For the possibility of interest rate cuts in 2024, Federal Reserve officials have recently expressed different opinions, emphasizing that the decision should still be based on inflation data. But have you ever thought about whether a rate cut by the Fed is really good news for the market? From history, what can we discover?
(Previous Summary:
Fed’s megaphone: Stop paying attention to what Powell says, interest rate decisions are based on inflation data
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(Supplemental Background:
Interest rate cut rekindles: Initial jobless claims in the US reach an 8-month high of 231,000, Bitcoin surpasses $63,000, Ethereum reaches $3,000
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Table of Contents:
Two factions within the Federal Reserve
Comparison chart of S&P 500 and US interest rates
Short-term market volatility, long-term upward trend
The Federal Reserve (Fed) in its interest rate decision in early May
Continues to maintain the federal funds rate in the range of 5.25% to 5.5%, persistently high inflation has continuously reduced market investors’ optimistic expectations for rate cuts at the beginning of the year.
Earlier, Nick Timiraos, a reporter from The Wall Street Journal known as the “Fed’s megaphone,” pointed out in an article
That there are currently two factions within the Federal Reserve: one faction is concerned that maintaining interest rates at a high level for too long in the context of slowing inflation and wage growth could bring more pressure to regional banks, commercial real estate investors, and other industries.
The other faction believes that due to the strong economic performance, there is almost no need for rate cuts this year. They are concerned that when the Fed sets the inflation target at 2%, the inflation rate may stay far above 2.5%. Before considering rate cuts, they hope to have more evidence of an economic slowdown.
Further reading:
Report: Nearly 300 US banks face collapse! Bad debt storm caused by high interest rates
Overall, whether there will be a rate cut this year as scheduled still depends on further inflation data. However, it should be noted that although we usually view rate cuts as positive news because market investors tend to allocate funds to the risk market, is it really the case?
The chart below compares the S&P 500 and US interest rates since 1980. We can see that during the COVID-19 pandemic in 2020, the financial crisis in 2008, and the dot-com bubble in 2000, the index declined in sync with interest rates.
At that time, the Federal Reserve initiated rate cuts because there were more severe economic problems, forcing the Fed to inject liquidity, which was not good news for the investment market. Although the background of this rate cut may be just to return to normal, we cannot rule out the possibility that investors may sell assets due to potential expectations of an “economic recession”. Investors should not simply believe that rate cuts will always stimulate stock market growth based on the frenzy after the pandemic.
The market logic for initiating rate cuts is different each time, and the real situation still needs to be observed over time.
Therefore, I remind all investors that although historical data shows that rate cuts are usually positive for the market in the long term, the fermentation period may take months to years. Short-term volatility is difficult to predict, and the market may even reverse and decline.
So please manage risks well and do not blindly believe that the market will only go up and invest with leverage just because the Federal Reserve has actually initiated rate hikes.
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