U.S. Rate Cuts: Strategies, Methods, and Key Issues
This article aims to explore the background and impact of the interest rate cut in the United States.
First, it is worth noting that on September 19, 2024, the United States announced a 50 basis point interest rate cut, adjusting the interest rate from the original 5.25%-5.5% to 4.75%-5.0%.
This interest rate cut was implemented after a long period of discussion and experimentation.
The strategies and methods adopted by the United States during the interest rate cut process are noteworthy and deserve in-depth study and learning.
At the same time, this article will also analyze the problems that have arisen during the interest rate cut process in the United States and the impact of the cut, drawing lessons and experiences from them.
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I.
Background of the U.S. Interest Rate Cut Observing the U.S. economy since 2024, two characteristics are worth noting.
The first characteristic is the inflation situation in the United States.
After entering 2024, inflation in the United States gradually declined, and this trend can actually be divided into two stages.
The first stage began in January 2022, when inflation continued to intensify, reaching 9% in June 2022.
To cope with this high inflation, the United States began an interest rate hike cycle that lasted until the end of 2023.
The U.S. interest rate rose from 0.0%-0.25% in 2022, after 11 interest rate hikes, to 5.25%-5.5% in October 2023.
This has had a profound impact on the U.S. economy.
The second stage began in 2024, as inflation gradually declined, and the U.S. inflation rate had fallen to 2.5% by August 2024.
This series of interest rate hikes significantly reduced inflation, bringing U.S. inflation back to a reasonable range.
As a result, the discussion of interest rate cuts in the United States gradually came to the agenda.
The above is a brief introduction to the entire background.
II.
How Did the United States Implement the Interest Rate Cut?
In our common sense, the decision to lower or raise interest rates seems to be made at any time according to the economic situation.
However, the actual situation is far more complex than we think.
The United States this time reduced the interest rate from 5.25%-5.5% to 4.75%-5.0%, going through several stages.
The first stage is the discussion phase.
This phase mainly focuses on the inflation situation in the United States.
The Federal Reserve, as the main channel for speaking, is closely followed by the U.S. Treasury.
The purpose of this phase is to convey the intentions of the highest level and attract the attention of the capital market.
An important reason for doing so is that the interest rate hikes and cuts in the United States are not just about the interest rates themselves, but they will also have a comprehensive impact on various aspects such as the stock market, real estate market, and gold trend.
Therefore, the U.S. government will pay special attention to how to influence the capital market through the intentions of the higher-ups.
The second stage is when the Federal Reserve Chairman and its members, in various public occasions and major policy platforms, express their judgment on the current economic situation through speeches and statements.
This includes the assessment of inflation and the analysis of possible future interest rate cuts or hikes.
In this process, the possibility of an interest rate cut gradually becomes the focus of discussion.
The Federal Reserve usually uses "interest rate cut probability" to describe the possibility of a cut.
When the probability of an interest rate cut exceeds 50%, it usually means that a cut is likely to happen.
The third stage is the assessment of the economic situation.
The Federal Reserve will form meeting minutes based on the assessment results, which will become an important basis for deciding whether to cut interest rates.
The final decision to cut interest rates this time was made after the Federal Reserve held a meeting on September 18.
Although the meeting minutes were confidential before the decision, the probability of an interest rate cut is usually announced in advance.
It can be seen that Federal Reserve Chairman Powell indicated at an economic forum before that the economic trend and inflation rate in the United States have reached a stage where an interest rate cut can be considered, which is actually an advance announcement of the September interest rate cut.
However, the issue of the extent of the interest rate cut is still another important decision point.
Usually, the United States discusses "whether to cut interest rates" and "the extent of the interest rate cut" as two separate issues.
At the beginning of 2024, there were calls for an interest rate cut in the United States, as the decline in inflation naturally leads to the demand for a cut.
On the contrary, when the inflation rate rises, it usually leads to the possibility of an interest rate hike.
Therefore, the U.S. decision-making bodies will continuously publish various opinions based on economic data, affecting the expectations of the capital market and research institutions, so that when the interest rate cut or hike really happens, the market will not experience violent fluctuations, thus ensuring the stable operation of the economy.
The U.S. economy has an important impact on the global economy, and the U.S. dollar, as the world's reserve currency, has a wide-ranging impact on the global economy.
Therefore, the characteristics of the United States in the process of interest rate cuts are that it will ensure the stability of the global market through a series of reserve practices.
In summary, the interest rate cut process in the United States includes three main steps: early data analysis, guidance of public opinion, and the implementation of the final decision.
These steps ensure a smooth transition to the interest rate cut and are also the key content of this article.
III.
Problems Brought by the U.S. Interest Rate Cut Strategy At present, the main consideration of the U.S. interest rate cut strategy is the domestic inflation situation.
The United States hopes to gradually reduce the inflation rate from the highest 9.1% to 6%, 5%, and below 2.5% at present.
This means that the interest rate cut in the United States has already had policy conditions, that is, the inflation rate has reached a reasonable expectation.
Corresponding to this is an important indicator, the non-farm employment index, which mainly reflects the employment situation in the United States.
The rise in employment rate and the decline in unemployment rate usually indicate that the U.S. economy is in a good state, providing room for interest rate adjustment.
However, due to the large increase in interest rates before, the interest rate in the United States has reached a high point in nearly 20 years, bringing great pressure to banks and even leading to the bankruptcy of some banks.
For example, at the beginning of the interest rate hike, Silicon Valley Bank and Signature Bank in the United States went bankrupt due to excessive pressure.
Before this interest rate cut, the loan interest rate in the United States had reached 6.47% (real estate loans), and the bank loan interest rate even reached about 8.5%, bringing great pressure to the U.S. economy.
Therefore, one of the main reasons for the interest rate cut in the United States is that after the inflation rate declined, the measure to maintain a high interest rate to withdraw money has shown problems.
At the same time, due to the high interest rate, the scale of U.S. government bonds is also increasing, increasing the fiscal burden.
For example, the additional loan interest in the United States in 2022 was $150 billion, and in 2023 it reached $280 billion.
This has made the U.S. economy burdened and become an important factor in promoting the interest rate cut.
In addition, the United States not only considers domestic issues during the interest rate cut process but also considers the impact of the cut on the global economy.
The interest rate hike in the United States usually leads to the global currency flowing back to the United States, forming the so-called "currency siphon effect," which has caused phenomena of capital flight and talent loss in third-world countries and developing countries, especially China.
Capital flight is also accompanied by the outflow of high-net-worth individuals, which has a significant impact on China's economy.
The interest rate cut in the United States actually has a reverse impact on the global economy.
The interest rate cut may lead to a rebound in the Chinese stock market, the stabilization of the real estate market, and a slowdown in the phenomenon of capital flight.
Therefore, when formulating interest rate cut policies, the United States not only considers the pros and cons of the domestic economy but also weighs its impact on the global economy.
Even when the United States preliminarily decided to cut interest rates on September 18, some domestic scholars still believed that interest rates should continue to rise because they paid more attention to domestic economic issues and the policy impact on the world economy.
This is also why even in the process of deciding to cut interest rates, there are still some members of the Federal Reserve decision-making committee who disagree with the cut.
In general, the interest rate cut in the United States helps to alleviate loan pressure, but it also brings problems of devaluation of the U.S. dollar and capital outflow, which is harmful to the U.S. economy.
It can be seen that before the interest rate cut was announced, the U.S. stock market fell, and although there was a slight rebound after the interest rate cut was announced, the overall trend is still not optimistic.
In the future, the U.S. stock market and the U.S. dollar index may continue to fall.
Therefore, it is not ruled out that the United States may suddenly reverse interest rate hikes while cutting interest rates, but overall, the United States is likely to enter an interest rate cut channel.
In the long run, high interest rates and high government bonds are not conducive to the U.S. economy and are a sign of economic recession.
The interest rate cut can activate funds, reduce the cost of funds, and promote economic development, but the issue of interest rate hikes and cuts is essentially a double-edged sword.
Although interest rate hikes can increase the value of the U.S. dollar, they may also make the cost of manufacturing too high, and although interest rate cuts can reduce the cost of corporate funds, they may lead to capital outflows, stock market fluctuations, or even crashes.
Therefore, the United States needs to carefully observe the various results brought about by the interest rate cut.
IV.
Future Trend Analysis After this interest rate cut in the United States, it is expected that there may be 1 to 2 interest rate cuts this year, and there may be two interest rate cuts next year, and there may be another interest rate cut in 2026.
These forecasts indicate that the United States may enter a continuous interest rate cut channel.
At the beginning of 2022, the interest rate in the United States was 0%-0.25%.
After two years of adjustment in 2022 and 2023, the interest rate rose to 5.25%-5.5%, indicating that the interest rate hike path in the United States is very clear.
It took more than two years to complete this process.
Correspondingly, the interest rate cut cycle in the United States may also need 2 to 3 years, although there may be repeated adjustments in this process.
The United States has a wide range of discussions in advance, speaks through multiple channels, holds meetings to make resolutions, and adjusts policies according to economic indicators.
This economic regulation model is worth our reference.
The main content of this article is to explore this interest rate hike and cut model in the United States and the lessons it brings to us.
V. Experience and Lessons Brought to Us by the U.S. Interest Rate Cut Strategy Firstly, the reason for the last round of interest rate hikes in the United States was the currency overflow caused by the indiscriminate issuance of currency during the 2020 pandemic, which directly triggered the inflation problem.
To cope with inflation, the United States adopted a strategy of raising interest rates.
One thing worth learning from the United States is its high attention to economic data and adjusting policies based on data.
Similarly, this interest rate cut in the United States is also an adjustment made based on the changes in economic data.Secondly, during the interest rate reduction process, the United States has formulated a comprehensive set of strategies.
Through market analysis, expert opinions, various meetings, and the response of the capital market, the policy-making in the United States, although decided by a few, widely incorporates the opinions of market participants.
Therefore, when the United States decides to raise or lower interest rates, the market has already anticipated it, thus avoiding sharp fluctuations.
After the United States announced a rate cut on September 19th, the capital market rebounded, precisely because the market had foreseen the direction of policy.
This experience tells us that for issues with a significant impact, there should be ample discussion, voicing opinions through different channels, holding various meetings to form resolutions, observing market reactions, and taking corresponding actions after all indicators are within the expected range.
The United States manages expectations through the "probability of rate cuts," controlling risks beyond people's expectations, which is worth learning from for other countries and organizations.
Thirdly, the United States' rate cuts not only consider domestic factors but also take into account international factors.
As the issuer of the world's reserve currency, the United States' decisions affect the global economy, hence its rate cut strategy has attracted widespread global attention.
Almost all mainstream investment institutions, media, and research experts are closely monitoring this economic phenomenon.
While attracting global attention, the United States also provides important support for solving the problem, reflecting the success of its strategy.
In summary, there are two important conclusions in the process of formulating the United States' interest rate reduction policy: First, the rate cut is a systematic process, from proposing preliminary opinions, tracking data, forming resolutions to social discussions, and finally to the policy's issuance, all proceed in an orderly manner.
The introduction of the "probability of rate cuts" concept allows the market to react in advance before the policy is officially released, thus avoiding the suddenness of the policy.
Second, the United States' rate cut strategy, especially its impact on large economies and the global economy, reflects the stability, continuity, and comprehensiveness of its decision-making, providing an important reference for the decision-making of other large economies.