Federal Reserve imminent rate cut: How will the market sentiment shift? How should investors position themselves?

2024 has already passed its halfway point. Recently, Federal Reserve Chair Jerome Powell broke from previous insistence, stating that rate cuts do not need to wait until inflation drops fully below 2% to be initiated. This relatively moderate stance immediately caused market shifts, with rate cut concept stocks and related financial products starting to stir.

But the real question is: How will the US rate cuts truly impact the global financial markets? What preparations should investors make in advance? What key decision points this year must be closely watched? This article will answer these questions one by one.

Overview of the Federal Reserve’s 2024 Meeting Schedule

The Federal Reserve holds 8 interest rate decision meetings each year, announcing rate decisions and policy stances at each. Among these, 4 meetings also release the Committee’s economic outlook and dot plots, commonly known as the “dot chart.” These 8 decision days are arguably the most critical workdays on Wall Street throughout the year.

The full schedule for 2024 is as follows:

Dot Plot Explanation: The 19 voting Federal Reserve officials each present their expectations for future interest rates. By observing the individual dots’ positions, investors can infer whether the overall policy inclination leans toward tightening or easing.

How Expectations for Rate Cuts Evolve

As of this writing (July 11, 2024), the most recent meeting was on June 12. Not only did they announce the rate decision, but they also released the economic outlook and dot plot simultaneously. Fed officials believe inflation remains uncomfortably high, so they sharply downgraded this year’s rate cut expectations from 3 to just 1. In other words, only one rate cut is expected this year.

However, this is not necessarily bad news. Officials also raised next year’s rate cut expectations from 3 to 4. Overall, the pace of policy easing has not slowed but has been pushed back in timing.

More notably, Powell’s speech on July 9 indicated: Inflation is no longer the sole factor in deciding rate cuts; delaying cuts too long could push the economy into recession. This statement is noticeably more moderate than previous positions that insisted rates must fall below 2%, implying that rate cuts could start earlier and possibly be larger than expected.

Chain Reaction of US Rate Cuts on the Stock Market

The basic logic seems simple: Rate cuts → lower deposit interest rates → reduced borrowing costs → relatively higher investment returns → more capital willing to enter. Based on this reasoning, the stock market should benefit.

But the reality is far more complex. The Fed usually cuts rates when the economy faces difficulties and needs policy stimulus. From another perspective, this suggests that corporate growth may already be slowing or even facing recession risks. Therefore, whether rate cuts truly boost the stock market depends on whether the policy stimulus is strong enough to offset economic weakness.

For example, in the current environment, the US stock market has repeatedly hit new highs despite high interest rates, mainly because large tech companies still exhibit strong growth. Once the economy truly begins to slow down and corporate profits growth diminishes, even with rate cuts, the support for the stock market will weaken significantly.

Impact of US Rate Cuts on the Forex Market

The US dollar is essentially a commodity. When the US cuts interest rates, the returns on assets held in dollars decline, prompting capital seeking higher yields to shift to other currencies or assets. Therefore, rate cuts generally lead to a depreciation of the dollar.

However, today’s financial markets are highly efficient, and expectations tend to be priced in advance. A typical example is 2022: before rate hikes even began, the market sensed inflation was out of control, and the dollar index surged ahead of time. When the rate hike cycle was still ongoing and inflation peaked, the dollar index immediately turned downward.

This tells us that, even if the direction of rate cuts is clear, whether the dollar will truly depreciate depends on the timing and magnitude of the cuts relative to expectations. If the market has already priced in rate cut expectations, the actual announcement may not bring the surprise traders anticipate.

Impact of US Rate Cuts on Gold

Rate cuts imply a relative decline in the dollar’s purchasing power, which, according to traditional asset allocation logic, should boost gold prices. In the short term, this relationship does hold.

However, in the long term, gold prices are influenced by many variables, making it less reliable to predict gold trends solely based on rate cuts. Unless you are engaging in short-term trading, it’s not necessary to overly rely on this relationship.

Deep Impact of US Rate Cuts on the Bond Market

The bond market is most directly affected by rate cuts. When rates fall → central bank benchmark rates decrease → risk-free rates decline → bond yields also fall. Since bond face values and coupon payments are fixed, falling yields push bond prices higher.

But these are not absolute rules; markets often react in advance. The key is whether the actual announcement aligns with expectations—whether the cut magnitude is as anticipated or exceeds/subceeds expectations.

Another factor is the credit rating and maturity of bond issuers. For example, US Treasuries: short-term bonds (2-year) tend to react only when rate cuts actually begin due to their quick maturity. Long-term bonds (10-year) tend to react earlier, with yields rising before rate hikes and falling before rate cuts, due to their longer holding periods.

Therefore, if you believe a rate cut cycle is about to start, allocating to long-term bonds can capture more capital gains; if you only seek income, short-term bonds are more stable.

Final Reflection on Investment Decisions

While the rate cut expectations for 2024 are gradually becoming clearer, this does not mean the stock market will rise continuously or bonds will necessarily surge. The fundamental logic of financial markets boils down to one question: Has this good news already been priced in? Are there other factors that could offset this positive signal?

Markets are constantly changing, and the most dangerous investment behavior is making decisions based solely on a single news event. Only by comprehensively analyzing various factors can one navigate the turbulent financial battlefield and achieve steady success.