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The Fed unexpectedly cut interest rates by 50 basis points in July? Historically, it's still possible. Dollar bulls have to be careful.
Jul 15,2019
The content below was translated by Tencent automatically for reference.

SMM News: on Sunday, market analyst Chris Matthews wrote that Federal Reserve Chairman Powell released pigeons again last week to strengthen market expectations of a 25 basis point or even 50 basis point cut in July. Although US inflation is strong and US stocks are also strong, it does not seem appropriate to cut interest rates, but historically, unexpected interest rate cuts have also occurred in the United States under such circumstances. This is in line with some academic research views, as well as the Fed's super-dove policy, which has the greatest impact on financial conditions and investor confidence.

Powell Congress testifies to strengthen interest rate cut expectations

Last week, Fed Chairman Powell's dovish Congress confirmed confidence that the Fed would cut interest rates in July and continue to ease policy further in the second half of the year.

The news also boosted the S & P 500 and NASDAQ to record highs. But investors are also prepared for stronger-than-expected US inflation data, soaring government bond yields in the past few days and the likely consequences of Fed policy in the coming months.

The Fed is likely to cut interest rates by 25 basis points at its meeting at the end of July or by a rare 50 basis points to launch several rounds of easing by the end of the year.

However, many analysts also disagree about whether the Fed will cut interest rates and whether they will cut interest rates by as much as 50 basis points. "it's hard for me to understand why the Fed plans to cut interest rates," said Mark Stoeckleh, chief executive of Adams Funds. " He added that his talks with management had made them "cautiously optimistic" about the direction of the US economy as the index hit an all-time high. This is not the traditional environment in which interest rate cuts are expected.

In his report, (Michael O'Rourke, chief market strategist at JonesTrading, even called Powell's testimony "surreal." in the report, he wrote that the unemployment rate in the United States is below the Fed's full employment target and prices are stable, which are unprecedented phenomena. In addition, the yield on the 30-year Treasury note is 50 basis points higher than the all-time low.

There are many factors that are not conducive to the Fed's rate cut, but it is not uncommon for the Fed to cut interest rates unexpectedly in history.

Other analysts say that in this environment, the Fed's rate cut is not as rare as people think. The Fed has cut interest rates 17 times since 1980, when the S & P 500 is less than 2 per cent from its all-time high, notes Detrick (Ryan Detrick), senior market strategist at LPL Financial. When the S & P 500 hit an all-time high in 1996, the Fed cut interest rates.

Indeed, the late 1990s was a hot reference period for many analysts, particularly in comparison with the 1998 financial crisis. Then, as today, the US economy began to feel the effects of a sharp global slowdown that eventually led to the collapse of hedge fund long-term capital managers.

The 1998 financial crisis led to a decline in consumer confidence and a tightening of financial conditions. After hitting a record high in July 1998, the US stock market tumbled by more than 18 per cent. Despite the strong job market, GDP rose 5.1 per cent in the third quarter and 6.6 per cent in the fourth quarter, the Fed decided to cut interest rates three times.

The Fed cut interest rates helped US stocks rebound quickly and continued to rise for more than two years until the dotcom bubble burst in 2000, giving way to a bear market that lasted for years.

Investors even hold another belief that the Fed could unexpectedly cut interest rates by 50 basis points at the end of July, as the federal funds rate futures market on Friday expected the Fed to cut interest rates by as much as 23.5 per cent in July, well above the 5.1 per cent forecast on July 6.

Historically, the Fed wants monetary easing to be a deterrent, said Brent Schutte, chief investment strategist at Northwestern Common Wealth Management. They are trying to beat market expectations in loosening monetary policy to maximize financial conditions and investor confidence.

Donald (Frances Donald), chief economist at Manulife Investment Management (Manulife Investment Management), told Manulife: "the reason for the Fed to cut interest rates by 50 basis points is consistent with academic research. Academic research shows that the closer to neutral interest rates, the lower the zero interest rate floor, the sooner the Fed should act, and the greater the rate cut should be. "

At the same time, Fed officials such as the chairman of the Atlanta Fed have warned investors that only a small number of Fed officials do not think the U. S. economy needs to cut interest rates again. A 50 basis point cut would require the Fed committee to be significantly more dovish about the interest rate outlook. From a political point of view, this seems unlikely.

The US will also release a series of economic data in the coming week, which is sure to be a factor in the Fed's decision on monetary policy, and investors need to keep an eye on it.

Retail sales data, import price index, industrial production and enterprise inventory data for June will be released on July 16, Beijing time. On July 17, the Commerce Department will release estimates of new housing starts and construction permits for June; on July 18, it will release weekly jobless claims and the (Conference Board) leading Economic Index of the United States Economic Advisory Association, and on July 19, it will release the University of Michigan consumer confidence index.

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