On Wednesday local time, the Federal Reserve announced a 25 basis point interest rate cut, lowering the federal funds rate target range to 2.00%-2.25%, in line with market expectations and marking the first interest rate cut since the end of 2008.
1. The Federal Reserve officially announced an interest rate cut
From the Federal Reserve’s regular meeting in June, the congressional mid-year hearing in early July, to the Group of Seven (G7) finance ministers’ meeting held in France last week, Chairman Powell all hinted at an important Signal - The Federal Reserve is about to cut interest rates at the end of this month.
Since 2015, in view of the fact that the U.S. economy has gradually emerged from the haze of the subprime mortgage crisis , the Federal Reserve, as the central bank, has adopted a currency normalization strategy in order to prevent the country from developing too fast and ensure a steady progress, and has raised the federal funds rate nine times. . In 2018, the Federal Reserve raised interest rates four times in a row, jumping from the "zero interest rate" era to 2.5%.
In the early morning of August 1, Beijing time, the Federal Reserve announced an interest rate cut of 25 basis points, lowering the target range of the federal funds rate to 2.00%-2.25%.
This interest rate cut will be the first market benefit released by the Federal Reserve after the subprime mortgage crisis, which is of great significance.
2. What “interest” does the interest rate cut mean?
Cut interest rates, and what you cut is the federal funds rate.
The U.S. Federal Funds Rate (Federal Funds Rate) refers to the interest rate of in the U.S. interbank lending market, the most important of which is the overnight lending rate. Such changes in interest rates can sensitively reflect the capital surplus and shortage among banks. The Fed's targeting and adjusting of interbank lending rates can directly affect the capital costs of commercial banks, and pass the capital surplus and shortage in the interbank lending market to industrial and commercial enterprises, thereby affecting consumption, Investment and the National Economy.
Federal Funds Rates are not only an important monetary policy tool of the Federal Reserve, but also the most important interest rate indicator in the world.
Every year, members of the Federal Open Market Committee (Federal Open Market Committee) gather together for several small meetings. Based on the current fundamental data in the United States (especially the inflation rate, employment rate and national consumption) and the world economic situation to formulate future monetary policy.
affects the money supply by adjusting the federal funds interest rate, thereby changing the heat of the capital market and achieving sustainable economic growth.
When the economy overheats, the Federal Reserve will promptly raise the federal funds rate benchmark to control the inflation rate to no more than 2% (standard for developed countries) to prevent purchasing power from being eroded by rising prices. When the economy slows down, the Federal Reserve will lower interest rates to lower borrowing costs, encourage investment and stimulate consumption.
3. Why should interest rates be cut?
This rate cut is the first since December 16, 2008, when the U.S. economy was going through a financial crisis that threatened to disrupt the global economy. Driven by the urgency of a severe economic recession, FOMC cut interest rates from 1% to a range of 0%-0.25% and maintained it for 7 years.
After the two-day meeting, policymakers noted that while household spending "started to pick up from the beginning of the year", business investment "continues to be weak".
With the interest rate cut, the committee decided to terminate the reduction of the balance sheet .
Fed successively conducted three rounds of acquisitions involving treasury bonds and mortgage-backed securities, which the market called quantitative easing (QE), and its balance sheet once exceeded 4.5 trillion yuan.
In October 2017, the committee began reducing the size of the bond portfolio, capping monthly returns while reinvesting the remainder.
The ultimate goal is to end the balance sheet reduction in September this year, but the FOMC decided to end it two months early, and all earnings will now be reinvested from the 1st.
Overall, bond portfolio holdings fell by $618 billion but remained at $3.6 trillion, well above what most Fed officials and market participants expected. The shrinkage display ends earlier than expected.
Conversely, nine rate hikes since December 2015 and the end of quantitative easing will be more damaging than Fed officials expect. After current Chairman Ball said in December last year that reducing the balance sheet would be in "auto-pilot mode," the stock market crash taught him a profound lesson.
Ball was in trouble two months before that, saying in October that fund levels were "far from neutral," meaning neither stimulus nor restraint, and signaled an end to rate hikes.
The Federal Reserve cut interest rates again. The FOMC pointed out that it was "the impact of global developments on the economic outlook and moderating inflationary pressures." It said that the current economic growth status is "moderate" and the labor market is "strong", but it decided to loosen policies.
He said at a press conference: The interest rate cut is designed to ensure that downside risks are addressed and to support a faster return of inflation to the 2% target level.
Powell said that weak global economic growth, trade policy uncertainty and inflationary pressures are worrying the Fed.
U.S. job growth was strong in June, with strong data signals. GDP growth in the second quarter was close to expectations. Since June, the Fed has seen both positive and negative developments. Overseas economic growth has disappointed, and other central banks are adopting or considering easing policy. Persistently below-target inflation could lead to lower inflation expectations. Global deflationary pressures remain. The FOMC will take appropriate actions to maintain economic expansion.
Powell said that cutting interest rates is a mid-cycle adjustment for the economic cycle. The global economy is weak and manufacturing poses risks to the United States. The interest rate cut is intended to maintain a favorable economic outlook amid risks.
4, gold US stocks compete dive , the US dollar index surges
After the Federal Reserve announced an interest rate cut, the three major US stock indexes fell in the short term, and the Dow Jones Industrial Average fell about 50 points.
The S&P 500 index fell about 0.2%.
In addition, the U.S. dollar index rose straight up, expanding to 0.2%, to 98.7; gold fell by more than 10 US dollars in the short term, to 1,419 US dollars per ounce.
After the Federal Reserve’s decision, non-US currencies plunged across the board. The euro fell against the U.S. dollar, the British pound against the U.S. dollar, and the offshore RMB against the U.S. dollar in the short term.
Benefited from interest rate cuts, the U.S. 10-year Treasury bond yield fell by about 5BP, but it jumped sharply during the session.
As of the close, the Dow fell 1.23%, the Nasdaq fell 1.19%, and the S&P 500 fell 1.09%. Among them, the Dow Jones Index once fell by more than 500 points during the session.
5. What are the benefits of cutting interest rates?
01
Capital market rejuvenation
html In mid-June, when the Wall Street Journal first reported that the Federal Reserve intended to cut interest rates in July, the three major stock indexes couldn't wait to jump on that day. The S&P 500 broke through a new high of 3,000 points for the first time, Nasdaq successfully broke through the 8,200 mark, and the Dow Jones Industrial Index soared to 27,000. The boiling stock market is enough to show that the capital market is eager to cut interest rates.
U.S. job growth was strong in June and data signals were strong. GDP growth in the second quarter was close to expectations. Since June, the Fed has seen both positive and negative developments. Overseas economic growth has disappointed, and other central banks are adopting or considering easing policy. Persistently below-target inflation could lead to lower inflation expectations. Global deflationary pressures remain. The FOMC will take appropriate actions to maintain economic expansion.
Powell said that the United States has not completely reached the end of the economic cycle and may still be in the middle of an economic cycle (Mid-Cycle Adjustment). Cutting interest rates is a mid-cycle adjustment. The global economy is weak and manufacturing poses risks to the United States. The interest rate cut is intended to maintain a favorable economic outlook amid risks.
02
The housing market is booming again
Because the federal funds rate directly affects short-term floating mortgage interest rates (such as: 5/1 ARM – 5-year fixed interest rate, floating annually thereafter), it indirectly affects long-term fixed interest rates (such as: 15-year/30-year fixed interest rates) , the reduction in the federal funds rate not only reduces the loan interest rate, but also saves investors a lot of monthly payments, and also greatly reduces the difficulty of purchasing real estate.
When the Federal Reserve first hinted at a cut in the federal funds rate on June 20, mortgage interest rates quickly responded positively.
A year ago, the 30-year fixed loan rate briefly exceeded 5%, but now it has dropped to 3.84%. Similarly, the 5/1 ARM preferred by foreign buyers has also dropped from 4.04% to 3.48%. You can see how big the difference is before and after, just look at the picture above.It is conceivable that when the Federal Reserve officially announces its new policy next week, the U.S. housing market will usher in a new wave of investment boom.
6. What should you do with your assets when interest rates are cut?
The U.S. real estate market will benefit from the reduction in U.S. dollar interest rates, and some hot money will pour into the U.S. real estate market, further pushing up real estate prices. For individual investors, a common U.S. real estate investment is to buy a residence, and through real estate funds, you can allocate anti-cyclical real estate assets. This type of assets is a better choice when the U.S. economy has expanded for 10 years.
Since June last year, the RMB has been on a roller coaster, plummeting against the US dollar for six consecutive weeks. A month later, the offshore RMB exchange rate broke through the 6.8 mark and fell below 150 points in 15 minutes. If we count from March 2018, the RMB has depreciated by 8% in just 3 months. In other words, the 350,000 tuition fee you prepared for your child to go abroad has inexplicably evaporated by 30,000 yuan.
Since 2014, the offshore RMB against the U.S. dollar has fallen from 6.0 to 6.95 this month. The depreciation rate exceeds 15.8%, which is exactly equivalent to the increase of Seattle real estate in 2017.
Chinese dollar bonds, as dollar-denominated bonds with Chinese attributes, have received dual impacts from Sino-U.S. policies. U.S. interest rate cuts will be a significant benefit to Chinese dollar bonds. At the same time, domestic financial deleveraging has also caused a lot of funds to shift from non-standard assets. Standardized assets, the high-yield attributes of Chinese dollar bonds have a good competitive advantage among standardized assets.
