Fed interest rate cut divergence exposed! The world is closely watching September, is your wallet ready?

On July 10, 2023, Beijing time, the Fed released the minutes of the Federal Open Market Committee (FOMC) interest rate meeting held on June 17-18.
The minutes show that the attending Fed officials disagree on the future direction of monetary policy. Although most officials believe that "this year is suitable for interest rate cuts," the debate over the timing and magnitude is particularly intense.
Why does every move of the Fed attract such great attention? What is the logic behind the interest rate cut? Why is it said that the result of this rate cut will impact everyone's wallet?
Today, let's unravel the layers together and help you understand the underlying logic and potential impacts of this policy shift.
Why is the world closely watching the Fed's interest rate cuts?
The Fed's monetary policy is not only the "steering wheel" of the American economy but also the "main valve" of global liquidity. Its influence is reflected in three aspects:
1. The "barometer" of the capital market: A Fed interest rate cut often means lower market funding costs, making corporate financing easier, and risk assets such as the stock market and bond market may enter a rising cycle.
For example, after the 2008 financial crisis, the Fed continuously cut interest rates and initiated quantitative easing, directly driving the US stock market into a ten-year bull market.
2. The "trigger" of exchange rate fluctuations: interest rate cuts may lead to the depreciation of the dollar, relative appreciation of emerging market currencies, which in turn affects the profits of multinational companies and the global trade landscape.
After the Fed cut interest rates in 2020, currencies such as the renminbi and euro strengthened for a time, attracting a large amount of international capital into the Asian market.
3. The "barometer" of economic expectations: The Fed's decisions reflect its judgment on the economic outlook for the United States and even the global economy. If interest rate cuts are implemented, it may indicate a slowdown in the growth rate of the US economy, and other global economies may also be forced to adjust their policies in response.
Why is the Fed considering cutting interest rates? Economic weakness or political pressure?
On the surface, the Fed's interest rate cuts are in response to economic slowdown, but the underlying reasons are far more complex than they appear:
1. Divergence in economic data: Although the unemployment rate in the United States remains low, signs such as weak manufacturing and weakening consumer momentum have raised concerns.
Goldman Sachs pointed out that the U.S. labor market "seems healthy, but the difficulty of finding jobs is increasing," and seasonal factors and changes in immigration policy may further suppress employment growth.
2. The "expectation game" of inflation: Fed Chairman Powell has repeatedly emphasized that "a decline in inflation is a prerequisite for interest rate cuts," but the minutes of the June meeting show that officials expect inflation to rebound to 3% in the coming months.
This contradictory attitude reflects the dilemma of the policy - on one hand, it aims to avoid runaway inflation, while on the other hand, it fears a hard landing of the economy.
3. The Underlying Political Pressure: The Trump administration has recently been pressuring the Fed frequently, calling on Wednesday for the Fed to lower the federal benchmark interest rate by at least 3 percentage points to help reduce the cost of repaying the national debt.
However, in the face of pressure, Fed Chairman Powell has repeatedly stated in various occasions that he will not yield to political pressure when formulating monetary policy.
He insists that, in the context of a strong economy and uncertainty over inflation, the Fed is in a favorable position to remain patient before obtaining further information.
What chain reactions will a rate cut trigger?
Citi believes that although the strong employment data from country M last week blocked the possibility of a rate cut in July, the consensus among Fed officials on cooling inflation is driving the process of starting rate cuts in September.
If the Fed really starts to cut interest rates in September, global markets may show the following trends:
1. Stock Market: Short-term euphoria coexists with long-term concerns. Goldman Sachs predicts that interest rate cuts will drive the S&P 500 index to rise by over 10% in the next 12 months, with technology stocks and consumer sectors potentially being the biggest winners. However, caution is needed regarding the risk of "good news already priced in."
Deutsche Bank pointed out that if the rate cut is not as expected or if economic data worsens, the market may experience reverse volatility.
2. US Dollar: Under depreciation pressure, the "seesaw effect" may cause the US Dollar Index to fall below the 100 level, while currencies such as the Renminbi and Japanese Yen may strengthen in stages, benefiting export-oriented economies like China.
Emerging market assets (such as gold and Hong Kong stocks) will attract more capital inflows, but countries with high debt may face exchange rate shocks.
3. Enterprises: Financing loosening and cost pressure coexist. The issuance cost of U.S. corporate bonds has decreased, and tech giants are expected to increase their buyback efforts, but export companies may suffer profit losses due to the depreciation of the dollar.
The Fed's interest rate decisions have never been a simple "economic issue," but rather a complex game involving economics, politics, and international relations.
For us, rather than speculating on the policy path, it is better to focus on two major anchors: the true direction of inflation data and the coordinated actions of global central banks.