Interpretation of Binance Report: 2024 interest rate cut cycle is coming, comprehensive analysis of the impact of the Fe

原作者: TechFlow

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As the global economic landscape continues to change, the direction of the Federal Reserves monetary policy affects the global financial market. In September 2024, the Federal Reserve cut interest rates for the first time since 2020, ushering in a new round of interest rate cuts.

Binance Research recently released a report that provides an in-depth explanation of the ins and outs of the Federal Reserve’s interest rate policy and its impact on the economy and various assets.

The report starts from the basic economic theory, combines the latest data and historical experience, and systematically analyzes the relationship between core economic indicators such as interest rates, inflation, and employment. At the same time, it comprehensively analyzes the performance of different asset classes such as stocks, bonds, commodities, and 暗号currencies during the interest rate cut cycle, providing investors with a clear decision-making reference.

TechFlow has sorted out the key information of the report, which is as follows.

重要なポイント

• Latest rate cut dynamics: The Federal Reserve announced a 0.5% rate cut in September 2024, followed by a further 0.25% rate cut in November, marking the first rate cut since the COVID-19 response in March 2020. The market expects a further 1-2 percentage point rate cut in 2025, with a probability of another 0.25% rate cut in December of about 62%.

• Policy background analysis: The Federal Reserve adheres to the principle of dual mission and is committed to promoting maximum employment and maintaining price stability (inflation target 2%). In mid-2022, inflation once exceeded 9%, prompting the Federal Reserve to take active interest rate hikes to the highest level in 20 years. As inflation gradually cools down, the Federal Reserve has started a new round of interest rate cuts.

• Interest rate impact mechanism: Interest rate is the price of money, and its changes will affect the market through two main channels:

• Lower borrowing costs, making it easier for market players to obtain funds while reducing existing debt burdens

• Lower risk-free rates of return, driving investors to seek other investment channels to increase returns

• Historical Trends: U.S. interest rates have shown a structural downward trend over the past 50 years, from 8-10% in the 1980s, to a period of near-zero interest rates in the 2010s, and to recent levels above 5%.

• Asset Performance Analysis:

• Stocks (SP 500) generally rise after rate cuts, with the possible exception of recessions

• The relationship between commodities and interest rates is complex, affected by multiple factors such as inventory costs, lack of yield and exchange rates.

• Bond prices and interest rates have a clear inverse relationship

• Although cryptocurrencies have limited historical data, they have performed strongly during interest rate cut cycles, such as a 537% increase in the 12 months following the March 2020 rate cut.

Policy shift: The prelude to global central bank rate cuts has begun

On September 18, 2024, the Fed lowered the target range of the federal funds rate by 0.5 percentage points to 4.75-5.00%, the first rate cut since March 2020 in response to the COVID-19 pandemic. Prior to this, in response to rising inflation, the Fed raised interest rates aggressively from March 2022 to July 2023, and then kept interest rates unchanged for eight consecutive meetings until this rate cut. The 0.25% rate cut in November further confirmed the start of a new round of rate cuts.

The Feds policy actions have always revolved around its dual mission: promoting maximum employment and maintaining price stability. In the post-epidemic period, prices rose rapidly, and inflation once exceeded 9% in mid-2022, which prompted the Fed to launch the most powerful interest rate hike cycle in 20 years, raising the target interest rate from 0-0.25% during the epidemic to 5.25-5.50%. As inflation gradually cooled, the Fed began to turn to easing. The current market expects that there will be room for a 1-1.5 percentage point interest rate cut in 2025, of which the probability of a 0.25% interest rate cut in December is about 62% (the probability of maintaining unchanged is about 38%).

The relationship between inflation, interest rate cuts and the broader economic system (including asset performance) is complex and deserves close attention from market participants.

It is worth noting that in 2024, many central banks around the world have started the process of lowering interest rates. This trend will have a profound impact on the global financial market.

Basic concepts: interest rates and economic operation mechanisms

Warren Buffett once said, Interest rates drive everything in the economic universe. Lets start with the most basic concepts to understand how interest rates affect economic operations.

The fundamentals of interest rates

• • Core デフィnition: interest rates are essentially the price of money

• Higher interest rates = more expensive currency

• Lower interest rates = cheaper money

Two major impacts of the current interest rate cut environment

1. Debt and borrowing effects

• Enterprises and institutions can obtain financing at a lower cost, promoting investment and expansion

• Reduced interest burden on existing debt, improving cash flow

• Consumer borrowing costs fall, boosting consumption and housing demand

• Overall economic activity was boosted, helping growth

2. Yield Effect

• The yield on risk-free assets such as government bonds has fallen

• Investors are forced to look for other investment channels to obtain higher returns

• Valuations of risky assets such as stocks and real estate are supported

• Funds move from low-risk assets to high-risk assets

Main economic variables

• inflation

• Fed sets 2% inflation target for long term

• It broke through the 9% high in mid-2022

• Employment

• The current unemployment rate remains at a relatively healthy 4.1%

• Non-farm payrolls data is released on the first Friday of each month and is an important market indicator.

• 市場 environment and external factors

• Corporate earnings: Quarterly financial reports and forecasts are a barometer of market confidence

• Regulatory policy: Regulatory attitudes towards financial innovation, including cryptocurrencies (as shown in the figure below, the number of crypto-friendly people in the US election represented by green has increased significantly in the House of Representatives and the Senate)

• Geopolitics: external shocks such as international trade relations and regional conflicts

• Macro indicators: including trade balance, consumer confidence, PMI, etc.

Historical perspective: Past Fed rate cut cycles and asset performance

Interest rate trend

U.S. interest rates have been structurally declining over the past 50 years:

• 1980s: Maintained at a high level of 8-10%

• 2010s: Near-zero interest rates

• Recent: Rising to more than 5%

• September and November 2024: A new round of interest rate cuts begins

Historical performance of various asset classes

Stock Market (SP 500)

• Overall trend: generally rising after interest rate cuts

• Specific performance:

• First rate cut in September 1984: 3 months + 1%, 6 months + 9%, 12 months + 14%

• July 1995 rate cut: 3 months + 6%, 6 months + 13%, 12 months + 22%

• Special case: Negative returns in 2001 and 2007 (recession years)

• January 2001: 12 months -12%

• September 2007: 12 months -18%

Commodities

• Influencing factors:

• Inventory costs: interest rates affect holding costs

• Income characteristics: No fixed income

• US dollar exchange rate: most commodities are priced in US dollars

• Inflation Links:

• Often considered a leading indicator of inflation

• Often used as an inflation hedging tool

Bonds

• Core feature: a clear inverse relationship with interest rates

• Operation mechanism:

• Interest rates rise → bond prices fall

• Interest rates fall → bond prices rise

• 10-Year Treasury Yield: Highly Correlated with Fed Funds Rate

Cryptocurrency

• Historical data: Only experienced two rounds of interest rate cuts (the second half of 2019 and March 2020)

• Performance highlights:

• July 2019 rate cut: 12 months + 25%

• March 2020 rate cut: 12 months +537%

• Special considerations:

• Short sample period

• The market size is relatively small and the volatility is high

• Affected by multiple factors, not just interest rate changes

This historical review shows that while interest rate cuts are generally supportive of asset prices, the specific performance varies by asset class and macro environment. Especially during a recession, even interest rate cuts may not prevent asset prices from falling, which suggests that investors need to consider multiple factors rather than simply making investment decisions based on whether or not interest rates are cut.

Conclusion: The global interest rate cut cycle has begun, and market opportunities and challenges coexist

As shown in the report, September 2024 became the fourth largest rate cut month in this century, with 26 central banks around the world implementing rate cut policies. This trend continued in October and November, marking a new cycle in global monetary policy. As the worlds most influential central bank, the Feds two rate cuts in September and November not only had far-reaching impacts, but also indicated that 2025 may usher in a wider range of policy easing.

From historical experience, interest rate cuts tend to reduce monetary costs, improve market liquidity, and thus support asset prices. However, this round of interest rate cuts is unique: global inflation has fallen significantly from its peak in 2022, but we still need to be vigilant about the risk of inflation rebound; the job market remains relatively stable, with the unemployment rate remaining at a healthy level of 4.1%; and the geopolitical situation adds additional uncertainty.

Looking ahead to 2025, the market generally expects the Fed to continue to cut interest rates by 1-1.5 percentage points. In this context, major central banks around the world may follow the Feds pace to further improve the liquidity environment. However, while investors are seizing opportunities, they also need to remain sober: different asset classes may show differentiated performance in the interest rate cut cycle, and simply following the interest rate cut may not achieve ideal returns. It is recommended that investors pay attention to structural opportunities and carefully plan on the basis of fully understanding the fundamentals to better cope with this new market environment.

This article is sourced from the internet: Interpretation of Binance Report: 2024 interest rate cut cycle is coming, comprehensive analysis of the impact of the Fed’s policy

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