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Fed interest rate cut divergence exposed! The world is closely watching September, is your wallet ready?


On July 10, 2023, Beijing time, the Fed released the minutes of the Federal Open Market Committee (FOMC) meeting held on June 17-18.
The minutes indicate that there is a divergence among the Fed officials regarding the future direction of monetary policy. Although most officials believe that "this year is suitable for a rate cut," the debate over the timing and magnitude is particularly intense.
Why does every move of the Fed attract such great attention? What is the logic behind the interest rate cut? Why is it said that the result of this interest rate cut will impact everyone's wallet?
Today, let's unravel the layers together and help you understand the underlying logic and potential impacts of this policy shift.
Why is the world closely watching the Fed for interest rate cuts?
The Fed's monetary policy is not only the "steering wheel" of the American economy but also the "main valve" of global liquidity. Its influence is reflected in three levels:
1. The "barometer" of the capital market: A Fed interest rate cut often means a decrease in market funding costs, making corporate financing easier, and risk assets such as the stock market and bond market may enter an upward cycle.
For example, after the 2008 financial crisis, the Fed continuously cut interest rates and initiated quantitative easing, directly driving the U.S. stock market into a ten-year bull market.
2. The "trigger" of exchange rate fluctuations: A rate cut may lead to a depreciation of the dollar, resulting in a relative appreciation of emerging market currencies, which in turn affects the profits of multinational companies and the global trade landscape.
After the Fed cut interest rates in 2020, currencies such as the Renminbi and Euro strengthened, attracting a large inflow of international capital into the Asian market.
3. Economic expectations as a "barometer": The Fed's decisions reflect its judgments on the economic outlook for the United States and even the global economy. If interest rate cuts are implemented, it may indicate a slowdown in the U.S. economic growth, and other economies around the world may also be forced to adjust their policies in response.
Why is the Fed considering a rate cut? Economic weakness or political pressure?
On the surface, the Fed's interest rate cuts seem to be a response to economic slowdown, but the deeper reasons are far more complex:
1. Divergence in economic data: Although the US unemployment rate remains low, signs of weakness in manufacturing and a slowdown in consumer momentum have raised concerns.
Goldman Sachs pointed out that the U.S. labor market "seems healthy, but the difficulty of finding a job is increasing." Seasonal factors and changes in immigration policy may further suppress job growth.
2. The "expectation game" of inflation: Fed Chairman Powell has repeatedly emphasized that "a drop in inflation is a prerequisite for interest rate cuts," but the minutes from the June meeting show that officials expect inflation to possibly rebound to 3% in the coming months.
This contradictory attitude reflects the dilemma of the policy - both to avoid runaway inflation and to fear a hard landing of the economy.
3. The Underlying Political Pressure: The Trump administration has recently been pressuring the Fed frequently, calling on Wednesday for the Fed to lower the federal benchmark interest rate by at least 3 percentage points to help reduce the cost of servicing the national debt.
However, in the face of pressure, Fed Chairman Powell has repeatedly stated on various occasions that he will not yield to political pressure when formulating monetary policy.
He insists that the Fed is in a favorable position to remain patient before obtaining more information amid strong economic growth and inflation uncertainties.
What chain reactions will the interest rate cut trigger?
Citi believes that despite last week's strong employment data from country M blocking the possibility of a rate cut in July, the consensus among Fed officials on cooling inflation is driving the process for a rate cut to start in September.
If the Fed really starts cutting interest rates in September, global markets may show the following trends:
1. Stock Market: Short-term euphoria coexists with long-term concerns. Goldman Sachs predicts that interest rate cuts will drive the S&P 500 index up by over 10% in the next 12 months, with technology stocks and the consumer sector likely to be the biggest winners. However, one must be wary of the risk of 'good news fully priced in'.
Deutsche Bank pointed out that if the interest rate cut is less than expected or economic data worsens, the market may fluctuate in the opposite direction.
2. US Dollar: Under the depreciation pressure, the "seesaw effect" may cause the US Dollar Index to fall below the 100 mark, while currencies like the Renminbi and Yen may strengthen temporarily, benefiting export-oriented economies such as China.
Emerging market assets (such as gold and Hong Kong stocks) will attract more capital inflows, but countries with high debt may face currency shocks.
3. Enterprises: Financing loosening and cost pressure coexist. The cost of issuing corporate bonds in the U.S. has decreased, and tech giants are expected to increase buybacks, but export companies may face profit losses due to the depreciation of the dollar.
The Fed's interest rate decisions have never been simply an "economic issue," but rather a complex game of economics, politics, and international relations.
For us, rather than speculating on the policy path, it is better to focus on two major anchors: the true direction of inflation data and the coordinated actions of global central banks. #美联储降息#
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