Federal Reserve Cuts Rates 25 Basis Points, Boosts Chinese Assets 2.85%

The Federal Reserve announced a 25 basis point reduction in the federal funds rate target range, bringing it down to 4.00% to 4.25%. This marks the first rate cut since December 2024. The decision was made after a two-day monetary policy meeting that concluded in the early hours of September 18, Beijing time. The latest dot plot indicates that most Federal Reserve officials anticipate two more rate cuts in 2025.

Following the announcement, Chinese assets experienced a significant surge. The Nasdaq Golden Dragon China Index, which tracks the performance of Chinese companies listed on U.S. exchanges, rose by 2.85%. Notable gainers included Xunlei, Baidu, and Puhua Bio, which saw increases of over 11%, 10%, and 7% respectively. Other companies such as Qifu Technology, Land Control, and NIO also saw substantial gains.

Federal Reserve Chairman Powell, during a press conference following the Federal Open Market Committee (FOMC) meeting, highlighted that while the unemployment rate remains low, it has shown slight increases. Inflation, although elevated, is expected to align with the 2% target in the coming years. Powell emphasized the need for the Federal Reserve to monitor developments in tariffs, inflation, and the labor market before considering further rate cuts.

Powell also addressed concerns about the independence of the Federal Reserve, reiterating the institution's commitment to maintaining its autonomy from political influence. He noted that the recent appointment of a new Federal Reserve governor, who currently serves as the chair of the White House Council of Economic Advisers, would not compromise the Fed's independence.

The decision to cut rates by 25 basis points was seen as a dovish move by the Federal Reserve, signaling a cautious approach to monetary policy. The move was met with a muted response from risk assets, as the market had already priced in the likelihood of a rate cut. The decision to reduce rates was supported by a majority of Federal Reserve officials, with 9 out of 19 officials predicting two more rate cuts in 2025, while 2 officials anticipated one more cut, and 6 officials saw no further need for rate reductions.

The impact of the rate cut on various asset classes was significant. While the decision was generally positive for risk assets, it had a more pronounced effect on commodities with strong currency attributes, such as gold. The price of gold initially surged to a record high of $3,704 per ounce before retreating, ultimately closing the day with a 0.83% decline. Silver also experienced a similar pattern, with prices initially dropping by over 3% before stabilizing and closing with a 2.14% loss.

The Federal Reserve's decision to cut rates was driven by a combination of factors, including concerns about the labor market and the need to support economic growth. The move was seen as a preemptive measure to address potential risks to the economy, such as rising tariffs and inflationary pressures. The decision to cut rates by 25 basis points was seen as a balanced approach, providing support to the economy without overstimulating it.