Foreign media have not noticed this. They all say that if the interest rate is cut based on previous records, the stock market will fall or what is the probability of it falling? They have not noticed this different interest rate cut. The reason why the Federal Reserve is willing to cut interest rates now is that I will tell you a real truth. Hello everyone, welcome to Queen's Finance. My name is Liu Xuantong. Today we are very happy to invite our general economic expert, Mr. Wu Jialong, to talk to us about the impact of the U.S. interest rate cut in 2024 on the stock and bond markets. Let us Welcome, Mr. Wu, host. Hello, dear audience. Mr. Wu, when we talk about this topic today , it reminds me of when I was a rookie when I first came to Financial Information. Our former President Sun once said something: Don’t talk to the Federal Reserve. This means that you must understand the trends of the Federal Reserve . Let’s talk about the Federal Reserve today. Last December, it suddenly seemed to indicate that there was a shift from hawks to doves. At that time, everyone rushed to buy bonds . I remember a lot. People buy it thinking it is a free question. However, the recent conversations or meetings may make everyone feel uncertain . It was originally expected that interest rates might be cut in March, but now it seems that the chance is slim . I would like to ask the teacher first. Help us explain the recent attitude of the Federal Reserve. What is its policy thinking or stance? You are welcome to join the Financial News channel. Membership supports Financial News, the most knowledgeable financial media about investment. We will update the program every week to take everyone to track the global trends. Political and economic trends and understanding the status of the industry. At the same time, 2024 is also the 50th anniversary of financial information. Whether you are a member of the channel or leave a comment and like our program, you can support us in continuing to bring you wonderful content. The Fed’s position is To deal with inflation, we must achieve the policy target before we can declare victory. The policy target or long-term interest rate target is 2%, so some people have specifically chosen this to ask why it is 2% , why not 1.5% or 2.5%, etc. Of course. La, this is the central bank of various countries. The central bank of New Zealand should be the first to initiate it. The central banks of various countries think this is reasonable. Below 2%, it is easy to fall into deflation , especially below 1%, and above 2%, it is easy to become inflation , because the threshold for whether there is inflation is 3% , so 2% is considered a relatively neutral range between inflation and deflation. It is called benign inflation. No inflation is not good , and too much inflation is not good , so we take 2% as If we leave 2% as the policy goal , this is inflation, right ? Then the interest rate must be the inflation rate plus the real interest rate , so the final interest rate must be higher than 2%. For example, if it is 3% or 4% , then the interest rate will be Room to cut interest rates. If something goes wrong now, the Fed wants to deal with financial systemic risks. It has room to cut interest rates . Otherwise, it doesn’t have to engage in quantitative easing all day long. The interest rate is 0 , so it retains some room to cut interest rates . It needs to respond to possible actions at any time. This is the need for the Federal Reserve. The Fed's position is to move towards 2%. Now the question arises. The Federal Reserve is now interpreting the inflation situation. According to the data , it said that its position is this. Last year, inflation did drop significantly in 2023, but there is still a long way to go before the target of 2%. It is the first point and then the second point. It is estimated that inflation will continue to trend downward, which is the downward trend. This is the second point and then the third point. It is estimated that the effects of monetary tightening will gradually show up over a period of time because of this policy. How long is the lag? Usually textbooks will say 9 months to 12 months, but some people say it is shorter, 6 to 9 months, which is 2 to 3 seasons. Sometimes it is 3 to 4 seasons. All in all, there is a time difference . It's worth about 9 months. If the US Federal Reserve really wants to use interest rate policy to help so-and-so win the election, then you have to calculate the time. After 9 months, you will see the effect in October. Isn't it now? Yes, so there are talents. It is said that action will be taken in March because there is a lag in policy , so the current tightening will still have some effects that will gradually show up in the second half of this year. Last year's interest rate cut will probably see the effect in the second half of this year . Because of this It is backward , so the Fed can wait and see the effect if necessary. If it is not enough, it will raise interest rates. If it is enough, it will stop here, which is the end point of raising interest rates. Seeing this, the Fed is now observing the inflation situation and then it faces 2 Risks : Inflation may rebound. It does happen . We mentioned in the second half of last year and the first half of this year that inflation may rebound. We asked the financial market not to rush to expect interest rate cuts because the Federal Reserve has seen one thing from its experience in combating inflation. The thing is, as a result of cutting interest rates too early, inflation paused for a while and then hit a new high, breaking through the previous high. As a result, the Federal Reserve was forced to raise interest rates again. After rising, they lowered interest rates again, and inflation fell back. Yes , but inflation has not really been resolved . In the future, it will still be at a high point and it will hit the second time. This situation has happened twice before. One was of course the inflation in the 1970s. The other time was around the 1930s. Later, Volcker ignored the three in the end . Seventy-Twenty directly raised the interest rate to 20%. Only in this way can inflation be brought down. So remembering the lessons of the past, the Federal Reserve would rather lower the rate slowly than to lower it too early and then raise interest rates again to suppress inflation. Going forward, the first one is fear of inflation rebounding again. Inflation has indeed rebounded. From the high point in June 2022, the CPI growth rate was 9.1% , and then dropped to 3.0% in June last year . It is a very considerable decline. From July last year to December to January this year, it was all above 3.0%. In July , it went from 3.0% to 3.2%. In August, it was 3.7%. In September, it was 3.7%. Then in October , it was 3.7%. 3.2% 3.1% 3.4% and 3.1%. This means that it is consolidating in the 3% to 3.7% zone . This is very bad because it means that inflation will drag on. What is inflation called? This is called the dilemma of the last mile of inflation. It cannot be reduced to 3%. If it is only 2.9%, 2.9%, 2.98%, it will not work . It is best to fall below 2.8% . This is relatively clear. Away from 3% to 2.5% to 2.2%. What the Fed is now calculating is that it is sure that it suddenly changed its stance in December last year because it knew that inflation would fall and it was sure that it would fall below 3% , but it did not expect that it would last long. There is a problem if inflation continues to hover at 3% to 3.7%, which will lead to future troubles. That is to say, the psychology of inflation expectations will take shape. Once the psychology of inflation expectations takes shape, I tell you that the fight against inflation will fail. So the Fed It is very careful. It knows that it is gratifying that inflation has come down, so it asks a question: How to look at inflation data? It depends on the medium-term trend to see if it is sustainable . In English, it is called sustainability , which means whether it is sustainable. Now it is on the downward trend and has been stuck by the Federal Reserve. The chairman also further explained that he divided the inflation data into three major blocks. The first block is called raw materials or commodities. The second block is called rent. Then comes wages . Wages are mainly for the service industry. Rent is mainly housing and real estate. This part includes housing, commercial use, and so on. 1 raw material or commodity is of course material. The key point is the price of crude oil , which is 20%. Rent accounts for 30%, and wages account for 50%. The current interpretation is that the inflation data will drop significantly. The real reason is the price of oil. After falling , rents are still above 6% and wages are still above 4%. These two have not dropped , so why did the Fed refuse to cut interest rates in March? This is an important reason. They want to confirm that rents and wages are really true. It is not just the oil price that is falling. What is more, the oil price is falling. There is now a geopolitical risk. The war in the Middle East may affect oil prices and transportation , or even increase freight rates . In this case, it may cause a rebound in inflation . That is to say, part of the oil price is inflation. The important force for the decline in data , but the driving force for the decline in inflation data may have been exhausted . In English, it is called Peter out, which means that the force has been exhausted. The profits have been exhausted. The subsequent decline in rental wages has not been compensated. If rental wages also start If it falls, it will be easier to deal with , so now we only see the oil price falling , but it seems to have stopped falling so far , so the driving force for the falling inflation data seems to have been used up , and the guidance it (the Federal Reserve) now gives is that it can be done this year It is almost certain that interest rates will be cut this year. There is a difference. It turns out that it thought there would be no interest rate cuts at all this year . Didn't it hint at that time and hinted three times in December? It was later in December. It said earlier that there would be no interest rate cuts in 2023 or 2024. When will the interest rates be considered? In 2025, then this year, why did it change its tune now ? It was changed in December. As you said, the decline in inflation data actually exceeded the Fed’s expectations, so the Fed started to change its tune . So, now, it is said that this year, it is estimated that the current The guidance is that interest rates will be cut by 3% this year , but the first interest rate cut will not be in March. This is the current outlook for interest rate cuts given by the Federal Reserve. Now we look at it and it says when it will happen. Then some people ask you why. Since When you say inflation is coming down, briefly explain why it didn’t fall in March. So the reporter from CBS asked them why it didn’t fall in March. He said we need more good data . It’s called more good data , not better data. It doesn’t mean we need more data. It's good enough that the data is as it is, but we need more good data. In fact, he is testing sustainability. Data must provide medium-term trends , so it must be sustainable. In other words, this is what he has a famous saying: Single data does not constitute The mid-term trend. If a single data is particularly high or low, then it needs to be filtered out. The first point is the mid-term trend. If you want to look at the sustainability of the mid-term trend, you need to dismantle the content of the inflation data and then For each sector, let ’s talk about whether the downward trend is sustainable. Then what is the financial market ’s reaction to the interest rate cut? The policy thinking is like this. If the data of the real economy is strong , then the financial market will interpret the Fed ’s interest rate cut and the stock market will be postponed. If the price of the bond market falls , the price of the bond market will also fall , and the yield rate may rise. If we see that the data on the real economy and the labor market weaken today , everyone will be happy and say that the Federal Reserve may cut interest rates early, cut interest rates early, so now it has become a saying Good data may cause the stock market to fall , which is a bad result. Bad data may have good results, which will become the market's mentality and expectations. So now we take a closer look. If interest rates really start to be cut , I will tell the audience that the current guess is this: March will not be After the reduction , assuming that there is really no reduction in March, then it will be May, June, July, these three situations. But I think June is the most likely. Why? Because among the 8 meetings of the Federal Reserve, March, June, September, 12 Month is the middle of the third month of each quarter. This time there are economic forecasts . The economic forecasts include GDP growth rate , unemployment rate and inflation rate . In addition, the dot plot of the interest rate path will give these 4 data and 3 It will only be given on June 9, December (month) , so it is very likely that the interest rate meeting in June will give guidance. No forward guidance will be given. At this time, there is a high possibility of cutting interest rates . And of course the next part will be necessary. Let’s see if the data has fallen below 3% . The latest situation is CPI. Let’s talk about CPI first. The overall CPI is currently down to 3.1% , but it has not fallen below 3% . Then the core CPI is 3.9%. That is, it has fallen below 4% for 2 consecutive months, and it has been at 3.9%, 3.9%. In this way, PCE is the inflation data most commonly cited by the Federal Reserve, called PCE . If PCE has fallen below 3% to 2.6% , then the core PCE , the data quoted by the Federal Reserve, is 2.9%, which has just fallen below 3%. This is also the first time since the outbreak of inflation that we have seen core PCE fall below 3% . So in theory, this is good news, but in fact, this is also the case. They should be aware of it , but they would rather wait a little longer , which means they would rather cut interest rates later than too early. That means the current forecast is the possibility of the Fed cutting interest rates this year. Quarter 2, May, June, July. Assuming that June is more likely , it is estimated that it will drop by 3 yards now. Of course, it depends on the data. The market originally expected a drop of 6 yards. Now it has been revised to a drop of 5 yards. In short, the market is still ahead of the Fed. Before that, the Fed originally expected a drop of 6 yards. They have been pouring cold water on the market and asking the market to calm down and not be so optimistic. If interest rates are cut , please note that the yield on short-term government bonds is highly linked to the official interest rate of the Federal Reserve. This is because the period is short and the substitution rate of the Federal Reserve is high. You can think of the benchmark interest rate as the overnight bank lending rate . Then it is 3 months, 6 months, and 2 years. The short-term government bonds are highly substitutable , so their yield rates are very connected. When interest rates rise, short-term bond yields rise. When interest rates fall , short-term bond yields fall . It responds very quickly and very sensitively. But long-term (bonds) are different because long-term (bonds) are like the next 5 or 10 years. It depends on the inflation rate in the past 5 years and 10 years. If inflation drops, the subsequent inflation rate will be relatively low, so the yield rate on long-term public bonds may be average and lower than short-term. This is called the interest rate. Inverted , so it seems that if you want to buy government bonds with your idle funds , then your risk tolerance is still enough. If you want to play bigger, you can play short-term, because the short-term will fluctuate more with the interest rate cut , but in the long-term, it will be more average. It is the average inflation rate over several years, 5 to 10 years, so its response will be slower than the short-term and the sensitivity is not that high. That is to say, as long as there is an interest rate cut , short-term bonds will immediately change. How much will the policy interest rate be lowered for short-term bonds? The rate of return will drop by as much as it needs to, which means that the sensitivity is very high. Then you see that it has raised interest rates and now the long-term government bond yields have not kept up. Do you know what this means? This is called transmission failure. Conduction failure. Monetary policy has a transmission process called transmission. mechanism , transmission failure, transmission failure, transmission failure, transmission failure, because the 10-year government bonds have not kept up. Why? Because monetary policy affects consumption and investment in the real economy through the 10-year government bond yield rate. The 10-year government bond yield rate is business. From here, the benchmark for transaction interest rates can be overweighted . Mortgage, car loans, credit cards, corporate loans, and student loans. The interest rates used for various market transactions are overweighted based on the 10-year government bond yield . So, if monetary policy wants to affect the real economy, You must look at the 10-year bond yield. As a result, the 10-year bond yield has not kept up. The short-term has followed very closely. So I say if you want to play with high sensitivity, do short-term bonds. If you are more long-term, look at the long term. On average, you can play with long-term bonds. So, why don’t you talk about the stock market? Because it turns out that the most annoying thing about the so-called stock market is uncertainty . If the uncertainty about interest rate cuts is reduced, things will become clearer and clearer. The decrease in uncertainty is good news for risk assets. The second point in the interest rate hike cycle is that when the rate hike is announced, the stock price falls. But in the second half, the stock price actually rises . Why? Because usually the Fed dares to raise interest rates. There is a positive outlook for the real economy as a background . Once the interest rate hike ends or even turns into a rate cut, the stock market usually rises. That was the case in the past , and now some people question that when the interest rates were cut twice in the past, everything fell afterwards . If the Fed If interest rates are going to be cut, don't be too happy and prepare to run away . He forgot one thing. The two major interest rate cuts in the past were the one in 2001 after the dot-com bubble burst , and then the next one in 2007, and the more after Lehman Brothers in 2008. It plunged directly to 0. The interest rates are like this and that. It is all because of the situation in the financial sector. It has to deal with financial systemic risks , so it cuts interest rates from normal interest rates directly to super loose. Note that normal interest rates increase interest rates in this way, which is called normal tightening . If it's higher, it's called over -tightening . If it's lowered, it 's called normal easing. If it's lowered again, it's super loose . The previous interest rate cut was to pull it directly from the normal interest rate level to super loose. Now it's from over-tightening to normal tightening, which is an interest rate cut. It is still tightening after that, which is different from the previous interest rate cuts. Now all the media , including foreign media, have not noticed this. They all say that based on previous records, if interest rates are cut, the stock market will fall or have a chance of falling. How many of them have not noticed this different interest rate cut? Now , the real reason why the Federal Reserve is willing to cut interest rates is that it wants to maintain a real interest rate of 2%. The real interest rate is the interest rate minus the inflation rate. The inflation rate. Who uses core PCE to calculate the data? Now the core PCE has fallen below 3%, right? Our interest rate is at 5.33% . So if this is reduced, you will find that its real interest rate is more than 2 percentage points. So as long as the inflation rate drops, it will An interest rate cut can To ensure that there is still a real interest rate of 2 percentage points, there will be enough tightening, so the interest rate cut is because inflation has dropped. In order to maintain the real interest rate of about 2 percentage points, it can lower the interest rate, so after it is lowered, it will still be If interest rates were tightened before, they would be loose or even super loose after they were lowered. Different interest rate cuts will certainly bring down the real economy and turn it into a recession. However, this is not the case now. We have not seen a financial crisis and there are no early signs of it recently. There is a thing called commercial real estate. Why mention commercial real estate ? Doesn’t it mean that the Federal Reserve is particularly concerned about the real estate market? Your real estate sales, profits and losses , and your family’s affairs. The Federal Reserve does not care. But what does the Federal Reserve care about? Because commercial real estate is backed by loans from large banks. Returning to the financial system , commercial real estate will be injured, which may hurt banks. Non-performing assets will increase sharply , which may affect the issue of financial systemic risk. Therefore, the Federal Reserve is concerned about this. Who will be affected by commercial real estate now ? For small and medium-sized banks and regional banks, the Fed is sure that this is a controllable risk , so it will find large banks to acquire the troubled small and medium-sized banks and deal with them internally . Therefore, the Fed will focus on large-scale banks. Are there any problems with banks that are too big to fail ? That’s called financial systemic risk. So you see now New York Community Bank and last year’s Silicon Valley Bank. They are all small and medium-sized banks. If something goes wrong, some of them can be solved and some of them are controllable. Risk : So whether commercial real estate will bring systemic risks now ? The Federal Reserve is not currently worried about this issue . Therefore, this time's interest rate cut is from excessive tightening to normal tightening. In this case, it will be compared with the earlier interest rate hikes during the asset bubble. For example, after the interest rate hike ended, I told you that the stock market rose sharply , so this 10,000 yuan actually makes sense. It is close to 1,000 yuan. This makes sense. You said the Taiwan stock market, yes. I think it was 24,000 (points) because we saw it 2 years ago. When TSMC reached a high of 688 yuan, we talked about it at that time, Lao Xie also said that in fact, it should be 700 yuan. That is to say, at that time, it was 800 yuan. Some were more optimistic and looked at 1,000 yuan . Why is this happening? Because TSMC’s overseas factories need to be constructed. 2 to 2 and a half years. Once the construction is completed, it will definitely be a plus for TSMC's revenue. Now it seems that TSMC is setting up more and more factories, both in Taiwan and abroad. There are many Kumamoto factories. Originally, there were 2 factories. It’s hard to build 6 factories now , so TSMC’s overseas expansion will definitely contribute to its operating profits. This part has not been reflected yet, so it makes sense that the market has not risen now. This part will definitely be reflected in the future. Unless you are talking about setting up factories overseas, the gross profit margin will be reduced and TSMC's gross profit margin will be lowered. That is another matter. Now it seems that it is not because the Kumamoto factory . The Japanese semiconductor industry has been suppressed by the United States for so long. This time, it borrowed TSMC's backdoor listing and listed it as TSMC. In the name of the name, the United States wants TSMC to set up factories overseas, which is called diversifying geographical risks. Japan's Kumamoto factory is doing very well now, right ? Japan has been holding back for so long and quickly seized the opportunity to rush forward. Therefore, the Kumamoto factory is not only ahead of schedule and surpassing the US factory , but may also have to Set up a few more plants , so it seems that the Kumamoto plant may contribute to TSMC in the future , plus the German plant , so the American plant may be held back, right? But the Japanese plant and the German plant will probably make up for it, so it makes sense for TSMC to continue to rise and it will drive it. The entire market index is like this. There is no 24,000 . That is our optimistic expectation. OK, thanks to you, Jinkou TSMC has been waiting for 688 yuan to break through for 2 years. Yes , it is the past two years since it set up factories overseas. In addition, AI is now breaking out . The topic has exploded , so it is estimated that more application fields will use this AI chip in the future . So we look at the bond market and the stock market separately. In fact, one thing we need to look at is the U.S. dollar. The U.S. dollar index. Everyone talks about the U.S. dollar index after it cuts interest rates. It will be bearish , but it shouldn’t be a reason why the Federal Reserve is actually delaying the rate cut. In addition to these economic factors, there is also a geopolitical reason. If the Chinese economy continues to decline and deflation, it is estimated that the Federal Reserve will have an impact on the global economy. It might have been a precautionary measure , so we relaxed it now and found that it had no impact. Chairman Ball’s latest statement is that the decline of China’s economy and real estate will have little impact on the United States . Its interest rate increase is actually a withdrawal of money, that is, quantitative easing flowing out of the United States. The money that has flowed out now needs to be recovered. Where will the money flow the most to China? Because China’s quantitative easing exceeds the sum of the United States, Europe, and Japan. Then China prints money and then points to the United States to print money. China’s own debt exceeds that of the United States and then points to it. The United States said that the United States has a lot of debt here, which is called rising in the east and falling in the west. The United States will decline and China will rise . It was a complete misjudgment . So after a lot of data came out, everyone discovered that it had been printing money for a long time and said that others were printing money , so it is a big country. Game is right, so it is very likely that the monetary policy of the US Federal Reserve , national security , US-China relations , and the so-called global prosperity are all connected. The currency is the currency of the United States , but the impact is global . We really thank Teacher Wu Jialong today. He is here The general manager helped us explain a lot of economic data in simple terms , including the 2%. How did this data come from ? It turned out to be New Zealand at that time. Thank you very much for watching. You are also welcome to support our program and give us a like. Subscribe and share. You are also welcome to watch our other videos. See you next time bye bye
