Fed's Rate Cut Lures Sages; Will It Reverse Course?
When the US dollar cuts interest rates, what will be the world's reaction? The outcome has disappointed the Federal Reserve.
Americans originally thought that people around the world would, as in the past, welcome the gift of the US dollar with joy, but nothing happened. This time, the US dollar's interest rate cut is different from all the previous cuts in history. So, when will the next US dollar interest rate cut occur?
The US dollar's interest rate cut has Americans on edge.
Historical experience has proven that interest rate cuts are the beginning of disaster.
The 2001 interest rate cut triggered the bursting of the internet bubble, with the Nasdaq evaporating 80% in two years; the 2007 interest rate cut was accompanied by the bursting of the US real estate bubble, leading to the subprime crisis; the 2020 interest rate cut triggered four circuit breakers in the US stock market, plunging 30%.
Americans have made a big mistake; they printed too many US dollars in the past few years. Today, the US looks prosperous everywhere, but in the eyes of professionals, there are dangerous bubbles everywhere.
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Especially in the US stock market and US debt, the glaringly obvious super bubbles have even scared away Warren Buffett. The old man is almost 100 years old, and he says he has never seen such a market. There is nowhere to hide, so he had to buy a bunch of Treasury bonds. The yield on those things is low, but at least they are safe.
The Federal Reserve's biggest concern is that the US dollar will flee too quickly, leading to a simultaneous collapse of the three major markets: the US stock market, the US dollar, and US debt. A great depression would ensue; if two of them collapse, an economic recession would come.
Powell's cold sweat is pouring down. What should be done?The Federal Reserve has once again deployed their signature move: controlling the pace of interest rate cuts, coupled with expectation management.
Thus, on September 19th, the Federal Reserve unexpectedly cut interest rates by 50 basis points directly, giving the impression of a rush to lower rates.
However, at the press conference following the interest rate meeting, Powell stated that there was no clear path for rate cuts, and whether or not to cut rates in the future, and by how much, would depend on economic data. He even suggested the possibility of pausing rate cuts, which is classic expectation management language.
Many have noticed that these two moves by the Federal Reserve are contradictory, or rather, they send completely opposite signals!
The initial 50 basis point rate cut by the Federal Reserve has only happened three times in recent decades, in 2001, 2007, and 2020, each time either during a major recession or a significant disaster.
However, this rate cut is not part of a narrative of economic recession, nor is it in response to a major disaster. Powell even stated forcefully on September 19th that there are no signs of recession in the U.S. economy from any perspective.
What exactly does the Federal Reserve intend to do?
The initial 50 basis point cut gives the impression of a rush to lower rates. Yet Powell's expectation management comments at the press conference give the impression that the rate cut plan is still uncertain.If a 50 basis point rate cut is considered a large hook, then Powell's speech on expectations management is the barb on that hook. This large hook is designed to entice global central banks to follow suit with rate cuts, especially the euro, pound, yuan, and yen. Why is that?
Because the Federal Reserve wishes to maintain the interest rate differential between the dollar and major currencies to prevent a rapid exodus of dollars, leading to a hard landing.
The barb in the expectations management speech is meant to seize dollar capital, implying that there is no need to rush out. The pace of dollar rate cuts has not yet been determined. Let's take a look at the US economic data together.
So, what was the outcome? Surprisingly, nothing happened!
Since disasters always start with the US stock market, many people stayed up late to watch the US stocks, but they were disappointed.
On September 19th, the US stocks fell first and then rose, with the three major indices closing higher. The Nasdaq Composite rose by 2.51%, the S&P 500 by 1.7%, and the Dow Jones Industrial Average by 1.26%.
The US Treasury yields also fell first and then rose. The benchmark 10-year Treasury yield reached a new high for the week, closing at 3.705%; the two-year Treasury yield, which is more sensitive to monetary policy, closed at 3.628%.
Both of these figures point to the same signal: dollar capital has not fled, or the loss is very limited.This conclusion is supported by two significant pieces of data.
The first piece of data comes from the Investment Company Institute in the United States, which shows that as of September 18th, U.S. money market assets decreased to $6.30 trillion, down from the previous value of $6.32 trillion. This marks the first outflow of funds since the end of July, but the outflow is very limited.
The second piece of data indicates that U.S. bank deposits for the week were $17.691 trillion, down from the previous week's $17.700 trillion, suggesting a similar outflow, but again, the loss is very limited.
Of course, one could argue that things don't happen that quickly, and it takes time for events to unfold. With U.S. interest rates still high, there is no need for everyone to rush.
The dam of the U.S. dollar has not collapsed all at once, has this fulfilled the Federal Reserve's wish? Of course not!
This only indicates that the hook's barb has taken effect, but no major central bank has taken the bait. Even the United Kingdom and Japan have announced in succession within two days that they will stand pat, followed by the People's Bank of China also declaring no interest rate cut.
A number of small country central banks have announced interest rate cuts, but they simply do not have the qualifications to compete for money and are not the targets of the Federal Reserve.
U.S. capital has not fled, and major central banks have not cut interest rates. The first cut of 50 basis points has lured out a bunch of old foxes.
This situation is too difficult. I feel for Powell for 100 seconds. Will the Federal Reserve make a U-turn? At the next interest rate meeting in November, will the Federal Reserve cut interest rates? Or will it pause the rate cuts? Or will it simply raise interest rates?We dare not guess anymore; Americans are too good at playing games. They will never let you guess the correct answer.