[Interest Rate Cycle] How to deploy US interest rate cuts
【Latest Interest Rate Interpretation】How should a market crash be deployed? With 2025 meeting schedule
On December 19, 2024, the Fed announced a 0.25cm decline, moving the Fed Funds Rate Target Range to between 4.25%-4.50%. In 2024, the US Federal Reserve decreased by 3 times and by 1 cm, in line with market expectations.
As the downside news is released, the market's future downside risk is measured. The Fed's spot chart shows that the median interest rate forecast for 2025 is between 3.75%-4.00%, which is unlikely to double again. In general, we can predict the timing of the reduction through the US PCE (Personal Consumer Expenditure Benefit), CPI (Consumer Price Index) and non-farm employment data, as these data have a higher than forecast/below the forecast/appropriate response to the reduction space and frequency! Want to use economic data to make it easier for you to start early? Join the Futubull Club, change the release date and data, and you can add it to the calendar to prevent big mistakes!
What is a reduction in interest rates?
A rate cut, also known as a rate cut, refers to the actions of a national or regional central bank or other institution that lowers the domestic benchmark interest rate and is one of the common loose monetary policies. In simple terms, interest rate reductions mean that banks/financial institutions can offer low loan rates at lower borrowing costs and lend loans to businesses and individuals to obtain funds.
Reasons for interest rate reduction
The main reasons for the Fed's rate cut include easing inflationary pressures and slowing economic growth. By lowering interest rates, the Fed wants to stimulate the economy and prevent potential recession risks.
As of now, the market has not seen a clear signal for the time being. Investors tend to keep an eye on price and employment data, with the recently released November U.S. Consumer Price Index (CPI) up 2.7% year-on-year and core inflation up 3.3% year-on-year. These data are broadly in line with market expectations and prevalents, indicating that inflationary pressures have not intensified, which also provides room for further rate cuts.
As for the non-farm employment report, although the number of new jobs in November was higher than expected, the overall unemployment rate was also higher than expected. Therefore, it makes sense to continue cutting interest rates to support the jobs market.
Reasons for the slowdown in the pace of interest rate cuts
The Fed must strike a balance between price stability and the employment market when making policy. Acting too quickly could lead to inflation remaining above the 2% target, while too slow action could affect labor markets and create weakness. Therefore, the pace of interest rate cuts must be cautious. Current forecasts show that the Fed will ease interest rate cuts in 2025, mainly due to concerns about inflation. The Fed forecasts a “strong overall economic performance” for the economic outlook next year and raised its forecast for GDP growth this year and next, and postponed the 2 percent inflation target until 2027, according to the 19 day rate decision.
These inflation concerns are closely linked to the uncertainty of Trump's policies. POLICIES SUCH AS COMPREHENSIVE TARIFFS AND MAJOR TAX CUTS COULD INCREASE INFLATIONARY PRESSURES AND MAKE THE FED MORE CAUTIOUS WHEN CUTTING INTEREST RATES. In such an economic environment, investors should keep a close eye on the direction of the Fed's policy and its impact on prices and the jobs market. Reasonable adjustment of investment strategies to respond to possible market fluctuations will help seize investment opportunities.
Why still opt for interest rate cuts amid inflation fears?
In the current economic environment, many investors do not understand why the Fed is still choosing to cut interest rates in the face of inflation concerns. In fact, Trump's new policies often take time to show from formulation to implementation, and the actual impact on the economy is not immediately apparent. This makes it necessary for the Fed to carefully assess the long-term effects when considering a rate cut. According to the latest forecast by the Federal Reserve, the average long-term fund rate is 3%. Current interest rates are still far from this figure, so interest rate cuts leave room for future economic stimulus. That means, to a certain extent, interest rate cuts can help spur economic growth without immediately causing inflation to skyrocket.
In addition, U.S. debt rates have risen significantly since the September interest rate cut, which may reflect the market's excessive concern about Trump's new policies that could trigger inflation. If market sentiment is too pessimistic, spontaneous downward adjustments may occur in the future, which is consistent with market expectations for future rate cuts.
Interest Rate Reduction 2025 | US Agenda
The FOMC (Federal Open Market Committee) holds 8 regular meetings each year, and here is the specific timeline for the Fed in 2025.
What is the impact of US savings on different types of Assets around the world?
The Fed's rate cut decision is not just about the rate cut itself, but also the overall economic situation. The ultimate goal of the policy is to promote economic growth. If the global economy is temporarily in a phase of no appreciable recovery this year, next year could enter a growth cycle. The implementation of the lowering policy will gradually show its positive impact on the economy, and economies previously affected by interest rate increases and deleveraging will begin to regain growth momentum.
Is the Fed rate cut good or empty for all kinds of assets around the world? Overall, falling interest rates promote economic growth and have different effects on different types of assets:
USD: The cost of capital is lower, corporate earnings are expected to improve, so US stocks generally rise.
U.S. stocks: U.S. stocks are often hit by Lido as the cost of capital falls, and corporate earnings are expected to improve.
Bond: A fall in interest rates will cause the yield of the national debt to fall, pushing up the price of government bonds.
Gold: As a safe haven asset, gold is often sought after in a declining interest rate environment, increasing the likelihood of price increases.
Crude oil: Lower interest rates help economic recovery and demand rebound, pushing crude prices higher.
Stay on top of US interest rate cut expectations
U.S. Decreasing is a Topic Concerned by Investors, and the Annual Conference explores the potential for mitigation ・ When to reduce the problem Equal. Consumer Price Index (CPI) and Non-Farm Workers are key economic indicators that determine the likelihood of a reduction. We can predict the likelihood that there will be no change in the US Fed's interest rate decision based on historical downside data and the 30-day US Fed Futures price analysis. Although the computing process is complicated, not every investor can calculate easily.
Futu launches a new Bull Affiliate Program that provides a variety of visualizable visitor data to help you see past, present and unpredicted future economic trends, including: the US FedWatch decline rate, CPI, and non-farm employment data. Investors can use these data to reduce their expectations and plan their investment strategy in advance!
How to Deploy Interest Reduction
In theory, the relationship between the stock market and economic fundamentals has always been relevant. Of course, the stock market for each market may be different: for example, US stocks are already at a high valuation, so corporate earnings growth may be partly used to digest valuations; while Hong Kong stocks are undervalued and may face a correction in valuation.
What about US debt? It is possible to go down in the short term, as mentioned above. In the longer term, however, as economic growth expectations and inflation expectations rise, US bond yields may also rise, and bond prices will fall.
What about the exchange? It gets a little complicated. Trump may expect a weak dollar in the medium to short term to boost exports, stimulate the economy, reduce trade deficits, etc., but policies such as tariffs could increase global economic uncertainty, and the dollar as a haven asset could be given a boost, making the dollar more volatile. WHILE THE RMB MAY FACE DEPRECIATION PRESSURE DUE TO POSSIBLE TARIFF POLICIES, AND THE REASONS FOR THE SINO-US SPREAD, THERE IS NO NEED TO BE TOO PESSIMISTIC FROM DOMESTIC POLICY SPACE AND ECONOMIC STRENGTH.
The factors influencing gold prices are complex. There is a downside factor, such as a reduction in interest rates (because gold has the property of resisting inflation, so interest rate cuts are usually favorable to gold, then a slowdown in interest rates is empty). However, it is at the heart of comparison that underpins the long-term rise in gold, such as gold as a safe haven asset in the context of an uncertain international political and economic environment, and there will be ongoing demand for gold at the bottom, including from global central banks and institutional/individual investors.
Bitcoin is a virtual currency asset asset asset, it can be a risk compared to a bad asset, it can be a risk asset asset, it can be a hedge, it can be a hedge asset assets, it can move in the case of the economy, it can move in the case of the economy, it can be in the case of the economy. Accelerates Bitcoin's rise. If this trend is not exceeded, the timing and implementation of the policies of TEPP 2.0 would be correspondingly risky.
The above, however, is based on relatively optimistic expectations for the global economy. There are still some risk factors to be aware of, such as uncertainty over Trump's policies, the escalation of geopolitical conflicts, the failure of the global economy to recover as expected due to negative impacts such as public health events, etc., which can cause greater disruption to asset yields and are unpredictable.
What are the benefits of reducing interest rates?
What is the impact on the stock market when the US Department opens the interest rate reduction channel? How to seize investment opportunities?
Prime Minister, Stocks are likely to perform better than Bonds, Gold and US Dollar hedging assets in the medium term, but in the medium to long term.
In general, interest rate cuts are used to stimulate the economy in times of recession or slowdown and lead to gains in the stock market. Perspectives on market conditions, during interest rate reductions, utilities,Real Estate TrustsEquities with a fixed dividend income are more advantageous because their dividend rates are more attractive than bank deposit rates. Property prices also have the potential to rise due to lower yields, which is also relatively favourable for property stocks.
In addition, falling interest rates will ease capital pressure on biopharmaceutical stocks and small cap stocks with higher financing costs and boost valuations for more growth tech stocks.
Will interest rate gold rise?
In addition to seizing opportunities in the stock market, you can consider adding gold, bitcoin, and US bonds to your portfolio to balance risk assets and hedges.
However, given the current environment, Stocks may perform better than other Assets in the context of the current economic outlook, but there are drawbacks:
Gold can be counterproductive when there are risks of conventional and uncertain political economy.
Impact of interest rate cuts on Bitcoin
Bitcoin has its anticipatory and risk-averse uses, as well as its monetary attributes and future applicability, which could lead to greater growth momentum.
Impact of interest rate reductions on bonds
While other Assets are fluctuating, US bonds may remain relatively stable.
Historical data show that the check rate on newly issued U.S. Treasury bonds will decrease after the Fed announces a rate cut during the rate reduction cycle, generally resulting in the following effects:
Price increase
Decrease in yield
The yield data after the past eight interest-rate cycles showed that prices for both short-term and long-term US Treasury bonds after the rate cut increased, and the gains were more pronounced for longer-term US bonds, which are more sensitive to interest rates.
Expiry of holdings
Capture the spread
Performance of US Treasuries after the start of the yield cycle (%)
Extended Reading:How to invest in bonds during the interest-rate cycleExtended Reading:How to invest in TLTW during the interest rate reduction cycle
Summary of Interest Reduction Investment Strategy
On the specific configuration:
For example, the US equity market may consider allocating a combination of value stocks and growth stocks, taking into account the potential for the digestion and growth of valuations, while the Hong Kong stock market considers being dominated by undervalued premium companies.
Gold configuration can be compared to a certain scale, but if risk underwriting is not good, Bitcoin's configuration margin is good.
In the case of US bonds, long-term bonds can have downside pressure and downside risks, so some short-term Treasury Assets can be considered.
Finally, I would like to point out to the big two things: keeping a long-term investment perspective, short-term exposure to opportunities and risk sensitivities at the same time. There are assets that are not managed to invest in. You can use ETFs and options tools to post opportunities.
Analysts' Recommendations for Rate Reduction Deployment
In this round of interest rate cuts, the most important thing is the schedule of interest rate reductions. Especially in the run-up to Trump's new policy of 2025, a system of protectionism and tax cuts that stimulate the economy or further inflationary worries is likely to change the timetable on a frequent basis. The progress of interest rate reductions will have a significant impact on the deployment of the above asset prices. Investors should be mindful of the volatility of asset prices while keeping an eye on the impact of asset prices and market risks. While sovereign debt performed well in 2024, if inflation concerns again become a concern in 2025, the bond market still has the chance to reappear in Q4 2023 (when US$20 ETFs rose nearly 20% in the fourth quarter), and bonds are still good to avoid a recession Investment Tools.
Market risks are more important when it comes to the performance of stocks, Gold and Bitcoin. Gold and Bitcoin prices will benefit the performance of Gold and Bitcoin prices if Trump's policies lead to the USD starting to take pressure off. In terms of higher shares, compared to the higher shares in the proposed portfolio, the main thing is that our reporting capacity is lower in relation to the risks associated with the US market, compared with the right help from the downside. Due to the weakness in commodity and energy prices, the higher shares are associated with the financial stocks in the proposal. Master, China Mainland Banking and Home Insurance stocks have performed well in 2024.
Chief Analyst of Futu Securities Liang
(The author is a licensee of the Securities and Exchange Commission and its affiliates do not have any financial interest in the Proposed Share Issuer)
