Introduction:
The Hidden Worries Behind the Federal Reserve's Sharp Interest Rate Cut
Is the RBA Overconfident?
On Wednesday US time, early Thursday morning Australian time, the Federal Reserve officially began its interest rate cutting cycle, announcing a 50 basis point reduction in the federal funds rate, bringing it to a range of 4.75% to 5%. At the same time, the Federal Reserve lowered its economic forecasts, including lowering the GDP growth forecast for 2024 from 2.1% to 2%, and raising the unemployment forecast to 4.4%.
Although the Federal Reserve's interest rate cut was expected, the magnitude of a 50 basis point reduction surprised the market. Of the 115 economists surveyed beforehand, 104 predicted that the reduction would not exceed 25 basis points.
Hidden Worries Behind the Federal Reserve's Sharp Interest Rate Cut
Despite the Federal Reserve's modest downward revision of the US economy, and Federal Reserve Chairman Powell's repeated emphasis at the press conference that concerns about the US economic slowdown have not reached a crisis level, he remains confident about achieving a "soft landing." However, the 50 basis point interest rate cut has raised questions about its motives in the market. Historically, the previous two instances where the initial interest rate cut reached 50 basis points occurred after the burst of the internet bubble in 2001 and during the subprime mortgage crisis in September 2007.
Looking at the latest data, the US job market has clearly cooled, and the manufacturing PMI shows weakness, indicating the reality of economic pressure. With the US elections approaching, regardless of who is elected, Powell may leave office in early next year. Therefore, avoiding a US economic recession before leaving office is obviously very important for his personal reputation. However, there were no significant financial market crashes or major risk events before this interest rate cut. Thus, we have reason to believe that the core reason for the Federal Reserve's move is a clear sense of increased risk of economic recession, and economic data may perform poorly for some time in the future. However, Powell hinted that there will be no more large interest rate cuts in the future, but will return to the conventional operation of cutting interest rates by 25 basis points each time.
The reaction of the US financial market also reflects a similar view: US stocks rose and then fell, and commodity prices generally closed lower, showing the market's cautious attitude towards the future economy. Historical experience shows that after the interest rate cutting cycle begins, the short-term performance of the stock market is often poor, and this time may not be an exception.Is the Reserve Bank of Australia (RBA) Overconfident?
However, on the other side of the Pacific, Australia has become one of the very few economies that have not yet joined the ranks of rate cuts. What's more intriguing is that Australia's neighbor, New Zealand, has already begun to cut interest rates, and its GDP in the second quarter has fallen into recession. So, what makes the Reserve Bank of Australia (RBA) so confident?
The answer is simple, and the key lies in economic data, especially inflation and employment data. Although Australia's inflation has eased, and its economic growth is far from that of the United States, unlike the continuous decline in U.S. inflation and the obvious cooling of the job market, Australia's job market remains strong.
According to data released by the Australian Bureau of Statistics (ABS) on Thursday morning, the unemployment rate in August remained at 4.2%, and the number of employed people increased by 47,000, far exceeding market expectations. This data is consistent with the RBA's previous statement that the Australian job market has slowed down but is still in a state of full employment. Almost all economists believe that it is unlikely for the RBA to cut interest rates within the year, and this view has become more certain after the latest data release.
However, the pricing in the bond and credit markets shows that the market expects the RBA may start to cut interest rates within the year. For example, there have been recent signs of a decline in bank deposit and loan rates.
In fact, the economic challenges faced by Australia are no less than those faced by the United States, and even more so—including weak external demand due to the slowdown in China's economy, the decline in international commodity prices that may affect resource export revenues, and the low GDP growth for four consecutive quarters domestically, with a growth rate of only 1% in the past 12 months, far lower than that of the United States. Despite the seemingly strong job market, hiring activities in the private sector have significantly decreased, and nearly half of the new jobs come from the public sector, which is quite rare in Australia, a country where the government does not directly lead the economy.
Therefore, the situation we see now is quite interesting: on one side, the Federal Reserve claims that a soft economic landing is very likely, but it has significantly cut interest rates by 50 basis points; on the other side, the RBA and economists insist that they will not cut interest rates, but market pricing suggests that a rate cut may be imminent.
In conclusion,
Whether it is a market misjudgment or policymakers being "insincere," it remains to be seen. The only thing that can be certain is that the Australian dollar may continue to be strong in the short term, but deposit and loan rates may not be able to maintain high levels—those who have the opportunity to lock in high-interest deposits or loans should act as soon as possible, while there is no rush to lock in loan rates.
When making any investment, please consider the applicability of the information contained in this article based on your personal investment objectives, financial situation, or personal needs, make decisions cautiously, and bear the risks yourself.
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