Federal Reserve Cuts Rates 25 Basis Points, Boosting Economic Growth

The Federal Reserve announced a 25 basis point reduction in the federal funds rate target range, bringing it down to 4.00%-4.25%. This marks the first rate cut since December 2024, driven by the recent underperformance of new job additions in the United States, which fell short of market expectations. The decision comes as a response to the economic slowdown, with projections indicating that the Federal Reserve may continue to lower rates in the upcoming policy meetings in late October and early December.

The Federal Reserve's decision to cut rates is expected to increase the money supply in the market, lower personal and corporate loan rates, and stimulate consumption and investment, thereby boosting economic growth. This move is anticipated to enhance market liquidity and risk appetite, positively impacting the stock market. Additionally, a weaker dollar is likely to bolster the prices of commodities such as gold and oil, which are priced in dollars. The reduction in the dollar's strength is also expected to alleviate debt pressures in emerging markets and attract international capital inflows into their stock and bond markets.

For China, the impact of the Federal Reserve's rate cut could be significant. Although China's benchmark interest rates are already at relatively low levels, there is still some room for monetary easing. The People's Bank of China could potentially lower the Loan Prime Rate (LPR) and the Medium-term Lending Facility (MLF) rate, or release liquidity through reserve requirement ratio (RRR) cuts. If China continues to implement monetary easing and maintain extremely low interest rates, it could provide a boost to the A-share market and drive a second wave of upward momentum. Historically, during periods of preventive rate cuts by the Federal Reserve, the A-share and Hong Kong stock markets have shown mixed performance due to their own fundamental factors. However, structurally, both markets have benefited from low interest rates, leading to expanded valuations in growth sectors and other interest-rate-sensitive industries. Hong Kong stocks, in particular, have shown greater elasticity. Sectors such as AI computing power, semiconductors, innovative drugs, and technology stocks in Hong Kong, as well as emerging technologies like solid-state batteries and robotics, are expected to continue benefiting from the rate cut. Additionally, the non-banking financial sector could see increased investment if China's monetary policy follows suit with further easing.

In the bond market, the Federal Reserve's rate cut is expected to ease the pressure from the interest rate differential between China and the United States, potentially attracting more foreign investment into Chinese bonds, particularly government bonds and policy-based financial bonds. In a global low-interest-rate environment, the appeal of Chinese bonds as an investment is likely to increase. Furthermore, as the impact of the Trump administration's tariff policies on the U.S. economy becomes more apparent, the dollar index is expected to face further downward pressure. This could provide an upward momentum for the renminbi. Considering the external volatility's impact on China's exports in the fourth quarter, timely counter-cyclical adjustments will help maintain economic stability, providing strong internal support for the renminbi's exchange rate. It is anticipated that the renminbi will remain stable, with minimal risk of rapid appreciation or depreciation.