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Federal Reserve officials speak out intensively, with the focus of debate shifting towards a more relaxed pace

王俊杰2017
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The Federal Reserve launched a new easing cycle last week and conveyed its intention to support economic expansion and stabilize the labor market to the outside world through a more aggressive 50 basis point scale.
After a brief surge driven by the interest rate decision, the US stock market seems to be waiting for more confidence amidst volatility, as the market has largely digested the policy benefits. The current focus of attention from the outside world is whether the slightly unexpected policy measures can successfully achieve the goal of a soft landing for the US economy, which is also a key factor for Federal Reserve officials to decide the direction of their future monetary stance.
How does the Federal Reserve view the economic outlook
Similar to the information revealed in the latest dot matrix, there are significant differences within the Federal Reserve regarding future economic and monetary policies.
On Monday, several local Federal Reserve officials stated that the current policies have put too much pressure on the economy as inflationary pressures have subsided and job market risks have increased. Chicago Fed President Goolsby said that inflation and unemployment rates are both close to the Fed's targets, and "if we want a soft landing, we cannot fall behind the curve
Since the second half of the year, there have been signs of loosening in the job market, with an unemployment rate of 4.2% in August at the median level that Federal Reserve policymakers consider consistent with stable inflation. Atlanta Fed President Bostic said he believes the economy is approaching "normal" levels at a faster pace than he expected, and monetary policy should also be adjusted from its current restrictive policy stance. Last week's 50 basis point interest rate cut was an appropriate way to initiate this process. The progress in inflation and labor market cooling is much faster than I imagined at the beginning of summer
Minneapolis Federal Reserve Chairman Neel Kashkari commented to the media that he agrees that a 50 basis point rate cut is appropriate, although he can also support a 25 basis point rate cut. Kashkari believes that it may be necessary to cut interest rates by two more 25 basis points by the end of the year, as the balance of risk has shifted from higher inflation to further weakness in the labor market. Even after the rate cut, the current range of 4.75% to 5% for the benchmark interest rate is still high.
From the latest statement, although the Federal Reserve has reached a consensus that monetary policy is too tight for the economic situation, there is a debate about how quickly it should return to a neutral interest rate level that neither stimulates nor restricts the economy in the future, and how much this level may be. The first financial reporter noticed that the quarterly economic outlook shows that the long-term federal funds rate is 2.9%, but the point distribution is extremely scattered.
Bostic stated that the issue of (neutral interest rate) is a subject of "intense" debate among a group of policy makers with a wide range of opinions, and there is a considerable degree of disagreement.
History: A soft landing will drive a new round of market trends
For optimistic investors, historical data shows that if the Federal Reserve achieves an economic soft landing, it will bring a new round of substantial returns.
According to Evercore ISI's summary of interest rate cut cycles, since 1970, as long as the economy avoids recession, the S&P 500 index has risen an average of 18% annually after the first interest rate cut.
Lower interest rates will help the stock market in several ways. The reduction of borrowing costs will increase economic activity, thereby enhancing corporate profitability. A decrease in interest rates will also lower the returns on cash and fixed income, reducing their competitiveness as investments in stocks. The benchmark 10-year US Treasury yield has fallen by about one percentage point since April to 3.7%, and lower interest rates also mean that future corporate cash flows are more attractive, which often drives up valuations.
According to Matthew Miskin, Co Chief Investment Strategist at John Hancock Investment Management, "At this stage, stock valuations are quite reasonable. As valuations continue to grow, they are expected to be limited, and profits and economic growth will be key drivers of the stock market." According to data from the London Stock Exchange's IBES, the net profit of the S&P 500 index is expected to increase by 10.1% in 2024 and another 15% next year.
There are indications that this monetary policy shift has received financial support. Jim Reid, Global Head of Macro and Special Research at Deutsche Bank, found that although the S&P 500 index tends to stabilize in the 12 months leading up to interest rate cuts, this time it has risen nearly 27% during this period. You can say that the potential 'no recession loose cycle' returns this time are borrowed from the future. It can be certain that many investors are not intimidated by high valuations and maintain a positive outlook for stocks, "Reed said in the report.
At the same time, interest rate cuts close to market highs often indicate good signs for the stock market one year later. Ryan Detrick, Chief Market Strategist of Carson Group, stated that since 1980, whenever a rate cut occurs when the S&P 500 index is less than 2% from its historical high, the index has been able to rise one year later, with an average increase of 13.9%.
UBS Global Wealth also expressed optimism about the future in a report sent to First Financial reporters: "Historically, stock markets have often performed well during periods when the Federal Reserve cut interest rates and the US economy did not fall into recession. We expect this time to be no exception
Is the market pricing reasonable
Many institutional strategists have stated that the Federal Reserve has reserved such aggressive measures in the past when the US economy is on the brink of recession or facing an imminent crisis. Some market views suggest that the overvalued US stock market may have already digested the benefits of loose monetary policy, making it more difficult for the market to further rise.
The recent rebound of defensive stocks indicates that many investors are still preparing for some risks. Data pointing to an economic slowdown may lead to growth panic and scare investors - similar to the market's response to the rising unemployment rate in early August.
Michael Hartnett, a strategist of Bank of America, said that after the Federal Reserve cut interest rates, the stock market has the risk of stimulating foam, and bonds and gold have become hedging tools against economic recession or a new round of inflation. This celebrity analyst suggests that investors should think twice before chasing a rally, rather than succumbing to pressure to chase a rebound. Hartnett said that investors who feel they have no choice but to invest more funds in risky assets should consider alternatives to US stocks.
Robert Pavlik, Senior Portfolio Manager at Dakota Wealth Management, stated that the short-term upside potential for the stock market due to lower interest rates is limited. In the context of economic cooling, people are feeling a bit nervous about the stock index rising by 20% this year
Recently, Societe Generale also issued a warning that a large number of valuation indicators, including price to book ratio and price to sales ratio, show that the current US stock market is far above historical averages, and "the current level can be summarized in one word: expensive
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