From summer to now, from stocks to bonds - global markets are welcoming the news of the Federal Reserve's interest rate cut.

The Fed has always been lagging behind many peers, before this, the central banks of the Eurozone, the UK, Canada, Mexico, Switzerland, and Sweden have all cut interest rates ahead of the Fed.

On September 18th local time, the Fed finally ushered in the first interest rate cut in 4 years, ending a 4-year era of high interest rates, and the impact of this rate cut and subsequent cuts on the economy and the stock market still needs time to verify.

The interest rate cut on September 18th local time is a foregone conclusion, the Fed announced that it will lower the target range of the federal funds rate by 50 basis points, to a level between 4.75% and 5.00%.

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This is also the first interest rate cut by the Fed in 4 years, symbolizing the end of an interest rate cycle.

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

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

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

That was in March 2020, against the backdrop of the COVID-19 pandemic causing a global business standstill, the Fed started emergency rate cuts within a few weeks, and short-term borrowing costs were reduced to near zero.

Until the spring of 2021, the Fed misjudged the situation, thinking that the sharp rise in inflation might be a flash in the pan.

Powell then changed 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 interest 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 interest rate cuts, 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, Senior Economist at Allianz Trade.

Although this interest rate cut is a foregone conclusion, analysts previously had different views on the magnitude of the cut.

Many people expected a smaller cut of 25 basis points.

Fed officials also tend to make smaller adjustments, this interest rate cut is stronger than expected, which means that the Fed has become dovish, which brings it into a new stage of the inflation battle: the Fed is trying to prevent past interest 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 increasing confidence that as long as we adjust our policy stance appropriately, the strong momentum of the labor market can be maintained."

The day after the Fed announced the interest rate cut, the three major US stock market indexes all closed up.

The S&P 500 index and the Dow Jones index both set new historical highs again.

The Dow Jones index broke through 42,000 points for the first time, and the S&P 500 index closed above 5,700 points for the first time, and the Nasdaq index once surged by 3%.

The Wall Street Journal said that forecasts show that the Fed will cut interest rates to 4.4% by the end of this year, far lower than the 5.1% they expected in June, and officials expect to cut interest rates four more times 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 fall.

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

However, some people worry that rapid interest rate cuts may reheat the economy and inflation may fall into an uncomfortable high level again.

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

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

Bowman was appointed by Trump in 2018.

This is also the first time since June 2022 that the voting committee has 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 Republican presidential candidate Trump's statement is 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 the press conference that if the economy is proven to be weaker or stronger than expected, the Fed is willing to accelerate or slow down the pace of future interest 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 interest rate cut has symbolic significance, economists and analysts say that it is too early to announce that the Fed has achieved an economic "soft landing."

"Saying this 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 ask 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 interest rate cuts and the November presidential election.

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

Sometimes it is.

Take the S&P 500 index as an example, it has performed well after several rounds of the first interest rate cut.

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

The only two negative return periods occurred after the Fed cut interest rates in 2001 and 2007, the former was during the period of the burst of the internet bubble, and the latter was during the subprime 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 some studies have shown that "defensive" industries, that is, those that are often more resistant to 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 cyclical stocks usually perform best when the Fed enters a gradual interest rate cut period.

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

For example, technology stocks have always belonged to 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 run after 6 months, 9 months, 12 months, 16 months from now."

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