Tianfeng: The Fed's significant rate cut may be driven by non-economic factors, increasing the risk of secondary inflation.

Feng believes that the Fed's rate cut this time is not a compensatory rate cut. If the Fed really thinks that the July non-farm data points to the necessity of cutting rates, it should openly guide more definite rate cut expectations (25bp+25bp) after the data is released, instead of the market speculating on the possibility of a 25bp or 50bp cut after the quiet period. Overall, Tianfeng believes that this may be a significant rate cut not driven by economic factors, which may also increase the risk of second-round inflation. The U.S. economy, stimulated by the rate cut at a relatively high level, is likely to see a rebound in demand, which will drive inflation. Next year, the Fed may consider raising rates again. This significant rate cut and hike in volatility is reminiscent of the Fed Chairman Burns in the 1970s. At the September FOMC meeting, the Fed unexpectedly cut rates by 50bp, revised upward the year-end unemployment rate forecast to 4.4% (from 4.0% in June), revised down the year-end core PCE to 2.6% (from 2.8% in June), and further raised long-term interest rates to 2.9%. Following the Jackson Hole meeting, the Fed declared victory over inflation by substantially cutting rates by 50bp, thereby starting a new rate-cutting cycle. Throughout the press conference, Powell did not provide strong evidence for a 50bp rate cut, only emphasizing repeatedly to "do the right thing." However, based on recent economic indicators, a 50bp rate cut "may not necessarily be right." Since August, core inflation has rebounded, wage growth has rebounded, employment conditions have improved, retail sales have surpassed expectations, the entire real estate chain has warmed up, the service industry PMI remains at a high expansion level, and industrial production has also unexpectedly recovered. All these indicators suggest that a significant rate cut is not urgent. Tianfeng believes that Powell may be bogged down by three "non-economic factors": market expectations, illegal immigration, and the U.S. election. First, there are market expectations that have been factored in too early. Tianfeng mentioned before that, following Powell's dovish turn in August, the market was not concerned about the reasons and consequences of cutting rates, only speculating on the extent of the cut, leading to rate cut expectations remaining around 100bp since August despite improving economic data. During the quiet period, with no data support, the 50bp rate cut expectation continued to rise with the help of former NY Fed Chair and other media reports, lacking logical support. Powell's decision to move closer to the market and cut rates by 50bp also lacks logical support, especially given the Fed's usual proactive management of expectations. Tianfeng believes that understanding Powell's decision requires going back to the Fed's underlying goal: financial market stability. The 50bp rate cut is a double-edged sword: it aligns with the financial market's pricing in advance to avoid significant asset fluctuations, while also increasing the potential risk of second-round inflation. The Fed's emphasis on the former is significantly higher than the latter. Secondly, there are unpredictable factors related to illegal immigration (and the corresponding level of unemployment). The Fed providing a stable 4.4% unemployment rate forecast for 2024 and 2025 is itself inconsistent; historically, unemployment rates have rarely remained constant, but the current influx of illegal immigrants poses many unknowns to the labor market. The rise in unemployment is clear, and Tianfeng has previously argued from various angles that this is more of a supply-side shock. The problem is that the entire U.S. labor market is influenced by the uncertainty of the rate at which illegal immigrants are entering (including the time for illegal immigrants to join the labor force and the participation rate), and the number of illegal immigrants recorded by the current U.S. Border Patrol has significantly decreased. Tianfeng believes that such a bold monetary policy adjustment and a relatively proactive rate-cutting path may not fully take into account the weakening marginal supply of labor, coupled with the demand recovery brought about by the rate cut. There is a certain risk of a downturn in the U.S. unemployment rate. Lastly, and most importantly, there is the factor of the U.S. election. Interestingly, during the press conference, Powell mentioned that as a Fed Chairman, he has experienced four presidential elections, all based on collective decisions to maximize the interests of the American people. Yet in 2016, the Fed actively avoided interfering in the election, and only continued to raise rates after the election. For the current U.S. economy, it may not be unreasonable to wait until November to act. Looking back now, Powell's idea of "doing the right thing" is not necessarily based on economic factors, but more on preferences related to non-economic factors. Powell maintained a neutral position during Biden vs. Trump, but quickly turned dovish when Harris succeeded to confront Trump, opening the rate-cutting cycle with a 50bp cut. Tianfeng does not emphasize causality between the two, but the timing of this change is relatively consistent. Previously, Trump threatened to replace Powell and publicly warned Powell not to cut rates before the election, which may have led to the opposite effect and prompted the 50bp rate cut. Tianfeng believes that this is not a compensatory rate cut. If the Fed really thinks that the July non-farm data points to the necessity of cutting rates, it should openly guide more definite rate cut expectations (25bp+25bp) after the data is released, rather than the market speculating on the possibility of a 25bp or 50bp cut after the quiet period. Furthermore, Tianfeng has consistently emphasized that since the release of the July non-farm data, the economic indicators have been improving, reducing the need for compensatory rate cuts. Overall, Tianfeng believes that this may be a significant rate cut not driven by economic factors, which may also increase the risk of second-round inflation. The U.S. economy, stimulated by the rate cut at a relatively high level, is likely to see a rebound in demand, which will drive inflation. Next year, the Fed may consider raising rates again. The high volatility of significant rate cuts and hikes is similar to the Fed Chairman Burns in the 1970s. Of course, this could also be the Fed...Storing anchoring expectations about the US economy not landing, and the high likelihood of adjusting monetary policy based on non-economic factors. Risk warning: significant deviation in US unemployment data, US corporate profits slowing down more than expected, unexpected events in US elections reoccurring, and increased uncertainty in US wage growth.Can I have a glass of water, please?