BlackRock: The Federal Reserve's first rate cut in 4 years is not the start of a complete easing cycle.

BlackRock's article states that, as expected by the market, the Federal Reserve announced a significant 50 basis point interest rate cut in its September rate decision and described this cut as a "reset" of its monetary policy. The decision to cut interest rates was based on the Federal Reserve's assessment of the current economic situation in the United States, that the "economic conditions remain strong" and the risks facing economic growth and inflation expectations have "balanced out," and that the monetary policy adopted is in sync with the development of the economic situation. BlackRock mentioned that the Federal Reserve chose to cut rates by 50 basis points instead of 25 basis points, and the reason for this may be found in Federal Reserve Chairman Powell's remarks: "The U.S. economy is growing steadily... We want to maintain this momentum." However, from this, it can also be seen that the Federal Reserve is more concerned about the risk of the U.S. economy slowing down excessively rather than balanced risks. At the same time, the Federal Reserve did not explicitly acknowledge the risk of inflation rising. It is worth noting that the Federal Reserve did not mention the positive impact of loose policy on U.S. economic growth, which is unusual in a context where restrictive policies should be implemented, further confirming the atypical nature of the current economic cycle. The impact and implications of Federal Reserve interest rate cuts on the market This rate-setting meeting is reminiscent of December 2023 when the Federal Reserve had already strengthened market expectations of interest rate cuts. While this move was unexpected and may have a short-term positive impact on the market, BlackRock's think tank believes that the possibility of further market volatility in the future will increase, especially when U.S. economic growth and inflation fail to achieve a "soft landing" as predicted by the Federal Reserve. Given the significant uncertainty in the global economic outlook and the dissent within the Federal Reserve before entering the "quiet period", achieving almost unanimous consensus in decision-making now may be more surprising than any dissent. Jean Boivin, head of BlackRock's think tank, stated that Federal Reserve Chairman Powell described this rate cut as a "reset" of monetary policy, a term that should be used when the Federal Reserve decides to pause rate cuts. So, it is clear that this is not the beginning of a broad easing cycle. We believe that the market's expectations for the magnitude of rate cuts may ultimately be disappointed, and the resilience of U.S. economic growth will be a positive development." Furthermore, through the Federal Reserve's Summary of Economic Projections (SEP) dot plot and the comments made by the Federal Reserve Chairman at the press conference, we have further clarity on the future direction of U.S. monetary policy. The dot plot shows that the median expected interest rate in 2024 implies that the remaining two rate-setting meetings this year may cut rates twice, each by 25 basis points, while the median expected interest rate in 2025 suggests that the policy rate could cut by another 100 basis points next year. Rick Rieder, BlackRock's Global Chief Investment Officer for Fixed Income, stated that the decision to cut rates may trigger a series of reactions in the financial system. The key significance is that the Federal Reserve may continue to cut rates in the next two years. With lower interest rates, fixed income assets are expected to benefit, but it does not mean that fixed income asset performance will rise in a straight line. The market is still influenced by other factors such as the development of the U.S. economy, U.S. election results, geopolitical situations, etc." However, BlackRock still favors assets in the middle of the yield curve, especially those with yields higher than U.S. Treasury bonds. Because the real benchmark interest rates in the U.S. are still relatively high, even if the Federal Reserve attempts to further lower rates in the next year, these assets may still provide substantial returns. On a global scale, perhaps no region is more eagerly awaiting the Federal Reserve's policy decision than Asia. For many years, central banks in various countries and regions in Asia have been constrained in loosening monetary policy due to a weak Japanese yen and high U.S. interest rate policies. Now, with the reversal in the yen's trend and adjustments in the Federal Reserve's policy, this situation is finally starting to change. Central banks in Asian countries are gradually regaining their independence in monetary policy. For example, the Bank of Indonesia unexpectedly announced a rate cut on September 18 Beijing time, while the Central Bank of the Philippines took rate-cutting action last month. The 10-year government bond yields of these two countries are both several hundred basis points higher than U.S. Treasury bonds, so they have had to raise rates significantly in recent years to curb currency depreciation. One of the key reasons stated by the Bank of Indonesia in its statement is the expectation of a more accommodative U.S. monetary policy. Navin Saigal, BlackRock's Head of Macro Markets for Fixed Income Investments in Asia, stated that for a long time, various regions and countries in Asia have faced high interest rates and low inflation due to external pressures, but these influences are now weakening. Therefore, now may be an ideal time for global investors to continue to include fixed income assets from Asia in their portfolios." Shen Yufei, Chief Equity Investment Officer of BlackRock Fund, Manager of BlackRock China New Horizons Mixed Fund, Manager of BlackRock Industry Preferred Mixed Fund, stated that at the current time, the Federal Reserve's rate cut is expected to reduce exchange rate pressures in various countries, open up space for easing monetary policies in various countries, and global liquidity easing will provide strong support for valuations. And as the marginal cost of funds falls due to lower interest rates, the attractiveness of stable high-dividend assets is expected to increase, with Hong Kong high-dividend assets more likely to benefit directly, and may also benefit certain interest rate-sensitive industries. Of course, the most discussed topic in the market is the release of monetary policy space in China following the U.S. rate cut, which could boost stock market performance if there is follow-up easing monetary policy domestically. However, overall, we believe that these impacts are marginal in nature, and the impact of the U.S. rate cut on the domestic stock market is more about the slope rather than the direction. Stock performance essentially reflects the profitability of companies, and is more relevant to the domestic economic fundamentals and long-term industry policy trends. Therefore, in our investment approach, we will closely follow the macroeconomy while conducting solid research from the bottom up to find industry and stock opportunities with alpha logic, and pay close attention to the possibility of a bottom asset turnaround. Liu Xin, Chief Fixed Income Investment Officer of BlackRock Fund, Manager of BlackRock Xingyue Fengli Bond Fund, Manager of BlackRock Puyue Fengli One-Year Holding Mixed Fund, Manager of BlackRock Citi 0-3 year policy Finance Bond Index Fund, stated that the Federal Reserve's initial rate cut was higher than expected, resulting in a rapid decline in short-term U.S. Treasury yields and a steepening of the U.S. Treasury yield curve. However, from the dot plot perspective.Look, the expectation of only two rate cuts in the remainder of the year is lower than previous market pricing, causing a slight rebound in US bond yields.He believes that, overall, in the context of the 50 basis point rate cut by the Federal Reserve, the domestic bond market and policy direction are still dominated by domestic factors. We judge that the fundamentals are expected to benefit the domestic bond market in the long term. The rate cut by the Federal Reserve in the second half of the year will ease exchange rate pressures and further open up monetary policy space. Credit bonds may face resistance in the short term due to valuation and slowing demand towards the end of the year, with an estimated oscillating trend, but are optimistic in the long term under the overall direction of declining long-term financing costs. Wang Xiaojing, head of multi-asset and quantitative investment at BlackRock Fund, said that after the rate cut by the Federal Reserve, the central bank should have more room for rate cuts, which is positive for the bond market. The midpoint of the renminbi exchange rate is already close to the current price, showing that the central bank has some room to operate in preventing exchange rate risks and not worrying about short-term exchange rate fluctuations brought about by rate cuts. The risk lies in the long-term interest rates falling too quickly or the yield curve inverting. He said that if interest rate cuts and reserve requirement cuts are implemented, although slightly later than market expectations, they will help restore sentiment and confidence in the stock market. The continuous narrowing of interest rate differentials is unfavorable to the financial industry but beneficial to other industries. If a large and fast-acting fiscal policy is introduced at the same time, it will stimulate demand and boost the overall market. The risk lies in monetary and fiscal policies not being timely or of sufficient scale. Measuring the long-term risk premium of the Shanghai and Shenzhen 300, the overall valuation of large-cap stocks is currently the third cheapest point in nearly twenty years, only surpassed by after the stock market crisis in 2015 and October 2012. However, some industries and style factors have already been fully or overly priced in the long-term value in a low interest rate, low growth environment, so caution is needed in the short term. He mentioned that attention should be paid to the potential for renminbi appreciation - the monthly national commercial bank foreign exchange settlements and sales have turned positive in August, after being negative for the first seven months. If the inflow of settlements continues, it will partially push up the renminbi exchange rate.