The Fed's Rate Cut Cycle Approaches: A Historical Review and Asset Performance Analysis

1. A new round of interest rate cuts has begun

The Fed announced a 50 basis point rate cut in the early hours of September 19, adjusting the target range for the federal funds rate to 4.75% - 5.0%. This rate cut aligns with market expectations but exceeds the predictions of many Wall Street firms. Looking back in history, a 50 basis point initial rate cut typically occurs during periods when the economy or markets face serious challenges, such as the tech bubble in 2001, the financial crisis in 2007, and the COVID-19 pandemic in 2020.

To alleviate market concerns about an economic recession, the Fed chairman emphasized in his speech that there are no signs of recession. At the same time, the Fed released a relatively conservative interest rate path forecast: it is expected to lower interest rates twice in 2023, totaling 50 basis points, four times in 2024, totaling 100 basis points, and twice in 2025, totaling 150 basis points, for a cumulative reduction of 250 basis points, with a final interest rate target of 2.75%-3%. This pace of rate cuts is relatively slow and later than market expectations.

The Fed has also lowered its GDP growth forecast for this year to 2.0%, raised its unemployment rate forecast to 4.4%, and lowered its PCE inflation forecast to 2.3%. These data indicate that the Fed is more confident in controlling inflation while paying more attention to employment conditions. Overall, the Fed has once again demonstrated its capability in managing expectations through a significant initial rate cut and a relatively conservative rate cut path.

2. Review of the Interest Rate Cut Cycles in the Past 30 Years

( 1989-1992: Interest rate cuts to tackle the savings and loan crisis

From June 1989 to September 1992, the Fed initiated a rate-cutting cycle that lasted for more than three years, with a total reduction of 681.25 basis points, lowering the policy interest rate from 9.8125% to 3%. This round of rate cuts was mainly aimed at addressing the savings and loan crisis and the economic recession triggered by the Gulf War.

) 1995-1996: Preventive Rate Cuts

From July 1995 to January 1996, the Fed implemented a preemptive interest rate cut, reducing rates by a total of 75 basis points. This round of cuts successfully achieved a "soft landing" for the economy, avoiding runaway inflation, and is regarded as a typical case of preemptive interest rate cuts.

( 1998: Short-term interest rate cuts to address the Asian financial crisis

From September to November 1998, the Fed again took preventive measures by lowering interest rates, with a total reduction of 75 basis points, in response to the potential impact of the Asian financial crisis on the U.S. economy.

) 2001-2003: Interest rate cuts in response to the burst of the internet bubble

From January 2001 to June 2003, the Fed conducted 13 rate cuts, totaling a reduction of 550 basis points, lowering the policy rate from 6.5% to 1.0% to address the economic recession caused by the burst of the internet bubble.

( 2007-2008: Rapid interest rate cuts in response to the financial crisis

From September 2007 to December 2008, the Fed cut interest rates 11 times during the financial crisis, totaling a 550 basis point reduction, bringing the policy rate down from 5.25% to nearly zero. It also introduced quantitative easing for the first time.

) In 2019: Preventive interest rate cuts in the context of trade friction

From August to October 2019, the Fed implemented three precautionary rate cuts, totaling 75 basis points, to address the risks posed by trade frictions and a slowdown in global economic growth.

2020: Emergency rate cuts in response to the COVID-19 pandemic

In March 2020, the Fed made two emergency rate cuts in a short period, rapidly lowering the interest rate to a level of 0-0.25% to respond to the impact of the COVID-19 pandemic on the economy.

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3. Analysis of Asset Performance During the Interest Rate Cut Cycle

US Treasury Bonds

U.S. Treasury bonds typically show an upward trend before and after interest rate cuts, with higher increases and certainty before the cuts. The average probability of rising in the 1, 3, and 6 months before a cut is 100%, with average gains of 13.7%, 22%, and 20.2%, respectively. The performance after the cut is relatively weaker, with both the probability and magnitude of increases declining. This indicates that the market usually reacts to expectations of interest rate cuts in advance. In the early stages of a rate cut, volatility in the bond market may intensify, while in the later stages, bond trends may diverge due to varying economic recovery situations.

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( Gold

The probability and extent of gold's rise before interest rate cuts is usually greater. However, since the launch of gold ETFs in 2004, the correlation between gold prices and interest rate cut cycles has become more complex. During the interest rate cut cycle in 2019, gold saw a significant rise after the first rate cut, followed by a consolidation and pullback over the next two months, but it maintained an upward trend in the long term.

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( Nasdaq Index

The Nasdaq index performs differently in various types of interest rate cut cycles. During recessionary rate cuts, the index generally shows a downward trend, except for the exceptionally long cycle in 1989. In contrast, during preventive rate cuts, the index usually trends upward over the long term. In the 2019 rate cut cycle, the Nasdaq experienced a pullback after the first two rate cuts but began a major rise around the third rate cut.

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( Bitcoin

In the interest rate cut cycle of 2019, Bitcoin briefly rose after the first rate cut, then entered a downward channel, correcting about 50% over approximately 175 days. In contrast, before this rate cut, Bitcoin had already corrected about 189 days in advance, with a maximum decline of about 33%. Based on historical experience, the long-term outlook remains optimistic, but short-term fluctuations or slight corrections may occur, with expected magnitude and duration being less than in 2019.

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Overall, the performance of different assets during a rate cut cycle is closely related to the macroeconomic environment. In the context of the current soft landing of the U.S. economy, investors may need to pay more attention to asset performance patterns similar to those during the preventive rate cuts of 2019.