Since the summer until now, from stocks to bonds—global markets have been welcoming the news of the Federal Reserve's interest rate cut.

The Fed has been lagging behind many of its peers, with the central banks of the Eurozone, the UK, Canada, Mexico, Switzerland, and Sweden having already cut interest rates before the Fed.

On September 18th local time, the Fed finally saw its first interest rate cut in four years, ending a four-year era of high interest rates.

The impact of this rate cut and subsequent cuts on the economy and the stock market will still need time to verify.

The interest rate cut on September 18th was a foregone conclusion, with the Fed announcing a 50 basis point cut to the target range of the federal funds rate, bringing it down to between 4.75% and 5.00%.

This is also the first interest rate cut by the Fed in four years, symbolizing the end of an interest rate cycle.

Prior to this, to combat soaring prices, the Fed had raised the benchmark interest rate to 5.5% through 11 rate hikes, and inflation has fallen from a peak of 9.1% in June 2022 to 2.5%.

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Fed Chairman Jerome Powell clearly stated in a high-profile speech last month in Jackson Hole, Wyoming, that Fed officials believe inflation has largely been defeated.

The last time the Fed cut interest rates, the world looked very different.

It was March 2020, against the backdrop of the COVID-19 pandemic causing global business to come to a standstill, and the Fed began emergency rate cuts within a few weeks, bringing short-term borrowing costs close to zero.

It wasn't until the spring of 2021 that the Fed misjudged the situation, thinking that the sharp rise in inflation might be a flash in the pan.

Powell then shifted his stance at the end of 2021, first withdrawing stimulus measures, and then raising interest rates in March 2022.

Faced with inflation soaring to a 40-year high, the Fed quickly raised interest rates by an unusual 0.5 percentage points and 0.75 percentage points.

This is the fastest rate hike cycle since the early 1980s, and by July 2023, interest rates rose to the highest level in 20 years.

Fast forward to this round of rate cuts, and the situation has changed dramatically: now, the US labor market remains relatively stable, and inflation is cooling down.

"This is a decision that is carefully timed, not an emergency wartime decision," said Dan North, a senior economist at Allianz Trade.

Although this rate cut was a foregone conclusion, analysts had different views on the magnitude of the rate cut beforehand.

Many expected a smaller cut of 25 basis points.

Fed officials also tend to make smaller adjustments, and this rate cut was stronger than expected, indicating that the Fed has become dovish, bringing it into a new phase of the inflation fight: the Fed is trying to prevent past rate hikes from further weakening the US labor market.

"We are committed to keeping the US economy strong," Powell said at a press conference.

"This decision reflects our growing confidence that the strong momentum of the labor market can continue as long as we appropriately adjust our policy stance."

The day after the Fed announced the rate cut, the three major US stock indices closed up together.

The S&P 500 and Dow both set new historical highs.

The Dow broke through 42,000 points for the first time, and the S&P 500 closed above 5,700 points for the first time, with the Nasdaq surging by as much as 3% at one point.

Future rate cut expectations have strengthened.

The Wall Street Journal reported that forecasts show the Fed will reduce interest rates to 4.4% by the end of this year, far below the 5.1% they expected in June, and officials expect four more rate cuts next year, each equivalent to a 0.25 percentage point cut, provided that the unemployment rate does not jump and the inflation rate continues to decline.

In this way, by the end of 2025, the federal funds rate will be slightly below 3.5%.

However, some are concerned that rapid rate cuts could reheat the economy and inflation could once again reach uncomfortable high levels.

In recent weeks, some Fed officials have believed that the US economy is not weak enough to require a 0.5 percentage point rate cut.

Fed Governor Michelle W. Bowman voted against this rate cut, and Bowman is also the only Fed official who voted against it, supporting a 0.25 percentage point rate cut.

Bowman was appointed by Trump in 2018.

This is also the first time since June 2022 that the voting members have held different views.

Candidates from both parties also quickly responded to the Fed's actions.

"This news is good news for Americans who are hit by high prices, and my current focus is on future work to continue to reduce prices," said US Vice President and Democratic presidential candidate Harris.

In contrast, the statement of Republican presidential candidate Trump was more negative: "If they are not just playing politics, then cutting interest rates so much indicates that the economic situation is very bad."

Powell clearly stated at a press conference that if the economy proves to be weaker or stronger than expected, the Fed is willing to accelerate or slow down the pace of future rate cuts.

Powell said: "The US economy is in a good position, and our decision today is to keep it there."

Although the Fed's rate cut has symbolic significance, economists and analysts say it is too early to declare that the Fed has achieved an economic "soft landing."

"Saying that now is like saying you have landed in the middle of a ski jump," said Gennadiy Goldberg, head of US interest rate strategy at TD Securities.

"We are still in suspense."

What does it mean for the stock market?

Since 1929, the Fed has gone through 14 interest rate cycles, and investors often wonder how the stock market will perform when the Fed starts to cut interest rates.

The general view is that interest rate cuts are good for the stock market, but unfortunately, there is no simple and unified answer to this question.

Especially this year, there is still considerable uncertainty about the expected rate cuts and the November presidential election.

The Fed lowers interest rates to stimulate the economy, which is often beneficial to stocks.

Sometimes it is indeed the case.

Take the S&P 500 as an example, which has performed well after several initial rate cuts.

Charles Schwab said that in the past 14 interest rate cycles, the S&P 500 has recorded a positive return 12 months after the first rate cut 12 times.

The only two negative return periods occurred after the Fed cut interest rates in 2001 and 2007, the former during the burst of the internet bubble, and the latter during the subprime mortgage crisis.

However, strategists say that investors should observe more carefully, especially in today's unusual environment, "it is necessary to understand that each cycle is different."

It is worth noting that studies have shown that "defensive" industries, that is, those key industries that are more likely to resist economic uncertainty, such as healthcare and utilities, usually perform well when interest rates rise.

On the contrary, "cyclical stocks" - industries that benefit from economic acceleration, such as non-essential consumer goods and industry - have greater potential when interest rates fall.

Analysis by research firm Ned Davis Research shows that when the Fed enters a gradual rate cut period, cyclical stocks usually perform the best.

It is worth noting that the definition of defensive and cyclical industries itself will change over time.

For example, technology stocks have always been considered cyclical stocks, but in this round of the Fed's tightening cycle, large technology companies have many characteristics of defensive companies, and the large amount of cash held by technology companies (as well as other factors) has made them immune to higher borrowing costs and has successfully outperformed the market.

Technology stocks are also expected to be boosted by this round of interest rate cuts, and analysts at the well-known US investment bank Wedbush said that the current market is relatively moderate, coupled with the boom in technology spending brought about by artificial intelligence, which will create ideal conditions for technology stocks, and technology stocks will rise before the end of this year and before 2025.

Even if the Fed's decision will have a certain impact on the stock market, each interest rate cut cycle is different, and monetary policy is not the decisive factor affecting the success or failure of the stock market.

The stock market will change with economic fundamentals, investor sentiment, and other factors, and the reaction of the economy to interest rate cuts is both long and variable.

As American economist Milton Friedman said in a speech to Congress in 1959, at that time, he compared the changes in Fed policy to - "You turn on the faucet now, and then it starts to flow after 6 months, 9 months, 12 months, 16 months from now."

The changes caused by this round of interest rate cuts have just begun.