The Federal Reserve Board of the United States announced on local time the 18th that it will lower the target range of the federal funds rate by 50 basis points, bringing it down to a level between 4.75% and 5.00%. This marks the first interest rate cut by the Fed in four years, but it has not established a clear rate-cutting process, and the market is still digesting its impact and expectations.

From March 2022 to July 2023, the Federal Reserve raised interest rates for 11 consecutive times, with a cumulative increase of 525 basis points. Over the past year, the Fed has maintained the target range of the federal funds rate at between 5.25% and 5.5%, the highest level in 23 years. The Federal Reserve believes that the data shows that economic activity continues to expand at a robust pace. GDP grew at an annual rate of 2.2% in the first half of the year, with a similar rate in the third quarter. Secondly, job growth has slowed, and the unemployment rate has risen slightly to 4.2%, but it remains at a relatively low level. Nominal wage growth has slowed over the past year, and the gap between job openings and the number of job seekers has generally narrowed. Thirdly, inflation has made further progress towards the Federal Reserve's 2% target, with the inflation rate dropping significantly from a peak of 7% to an estimated 2.2% in August.Based on the progress made in current inflation and the balance of risks, the Federal Reserve decided to lower the target range of the federal funds rate by 0.5 percentage points to 4.75% to 5%. Prior to the press conference, the market widely anticipated and hoped for a 50 basis point cut, and the Fed's decision soothed market sentiment. However, this unexpected rate cut did not stimulate the market but instead faced new uncertainties, leading to subsequent market entanglement and volatility.

As the market began to intensively discuss the prospect of the U.S. economy potentially falling into a recession before this meeting, there was an expectation that the U.S. federal funds rate would promptly lower the cap to 4% through a "small steps, quick pace" rhythm. This "small steps, quick pace" fixed interest rate path is premised on avoiding an economic recession. If the Fed had made a decision in line with market expectations, it would create an illusion in the market: Yes, a recession is coming, which would attract the market to start trading on a recession. The consistency of financial market expectations would then inject the recession expectation into the entire economic system, thereby triggering a real recession. However, the Fed initiated the rate-cutting process with a 50 basis point cut, which historically only occurs when the economy faces risks. Market statistics have found that this was the case during the technology bubble in January 2001, the subprime crisis in September 2007, and the global pandemic impact in March 2020.

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Therefore, Powell expressed the Fed's position in the subsequent Q&A session with reporters. First, Powell emphasized that he does not see any signs in the economy indicating that the possibility of a recession is increasing. Although the labor market has cooled, there has been no victory on the inflation front. Second, the Fed is only moderately calibrating its policy stance and does not have a predetermined policy path. If the economy remains robust and inflation persists, it will relax policy restrictions more slowly. If the labor market unexpectedly weakens, or inflation decreases faster than expected, it is also prepared to respond. In summary, the future is uncertain, which also avoids the market engaging in overly aggressive one-way trading.

The Fed's unexpected rate cut and avoidance of market linear extrapolation have released the space for monetary policy easing in emerging market countries, but at the same time, it has avoided funds gradually fleeing from dollar assets and causing market shocks. In the past few years, the Fed's excessively high interest rates have constrained the monetary policies of other economies, leading to the dominance of the dollar. Now, after the Fed's rate cut, emerging market countries will generally follow suit in lowering rates, which is beneficial for improving liquidity, consumption, and investment in various countries. For China, it is mainly reflected in the release of pressure on the depreciation of the renminbi exchange rate.

Our country's central bank recently stated that it will accelerate the implementation and effectiveness of financial policy measures that have been introduced, and will start to introduce some incremental policy measures to further reduce corporate financing and resident credit costs, maintaining reasonable and adequate liquidity. The average statutory reserve requirement ratio for financial institutions is currently about 7%, which also has some room. Therefore, the market expects that the central bank may use reserve requirement ratio cuts, interest rate cuts, and adjustments to existing housing loan interest rates as incremental policies. However, the current issues in our country are not determined by monetary policy. Monetary policy has some effect in reducing financing costs, but how to respond to insufficient effective demand is the key. Therefore, with China and the U.S. in different cycles, our country's economy mainly relies on deepening reforms and expanding effective fiscal expenditure, releasing potential, increasing momentum, and consolidating the upward trend of the economy.