On the early morning of September 19th (Thursday) Beijing time, the Federal Reserve will announce its interest rate decision, and the market expects the central bank to make its first interest rate cut in recent years at this meeting. The current target federal funds rate in the United States remains in the range of 5.25% to 5.5%, which is the highest interest rate level in nearly two decades.
The market believes that there is a high probability that the Federal Reserve will cut interest rates at this meeting, but there is a disagreement on whether to cut interest rates by 25 basis points or 50 basis points. The interest rate observation tool shows that current traders expect a 60% probability of the Federal Reserve cutting interest rates by 50 basis points and a 40% probability of cutting interest rates by 25 basis points, which is relatively close.
From the market performance, the US stock market has already responded to the expectation of interest rate cuts from the Federal Reserve's meeting. On September 17th, both the S&P 500 index and the Dow Jones index hit historic highs during intraday trading, while the Nasdaq index remained near historic highs.
However, historical data shows that in the last three interest rate cut cycles, the US stock market has risen and fallen during the rate cut cycle, showing significant adjustments and continuing to rise after the end of the rate cut cycle.
The first round of interest rate cuts: The Federal Reserve began cutting interest rates in January 2001 and ended it in June 2003, with interest rates ranging from 6.5% to 1%. The S&P 500 index rebounded to its peak at the end of January 2001 and reached its bottom in early October 2002, during which it fell from a high of 1383.37 points to a low of 768.63 points, with an adjustment of over 44%.
The second round of interest rate cuts: The Federal Reserve began cutting interest rates in September 2007 and ended it in December 2008, with interest rates ranging from 5.25% to 0.25%. The S&P 500 index peaked in mid October 2007 and bottomed out in early March 2009, dropping from a high of 1576.09 points to a low of 66.79 points, with an adjustment of over 56%.
The third round of interest rate cuts cycle: The Federal Reserve started cutting interest rates in July 2019 and ended it in March 2020, with interest rates ranging from 2.5% to 0.25%. The S&P 500 index peaked in mid February 2020 and bottomed out in late March 2020, dropping from a high of 3393.51 points to a low of 2191.86 points, with an adjustment of over 33%.
In terms of Chinese assets, since the implementation of the floating exchange rate system in 2005, the US dollar to RMB exchange rate has been positively correlated with the trend of the US federal funds target rate. After the Federal Reserve initiates its interest rate cut cycle, the RMB exchange rate usually experiences a certain degree of appreciation.
Lian Ping, former Chief Economist of Bank of Communications and Chairman of the China Chief Economist Forum, pointed out that the Federal Reserve's interest rate cut will alleviate the depreciation pressure on the RMB exchange rate caused by the tightening monetary policy of the United States in the past two years, and promote a certain degree of phased appreciation of the RMB.
Lian Ping stated that from the third quarter of 2024 to the first half of 2025, the RMB/USD exchange rate is expected to gradually rebound to around 6.8-7.1; In the second half of 2025, with the phased rebound of the US dollar index, there is a high possibility that the RMB/US dollar exchange rate will maintain two-way fluctuations in this range. The phased appreciation of the Renminbi will gradually have a series of positive impacts on the financial market and Renminbi assets.