The Federal Reserve announced a 25 basis point interest rate cut. What impact will this have on us?
In the early morning of September 18th, Beijing time, the Federal Reserve announced a 25 basis point interest rate cut, lowering the target range for the federal funds rate to 4.00% to 4.25%. This brings the total rate cuts to 125 basis points in this round of rate cuts.
Several international investment banks predict that the Fed will embark on a path of continuous rate cuts, with Morgan Stanley suggesting a fourth consecutive rate cut.
Analysts believe that the Fed's rate cuts increase the money supply in the market. Furthermore, they lower interest rates on personal and corporate loans (such as mortgages and corporate loans), encouraging consumption and investment, thereby boosting economic growth.
Rate cuts weaken the US dollar exchange rate, which typically boosts the prices of dollar-denominated commodities such as gold and crude oil. Furthermore, a weaker dollar eases debt pressures in emerging markets and attracts international capital inflows into their stock and bond markets.
A Founder Securities research report analyzes that the Fed's interest rate cuts are generally positive for Chinese assets. The Federal Reserve may have room to cut interest rates three times this year, potentially narrowing the interest rate differential between China and the United States and reducing exchange rate pressure marginally, creating favorable external conditions for monetary easing by the Chinese central bank. Furthermore, historical experience shows that after the Fed begins a cycle of rate cuts, domestic equity assets have seen significant excess returns, with the ChiNext Index leading the gains, and growth-focused stocks leading the market. Following the Fed's rate cut cycles in 2019 and 2024, the domestic stock market saw significant excess returns, with the ChiNext and growth-focused stocks leading the pack.
The RMB exchange rate against the US dollar has recently appreciated. On September 17, the offshore RMB exchange rate against the US dollar rose above 7.1 during intraday trading, the first time since November 7, 2024. A foreign trade company executive told reporters that the previous settlement price was around 7.2, and that further appreciation of the RMB would increase the frequency and intensity of settlements.
Regarding the future trend of the RMB exchange rate, Wang Qing, chief macro analyst at Orient Securities, told reporters that as the Federal Reserve resumes interest rate cuts and the impact of the Trump administration's tariff policy on the US economy gradually becomes apparent, the US dollar index will still face certain downward pressure, and the exchange rates of major non-US currencies, including the RMB, against the US dollar will be easier to rise than to fall; however, the US dollar fell sharply in the first half of the year, and the market has digested various negative factors for the US dollar, including the Federal Reserve's interest rate cuts. In addition, with the current weak economic trends in Europe and Japan, the US dollar will have stronger resilience against declines in the later period.