Fed Cut: Will It Revive Housing and Stocks?

In the unpredictable global economic landscape, any minor move by the Federal Reserve is like a pebble thrown into a lake, stirring ripples in the market's sensitive nerves.

In late August, Federal Reserve Chairman Powell's speech at the Jackson Hole Global Central Bank Annual Meeting was resounding: "The time for policy adjustments has come."

Once these words were spoken, the market speculated that the Federal Reserve would start the interest rate cut in September.

As the cornerstone of global asset pricing, the shift in the Federal Reserve's policy interest rates will undoubtedly have a profound impact on global capital flows and the performance of major asset classes.

When September arrived, both the various data released by the U.S. government (which has no real reference value but clearly cooperates with the Federal Reserve's monetary policy expectation management) and some public statements by Federal Reserve officials have heightened the market's expectation that "the Federal Reserve will cut interest rates in September" to an unprecedented level.

There is a classic line in "Downfall": "Everything will be fine as long as Steiner launches an attack!"

This line later became the most frequently used meme in the internet community, without exception.

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At this moment, in the minds of domestic capital market participants in China, "Federal Reserve interest rate cuts" are like "Steiner launching an attack," a panacea for all problems.

Many people believe and spare no effort to create momentum in the domestic public opinion environment: this mentality and expectation can be understood, after all, when the Shanghai Composite Index has already fallen below 2800 points, and the housing prices in many cities across the country have returned to the levels around 2016, the five words "Federal Reserve interest rate cuts" are like a magic spell that can rekindle the most fervent hope in countless people - hope is more precious than gold these days.

However, this consensus, or common mentality, may be a very fragile and dangerous state.

Bad news exhausted is good news, and vice versa.

After the good news is exhausted and realized, if it does not meet expectations or deviates significantly from expectations, then the realization of the good news is likely to be a greater bad news.

In fact, many people are unwilling to accept such a rational view, just as some time ago this account wrote that this round of the Federal Reserve's formal interest rate cut may be a new round of harvesting for China and the world, and many readers were unhappy: raising interest rates is harvesting, and this interest rate cut is also harvesting, can't we think of something good?

Let's be blunt: relying on the current confrontational game opponent's water release, who is naive?

Objectively speaking, since the Federal Reserve's first interest rate hike in March 2022, China's domestic economic environment has shown a clear continuous pressure, increasing pressure, and a state of liquidity tightening.

More and more industries, companies, and individuals have felt the squeeze from the economic environment.

To be honest, money is not easy to earn, and the uncertainty of income and positions has increased, which is a very bad feeling in the economic era.

Under the tightening trend of the domestic economic environment, seeking stability and safety has become a consensus, and everyone's life is not easy.

Based on such a background and the actual situation, many groups of market participants with vested interests have placed their hopes for market reversal and market rebound on "Federal Reserve interest rate cuts," and this group, whether they themselves believe it or not, has been continuously creating a lot of content to promote.

The backbone is very soft, this is a disease, it needs to be cured, and it is not easy to cure.

Starting from a rational perspective, the most potential and imminent impact and risk for the domestic economic environment at present may come from the Federal Reserve's next monetary policy adjustment actions.

This article is written at the beginning of September when the market expectation and consensus of "Federal Reserve interest rate cuts in September" have reached a peak, and on the eve of the new round of the Federal Reserve's interest rate meeting (the Federal Reserve is scheduled to hold an interest rate meeting on September 17-18), it will take a detailed combing of the Federal Reserve's past several rounds of interest rate hikes and cuts as the entry point, combined with the current China-U.S. game and several domestic economic realities, to discuss and analyze the impact of the Federal Reserve's interest rate cuts on the domestic economic environment, the real estate market, the stock market, and the physical consumption market in a deep, attitude, and evidence-based manner.

From history and experience, the Federal Reserve's interest rate cuts include two types: relief-type interest rate cuts are common after a crisis, and preventive interest rate cuts are more common when the economy shows signs of slowing down.

Since 1982, the Federal Reserve has conducted 4 relief-type interest rate cuts and 5 preventive interest rate cuts.

According to the purpose of the interest rate cut, the Federal Reserve's interest rate cuts can be divided into two categories: relief-type and preventive.

The main difference between the two is whether the U.S. economy has entered a recession when the interest rate cut is made.

The former often occurs after the economy has clearly entered a recession and is used to stimulate the economy, while the latter is common before the economic recession has occurred and aims to prevent the risk of recession.

Under "normal" circumstances, the Federal Reserve's decision to cut interest rates should be based on the following logic: inflation is under control, the employment situation is somewhat weak, and there is a risk of the U.S. economy losing speed (or has already lost speed); at this time, it should let go of the brake and step on the accelerator, and the specific intensity depends on the specific road conditions.

The problem is that the above "normal" situation has never occurred in the more than twenty years since the 21st century!

Here is a combing for everyone: 2000-2003: The interest rate cut cycle accelerated by the 911 event.

After the strong growth in the late 1990s, the U.S. economy showed signs of weakness in 2000, and the Federal Reserve also entered the interest rate cut cycle in the second half of 2000.

Originally, this was a moderate and gradual interest rate cut cycle, but the 911 terrorist attack completely changed everything - given the sharp drop in the stock market, the serious blow to the confidence of the people in the entire Western world, and the highly uncertain international political environment, the Federal Reserve made three consecutive interest rate cuts (each 50 basis points) within 2001; from 2002 to 2003, it further reduced the federal funds rate to a low of 1.00%.

Many economists believe that it was this series of radical interest rate cuts that led to the excess global liquidity in the following years and indirectly catalyzed the subprime crisis from 2007 to 2008.

There is no doubt that the interest rate cut cycle from 2001 to 2003 was initially for the normal economic cycle adjustment, but it quickly became a "crisis response" to the 911 terrorist attack and the subsequent counter-terrorism war.

The fast pace and large amplitude of the interest rate cut did indeed solve the urgent problem, but the complex chain reactions it triggered were beyond the estimation of the decision-makers at the time.

2007-2008: The interest rate cut cycle started to deal with the subprime crisis.

Starting from June 2006, the Federal Reserve kept the federal funds rate at 5.25%, standing still and watching the changes in the economic situation.

In September 2007, as the subprime crisis spread, the Federal Reserve began to cut interest rates, initially maintaining a normal pace, but it became extremely aggressive in January 2008: within just ten days, it cut interest rates by 75 basis points once and 50 basis points once, a pace that was unprecedented.

With the bankruptcy of Lehman Brothers, the Federal Reserve continued to aggressively cut interest rates and finally reduced it to "zero interest rates" (actually a range of 0-0.25%) in December 2008.

In addition to cutting interest rates, the Federal Reserve also started quantitative easing (QE) policies, buying medium and long-term bonds in the open market to lower long-term interest rates.

Quantitative easing went through three stages and basically ended in 2015; the "zero interest rate" policy ended at the end of 2015.

This large-scale water release that lasted for more than eight years left an indelible mark on the global capital market and laid a solid foundation for the long-term bull market of the U.S. stock market in the past decade (although this was not the intention of the decision-makers).

2019-2021: "Mid-cycle adjustment" unexpectedly turned into a large-scale interest rate cut.

The long-term "zero interest rate" and quantitative easing have inflated the Federal Reserve's balance sheet to a terrifying extent, and the risk of global excess liquidity has arisen again.

In order to avoid overcorrecting, the Federal Reserve carefully shrank its balance sheet while raising interest rates, and by the end of 2018, it had finally raised the federal funds rate to 2.50% (still at a historically low level).

At this time, the U.S. economy showed some signs of weakness again, so the Federal Reserve made three interest rate cuts (each 25 basis points) from July to October 2019.

However, the Federal Reserve emphasized that this was a "mid-cycle adjustment," and the basic trend of gradually rising interest rates remained unchanged, and interest rate hikes would be resumed as soon as the economic situation improved.

Man proposes, God disposes.

The global pandemic that appeared at the beginning of 2020 changed everything.

In the face of panic among U.S. residents and multiple circuit breakers in the U.S. stock market, the Federal Reserve once again broke the precedent and sharply reduced the federal funds rate to 0-0.25% within March 2020, once again entering the era of zero interest rates.

Since then, the U.S. stock market and the entire U.S. economy have indeed reversed sharply, but this has also brought serious inflation problems, which have only been solved to some extent now.

It is not difficult to find that since the 21st century, the three interest rate cut cycles of the Federal Reserve have all had a strong "event-driven" color, and they are passive responses to sudden events: 2000-2003 was originally a "normal" interest rate cut cycle, but it was pushed by the 911 event in the middle, becoming "abnormal"; 2007-2008 was originally an "abnormal" interest rate cut cycle opened to deal with the subprime crisis from the beginning; 2019-2020 was originally a "mid-cycle adjustment" (cannot be regarded as a complete cycle), but it was turned into an "abnormal" interest rate cut cycle by the global pandemic.It is precisely because the "normal" Federal Reserve rate cut cycle has not occurred for too long that it is almost impossible to conduct meaningful historical comparative studies.

This time, there is no crisis, or rather, no widespread, symbolic crisis has emerged, only "normal" rate-cutting actions.

Will the market perform better?

Theoretically, perhaps.

Therefore, many people believe that "as long as the Federal Reserve starts to cut rates, everything will get better."

However, from the perspective of the United States, in fact, each round of the Federal Reserve's rate cuts has a pattern, which is to successfully transfer domestic risks, contradictions, and losses abroad through the action of rate cuts.

This is the key.

So, if the Federal Reserve's rate cuts take effect in 2024, looking at the global situation, where can the debt pit dug out by the monetary easing due to the pandemic since 2020 be transferred?

Who can bear it?

It is well known that the most researched and frequently updated views on the Federal Reserve are from domestic Chinese securities firms - hundreds of macro and strategy chiefs have published thousands of "Federal Reserve rate cut forecast reports," and even industry analysts who are not directly related to macroeconomics often say a few words; this is a traditional skill.

Not only that, but even some groups of real estate speculators have joined in the frenzy of the Federal Reserve rate cut expectation speculation.

There are many analyses on the impact of the Federal Reserve's rate hikes and cuts on the real estate market on the Internet, and there is a popular view that many big V's are talking about, that is: the decline in the real estate market over the past three years was caused by the Federal Reserve's rate hikes.

As long as the Federal Reserve cuts rates, housing prices can still rise, and even reach new highs.

It seems that the Federal Reserve's rate cuts are more worth looking forward to than domestic policies, the will of the country, and China's economic fundamentals.

Is this situation and logic absurd?

In fact, the views of the above groups are completely wrong and cannot withstand scrutiny.

What if, I say if, the Federal Reserve really cuts rates, and the domestic economic environment and asset financial market performance do not meet the expectations of these groups, what should be done?

In fact, the possibility of this situation becoming a reality is very high: First, let's talk about the real estate market.

From the second half of 2021 to now, over three years, the average housing prices across the country have fallen by 30%, and the housing prices in Beijing have returned to the level of the second half of 2016.

And these really have nothing to do with the United States' rate hikes.

China's past real estate has implemented a distorted model of high leverage, high turnover, and high debt.

Developers, in order to develop crazily, have added leverage to the extreme in all links of the entire chain of land acquisition, development, and sales, to the point of absurdity, taking a piece of land, leveling the land, and repairing to zero can be pre-sold.

The pre-sale fund supervision account is basically "virtually non-existent," and these alone have buried many big mines for real estate.

Coupled with the continuous speculation of houses, the soaring housing prices, the formation and continuous expansion of the bubble, and finally the sudden landing of the pandemic and the three red lines, pulling the 2 trillion yuan in debt Evergrande, thus triggering a real estate explosion.

If the Federal Reserve's rate hike could blow up China's real estate market, then China's housing prices should have plummeted at least four times, because the Federal Reserve has raised rates four times in the past 20 years.

It is clear that this is not the case.

Before 2021, China's housing prices have always been rising, and there has never been a continuous sharp decline like now.

Even if there is a period of weakness, the country can pull it up with a policy, and the problem is not big.

Can the current market and housing prices be blamed on the lack of strength of the 2024 new policy?

On May 17, 2024, the People's Bank of China and the National Financial Regulatory Administration jointly issued a series of major real estate policies, including the cancellation of the lower limit of commercial personal housing loan interest rates for the first and second sets of housing, the reduction of the minimum down payment ratio for residents' home purchases to 15%, the reduction of personal housing provident fund loan interest rates, and the establishment of 30 billion yuan of guaranteed housing re-lending, etc.

The "5·17" new policy is called the "epic" city-saving policy, which has attracted great attention in the industry.

Therefore, even if the United States cuts rates this round, it has almost no impact on our real estate market.

Housing prices will not rise suddenly because of this, and real estate companies in the ICU will not come back to life because of this.

In a word, what the real estate market is now, it will be almost the same after the rate cut, with no big change.

Some people say, won't the United States cut rates, won't it cause capital to flow back, and won't these funds flow into the real estate market.

At worst, it can also pull up a wave of stock market.

This is the second impact after the United States cuts rates: it will cause capital to flow back.

First, everyone has to understand the logic of capital flowing back due to rate cuts.

After the United States cuts rates, only when its interest rates are lower than China's will funds flow back in large amounts.

The reason is also very simple, exchange US dollars for RMB, deposit in Chinese banks, or buy Chinese bonds, buy RMB assets, hold domestic stocks priced in RMB, and the interest is high.

At the same time, after the rate cut, the RMB will appreciate, and after depositing money in the bank for one year and taking it out, it can also make a wave of money by changing it into US dollars.

This is not a good thing, but it is a typical speculative capital, vulture funds, to come to China for "arbitrage trading" at a low cost in US dollars, and whether this money can come or not is uncertain, but from the perspective of the country, it will definitely not let such money in.

From the perspective of national currency control, the country needs industrial capital, corporate funds, long-term savings, and patient capital.

And whether these funds will come to China is actually not much related to the interest rate difference, it cannot be said that there is no relationship at all, but the interest rate is not the key reason for the stay and departure of these capitals.

It mainly depends on the certainty of continuous operation and obtaining benefits under the environment of great power game.

Finally, the US dollar rate cut will cause the RMB to continue to appreciate.

In fact, since the consensus on the expectation of the US dollar rate cut has been established and continuously strengthened in the past few months, the RMB has entered the appreciation channel.

The appreciation of the RMB is actually not good for exports, because the RMB becomes more expensive, and the goods sold abroad will also become more expensive, and the price advantage will be weakened, so the profits of export enterprises will be reduced.

The most obvious example of the impact of the appreciation of the domestic currency on exports is Japan.

In 1985, the United States, Japan, Germany, and other five countries signed the famous "Plaza Agreement," deciding to raise the exchange rate of other currencies against the US dollar.

Since then, the yen has continued to appreciate, and it has appreciated more than 1 times in about a year, causing a great impact on exports and indirectly laying the groundwork for the subsequent collapse of the real estate market.

However, the appreciation of the RMB also has benefits, that is, in turn, buying foreign goods is cheaper, and going abroad for tourism and study is also cheaper.

Isn't this transferring the power to consume abroad and transferring out the savings and private wealth of Chinese residents?

From the end of August to the beginning of September 2024, as inflationary pressures eased and employment data weakened, global concerns about U.S. economic growth intensified, further strengthening market expectations for the Federal Reserve to cut rates.

Before the Federal Reserve's monetary policy meeting in September, the release of data such as July CPI, August non-farm employment, and August CPI will become an important signal for the Federal Reserve to decide the pace of rate cuts.

This year, the Federal Reserve has held five policy meetings, and each meeting has taken rate cuts as a possible action for the future.

Since September, important U.S. economic data has been released one after another, almost all of which are below expectations and are weakening.

The U.S. August ADP employment number fell to 99,000 people, setting a three-year low record, and this data is called "small non-farm," and then the U.S. August non-farm data was also announced, and the result was as expected, also below expectations.

The U.S. has successively released data with "job vacancies," falling to a three-year low, and the manufacturing PMI index is also below expectations, showing a significant decline in U.S. manufacturing.

These four data all point to the deterioration of the U.S. labor market, thereby raising expectations for the Federal Reserve to cut rates in September.

It is worth mentioning that the United States once again shamelessly "modified" and adjusted the previous data, slapping the face of those who believed in these data before.

But the reality is that the Federal Reserve's monetary policy still maintains a high-interest-rate situation and has not made any substantial adjustments, and it has played the "expectation management" of talking big to perfection.

Many people describe the U.S. non-farm data as a "girl" who is dressed up by the Federal Reserve, and as long as it gets through the wedding night, it's too late for the groom to find out the "true face."

It is very realistic that the United States is not only a donkey and elephant dispute internally, but also a dispute between the Anglo-Saxons and the Jews.

At present, the Jews are in the upper hand and have almost used all means to try to complete the global harvest of the dollar tide.

So, no one knows what will happen until the last moment.

Whether to cut rates in September is called a "life and death game" by the market.

If the rate is cut, funds flow to the world, and the economy gradually improves; if the rate is not cut, or even raised, it is a financial storm, and even a hot war...

Although this kind of rhetoric is somewhat alarmist and exaggerated, it is enough to show the importance of whether the Federal Reserve will cut rates in September.

Based on such a background and the above analysis, here are a few possible directions for the Federal Reserve's next rate cut, for a rational prediction: either, it is a symbolic small rate cut, such as 25-50 basis points, and still maintain the interest rate spread advantage, and then start to strengthen the harvest action from other dimensions; or continue to play with the expectation management trick, say some decent words, change the data, and then maintain the high interest rate of the dollar's suction situation.

Or, there is enough certainty and internal consensus, and it has been clear that the purpose of this round of rate hikes can be achieved, so it will continue to cut rates as expected by the market.

From the three possibilities, the certainty that can actually be grasped is: 1, the Federal Reserve will not easily cut rates, even if it does, it will not be a one-step solution, but a gradual squeeze;Here is the translation of the provided text into English: 2.

The Federal Reserve's interest rate cut has finally been realized, but there are still too many uncertainties that may exist; 3.

Before the interests of the United States as a nation are clearly secured, the resistance to the Federal Reserve's rate cut is visibly large.

Of course, some relatively smaller possibilities must also be considered, such as the Federal Reserve not cutting rates in September at all.

There are also two possibilities that must be considered, the probability of which is hard to predict, but no one can guarantee that they will not occur: whichever of the above situations arises, it will mean that this rate cut cycle has once again become "abnormal".

Economic history textbooks in a few years may record that there has been no "normal" Federal Reserve monetary policy cycle in the first half of the 21st century.

In fact, there are no normal things in the world to begin with; what is abnormal becomes normal after happening many times.

In summary, this round of the Federal Reserve's rate cut may not be the good news that many people think it is.

More likely, it is the signal for the start of a new global crisis, or the prelude to the dollar's global bottom-fishing strategy.

The logic is not complicated, and the country is certainly well aware of it, and the corresponding defenses and preparations must have been arranged.