in controlling inflation while paying more attention to employment conditions.

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

1. Recessionary rate cuts from 1989 to 1992: In response to the savings and loan crisis, a total of 681.25 basis points were cut.

2. Preventive interest rate cuts in 1995-1996: In response to the economic growth slowdown, a total of 75 basis points were cut.

3. 1998 Preventive Interest Rate Cuts: In response to the impact of the Asian financial crisis, a cumulative reduction of 75 basis points.

4. 2001-2003 Recessionary Rate Cuts: In response to the burst of the Internet bubble, a total of 550 basis points were cut.

5. 2007-2008 Recession-style Rate Cuts: In response to the subprime mortgage crisis, a cumulative rate cut of 550 basis points.

6. 2019 Preventive Rate Cuts: In response to the risks of global growth slowdown, a total of 75 basis points were cut.

7. 2020 Recessionary Rate Cuts: In response to the impact of the COVID-19 pandemic, interest rates were lowered to near zero.

Different types of interest rate cut cycles have varying impacts on the prices of different assets. In preemptive rate cuts, U.S. Treasuries and gold usually see larger gains before the cut, reflecting the market's anticipation of the rate cut. The Nasdaq index tends to trend upward in the long term after a preemptive rate cut, but short-term performance varies. Bitcoin underwent a prolonged adjustment during the interest rate cut cycle in 2019.

Considering that the current U.S. economic data does not support a recession judgment, investors can focus on the asset price trends during the preventive rate cut period from 2019 to 2020. Overall, after the rate cut cycle begins, asset price trends will depend more on changes in the economic fundamentals and the effects of policies.