The Federal Reserve announced a 25 basis point cut in interest rates

1. Overview of interest rate cuts

On November 7, 2024, local time, the Federal Reserve announced that it would cut the target range of the federal funds rate

 by 25 basis points to a level between 4.5% and 4.75%. This is the second interest rate cut after a 50 basis point cut on 

September 18, 2024.

2. Reasons for interest rate cuts

(1) Macroeconomic conditions

Steady expansion of economic activity but uncertain outlook: recent indicators show that U.S. economic activity continues 

to expand steadily, but the economic outlook is uncertain, the risks of achieving full employment and 2% inflation targets 

are roughly balanced, and the Federal Reserve needs to pay attention to the risks facing its dual mission.

The labor market has changed: labor market conditions have generally eased since earlier this year, with unemployment 

rising but still low.

Inflation has made progress but remains high: inflation has made progress towards the Fed's long-term target of 2%, but 

it is still somewhat high.

(2) Policy adjustment logic

Near neutral: Fed officials try to return the federal funds rate to a more normal or neutral level. Before the 2008 financial 

crisis, many people believed that the neutral interest rate might be around 4%, and now there are also considerations to 

adjust policy gradually closer to this level.

3. Impact of interest rate cuts

(1) Domestic implications

Financial markets

Stock market rose: after the announcement of the interest rate cut, U.S. stocks continued to rise. On that day, the three 

major U.S. stock market indexes all hit record highs. The Nasdaq composite index stood at 19000 points for the first time, 

and the standard&Poor's 500 stock indexes approached 6000 points.

Bond market changes: bond prices may rise and yields fall. Short-term and medium-term interest rate bonds may perform 

strongly, and investors may flow funds to short-term and medium-term interest rate bonds to increase their demand and 

price. But for the bond market as a whole, the decline in interest rates may lead to an increase in market share and more 

market volatility.

Lending rates fall: commercial bank lending rates will fall accordingly, which means that the cost of personal and corporate 

loans will be reduced and consumption and investment demand will be stimulated. Mortgage rates for home buyers could 

fall, as could the costs for credit card users.

Industry

Different industries are affected differently, for example, the real estate industry may promote market activity due to lower 

mortgage interest rates and reduced purchase costs. For growth industries such as science and technology, from historical

 experience, interest rate cuts can theoretically enhance the present value of their future earnings expectations, which is 

good for related companies, but the boosting effect in the current environment may not be as significant as in the past, 

and many factors need to be considered to affect the specific impact of Companies in the industry.

(2) Impact on the global economy

Exchange rate fluctuation: the exchange rate of the US dollar may decline, which will have a direct impact on the import and 

export trade of other countries. If the RMB exchange rate is closely linked to the US dollar, it may lead to the appreciation of 

the RMB, the price of China's exports may rise, and the demand for imported goods may decrease. Other currencies may 

also fluctuate against the US dollar, such as the exchange rates of some countries in Asia, Africa and Latin America against 

the US dollar, which may face pressure to change under similar circumstances, affecting their international trade and capital 

flow patterns.

Emerging market capital flows: may prompt international capital flows to emerging markets. Due to the decline in the 

attractiveness of US dollar assets, some funds may flow out of the United States in search of opportunities for higher 

returns. Emerging market countries such as Southeast Asia and Latin America may attract these funds, which will have an 

impact on their economic growth and may also bring the risk of financial market volatility.

Impact of international trade pattern: on the one hand, exchange rate fluctuations affect the import and export 

competitiveness of various countries' commodities; On the other hand, changes in global capital flows will affect domestic 

macro-economy and resource allocation, thus affecting global trade and countries. For example, if the U.S. economy 

changes due to interest rate cuts, the demand for products from different countries will change, and China's foreign trade 

related industries may face opportunities or challenges, depending on the U.S. economic recovery and Global trade 

protectionism.

4. Impact of interest rate cuts on specific industries

(1) Real estate

Mortgage interest rates usually fall with the Fed's interest rate cuts, which helps ease the global housing affordability crisis, 

stimulate the activity of the real estate market, and increase the potential demand for housing sales for real estate 

developers; For buyers, reducing the cost of buying a house may increase their willingness and ability to buy a house.

(2) Stock Industry

Overall performance: interest rate cuts help raise the valuation of stocks, usually a positive catalyst for stock prices, which 

may push up the overall stock market. From the perspective of growth companies, the prices of companies whose value 

comes from their future earnings potential may receive great attention, and risky assets such as low-quality technology 

stocks may be boosted.

Industry differentiation: Although the overall stock market may rise, the performance of different industries may be divided. 

Some industries that are greatly affected by the economic environment or their own industry cycle may rise by a limited 

margin or even fall. For example, industries seriously affected by international trade frictions or in overcapacity, such as 

some traditional manufacturing industries and enterprises that rely heavily on imports and exports and are sensitive to 

exchange rates, may not respond as positively to interest rate cuts as emerging technology industries and consumer 

industries.

(3) Bond industry

Interest rate cuts will lead to higher bond prices and lower yields. As yields fall, fixed income bonds may become more 

attractive, short-term and medium-term interest rate bonds may perform more strongly, and investor demand for bonds 

and the allocation of bonds of different maturities will be adjusted to change the pattern of the bond market.

5. Role in the global economy and impact on the global economic landscape

(1) Role in the global economy

Monetary policy signal transmission as an important central bank in the world, the Federal Reserve's interest rate cut is 

an important signal of monetary policy adjustment, which conveys some judgments and policy tendencies within the U.S. 

economy to the global market and affects the expectations of global investors on the economic situation and investment 

decisions.

**The impact of economic radiation affects the economies of various countries through international capital flows and 

exchange rate changes. On the one hand, attract or change the investment flow and intensity of their own domestic capital 

and multinational enterprise capital inside and outside the United States; On the other hand, through exchange rate 

changes, we can adjust the relative position of the United States in the international trade pattern, and each country will 

adjust its own economic policies or trade strategies accordingly. For example, the depreciated dollar is conducive to 

improving the competitiveness of U.S. export enterprises, strengthening the ability of U.S. goods to compete for market 

share in the international market, and affecting the flow and pattern of global commodity trade.).

(2) Impact on global economic pattern

Emerging market opportunities and risks coexist

Capital inflows bring opportunities: emerging markets may usher in opportunities, and a large amount of international 

capital flows to emerging markets and developing countries to promote local infrastructure construction, industrial 

upgrading and scientific and technological innovation and promote economic growth.

Volatility risk can not be underestimated: the openness of emerging markets is different and the stability of financial 

markets is different. The increase of US dollar liquidity and capital inflows may bring about adverse economic trends 

such as inflation, exchange rate fluctuations and financial asset bubbles, which will cause difficulties in policy regulation 

for emerging market countries with unstable financial systems and sound reasonable regulatory systems.

Economic policy adjustment and game deepening in various countries

The adjustment curves are different: because the Fed's interest rate cut may lead different countries to enter the interest 

rate cut channel or carry out targeted monetary policies according to their own national conditions, such as China and 

other countries will consider interest rate cuts and loose monetary policies to stimulate economic growth based on the 

domestic macroeconomic situation, such as the promotion of exchange rate liberalization in the free trade zone, but also 

considering financial stability and inflation and other issues, Japan may take more account of the appreciation of the yen 

and make corresponding adjustments. It can be seen that in order to adapt to the changes in the economic pattern brought 

about by the Fed's interest rate cut, there are some differences in the timetable and direction of policy adjustment among 

countries.

The international game is more complex: during the adjustment of the global economic pattern, the complexity of 

international relations intensifies, the risk of international trade frictions increases, trade protectionism may rise and other 

economic and political phenomena may occur frequently. For example, the United States may increase restrictions on trade 

tariffs and non-tariff barriers with other countries to safeguard the economic interests of the United States, but also bring 

losses and adverse effects to international economic and trade cooperation.

6. Follow-up policy possibilities

(1) Considerations for further interest rate cuts

Economic data and Outlook: the Federal Reserve may cut interest rates further if subsequent economic data show weak 

economic growth, a deteriorating job market or a faster than expected decline in inflation. For example, an unexpected 

weakening of the labor market or a sustained decline in inflation that is likely to fall below the 2% target may be factors 

that may prompt interest rate cuts.

Changes in the international economic situation: major signs of recession in the global economy, intensified international 

trade frictions or major adjustments in policies in other major economies may affect the U.S. economy, and the Federal 

Reserve may also cut interest rates further to cope with external risks. For example, if emerging market countries have an 

economic crisis due to their own problems or the impact of the Federal Reserve's interest rate cut, it may prompt the Federal 

Reserve to make further interest rate cuts.

(2) Adjust pace and rhythm analysis

Response to near neutral interest rates: with near neutral interest rates, it may be necessary to slow down the pace of 

interest rate cuts. Powell said that he had just begun to consider adjusting the pace of interest rate cuts, and that the Federal

 Reserve was not in a hurry to reach neutral interest rates and would act cautiously to find the right way. Although 

confidence has been gained in cutting interest rates, the current time is also not considered a good time to do a lot of 

forward-looking guidance.

Comprehensive assessment of the adjustment strategy: when considering further adjustments to the target range of the 

federal funds rate, the Federal Reserve will carefully assess the follow-up data, changing prospects and risk balance. The 

Federal Reserve will continue to reduce its holdings of treasury bonds, agency bonds and agency mortgage-backed 

securities, and is firmly committed to supporting full employment and returning inflation to its 2% target.

(3) The impact of fiscal policy

If the U.S. government introduces new fiscal policy and has an impact on the economy, the Federal Reserve may consider 

other factors in its economic model to reassess monetary policy decisions. Fiscal policy and monetary policy work together

 to better respond to various situations in the economy. When U.S. fiscal policy substantially increases spending or 

stimulates economic growth after tax cuts, the Federal Reserve may assess the impact of this on macroeconomic 

indicators and its fit with monetary policy objectives to decide whether and how to adjust monetary policy .

Summary: on November 7, 2024, the Federal Reserve cut interest rates by 25 basis points due to the steady expansion of 

economic activity but uncertainty, changes in labor market and inflation, and the logic of policy adjustment close to 

neutral interest rates. It has had a variety of impacts on the domestic financial market and industry of the United States, 

transmitted monetary policy signals in the global economy, affected exchange rates, capital flows and international trade 

patterns, and had an impact on the global economic pattern, such as the coexistence of opportunities and risks in emerging 

markets and the deepening of economic policy adjustment and game in various countries. The possibility of follow-up 

policies needs to consider economic data, international economic situation, near neutral interest rates and the impact of 

fiscal policy to comprehensively judge whether to further cut interest rates and adjust the pace.