The Federal Reserve's interest rate cut has finally settled.

On September 18th local time, the Federal Reserve announced that it would lower the target range of the federal funds rate by 50 basis points, bringing it down to between 4.75% and 5.00%.

This marks the first rate cut by the Fed in four years.

As the Fed's rate cut takes effect, opinions are divided on the view that "almost every rate-cutting cycle in history has been accompanied by a recession in the U.S.

economy."

Does the Fed's rare rate cut truly signify a recession in the U.S. economy?

As the benefits of high interest rates in the U.S. fade, will foreign capital flow back, thereby boosting China's economy and the sluggish A-share market?

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"Economic growth can't keep up with the expansion of debt," "a heavy burden for future generations," "the U.S. is heading towards bankruptcy"... On the eve of the Fed's rate cut, concerns about the U.S. economy are rising from all sides.

Musk warned, "At the current pace of government spending, the U.S. is on a fast track to bankruptcy."

On July 29th, data released by the U.S. Department of the Treasury showed that the total U.S. debt reached 35 trillion U.S. dollars for the first time, equivalent to the combined economic output of China, Germany, Japan, India, and the United Kingdom.

The massive U.S. debt, with the U.S. government's debt-to-GDP ratio exceeding 120%, means that even if Americans don't eat or drink for a year, they still can't repay the enormous debt.

For years, the U.S. has often "robbing Peter to pay Paul," promoting uncontrolled expansion of U.S. debt, and using high interest rates to "induce" international capital to buy U.S. debt on a large scale, increasing the U.S. interest burden.

According to the Congressional Budget Office, federal spending on interest payments this year is expected to reach 870 billion U.S. dollars, surpassing the 822 billion U.S. dollars allocated for defense in 2024.

Despite the U.S.'s high debt development, the U.S. economy still performs poorly.

On September 6th, the U.S. Bureau of Labor Statistics released the August non-farm employment report, showing that the U.S. non-farm employment increased by 142,000 people in August, lower than expected (165,000 people).

The Fed's rate cut on the same day released a dot plot showing that the forecast for U.S. economic growth this year has been reduced from 2.1% in June to 2%, and the unemployment rate has risen from 4% in June to 4.4%.

From the oil crisis of the 1970s, the savings and loan crisis of the 1980s, the internet bubble at the turn of the century, to the global financial crisis in 2008 and the global COVID-19 pandemic in 2019, each significant rate cut by the Fed has coincided with a recession in the U.S. economy.

As the globally recognized "stock god" Warren Buffett, on the eve of the Fed's rate cut, he also sold a large amount of Apple and Bank of America stocks, actively hoarding cash.

Berkshire Hathaway sold stocks worth up to 75.5 billion U.S. dollars in the second quarter of this year, bringing the company's cash reserves to a record 276.9 billion U.S. dollars, about 1.98 trillion RMB.

For the global economy, the high interest rate cycle of the United States in the past has been quite "destructive."

As we all know, in recent years, the United States has often used national security as a banner to promote the reflow of manufacturing, which has brought a huge impact on the global supply chain pattern.

Along the way, U.S. capital has also been flowing back.

Since March 2022, the Fed has raised interest rates 11 times in a row, maintaining the target range of the federal funds rate at 5.25% to 5.5%, with a cumulative increase of 525 basis points.

As the most aggressive interest rate hike cycle in the United States in nearly 40 years, it has also made countries around the world suffer, because this aggressive interest rate hike policy has greatly attracted global capital to flow into the United States, causing a strong siphoning effect on other economies.

The logic is not difficult to understand.

After the U.S. raises interest rates, the interest rates rise, and various low-interest currencies of other countries will flow into the United States to earn the interest rate difference.

Secondly, the Fed's interest rate hikes will also cause the U.S. dollar to appreciate, and the currencies of other economies to depreciate, and the currency will be exchanged for a large amount of U.S. dollars, flowing into the United States.

In 2024 alone, the average depreciation of all emerging market currencies against the U.S. dollar exceeded 1.5%.

The currencies of South Korea and Brazil depreciated by about 6% against the U.S. dollar, and Thailand, with a larger depreciation, depreciated by about 7.5%.

And only within five months after the Fed started raising interest rates in March 2022, the emerging markets have suffered net outflows of portfolio funds for five consecutive months, with a total amount exceeding 39 billion U.S. dollars.

This has set a record for the longest continuous net outflow of funds in emerging markets since 2005.

Some so-called "foreign capital withdrawal theories" in China are also being widely discussed.

In 2023, China's net foreign direct investment was 42.7 billion U.S. dollars, a decrease of 147.5 billion U.S. dollars from the previous year, reaching a new low since 2001.

The Fed has accelerated the pace of monetary tightening, and the cheap capital that has lasted for many years has disappeared, the cost of overseas debt issuance for domestic real estate companies has increased, and financing has become more difficult, and the credit risk pressure of Chinese real estate overseas debt affected by the Fed's monetary tightening is also increasing.

Since 2022, the credit risk in China's real estate industry has increased, and default events have occurred in both the domestic bond market and the overseas debt market, including some large real estate development companies.

Every interest rate hike in the United States will trigger a global chain reaction, with the contraction of global capital liquidity, the increase in corporate financing costs, and the inflow of global capital into the United States.

However, this time the U.S. rate cut has the possibility of capital outflow from the United States.

"The Fed's rate cut may prompt Chinese companies to sell up to 1 trillion U.S. dollars worth of dollar-denominated assets, thereby pushing the appreciation of the renminbi by 10%," said Stephen Jen, CEO of the British hedge fund Eurizon SLJ Capital and the well-known proposer of the "U.S. dollar smile theory."

As the Fed reduces borrowing costs, the interest rate spread between China and the United States narrows rapidly, and the relative attractiveness of dollar assets weakens, which may trigger a large amount of capital flowing back to China.

The logic behind it is that after the epidemic, China's production capacity was the first to recover, coupled with the strong demand brought by overseas fiscal stimulus, exports have rebounded significantly, leading to a large accumulation of trade surplus by export companies, and this part of the funds are currently stored overseas in the form of dollar assets.

After the Fed's rate cut, the relative attractiveness of dollar assets may weaken, and some of the funds previously invested in dollar assets are expected to flow back to the domestic market, bringing about the appreciation of the renminbi exchange rate and other assets denominated in renminbi.

Yuanda Information Securities Research Institute also pointed out that China's main stock indexes are currently at a historical low valuation, and as the Fed enters the rate-cutting cycle, it reduces the attractiveness of the U.S. dollar and dollar assets, leading to capital flowing to other markets, which will increase the liquidity of China's stock market and thus improve the market valuation level.

At the same time, the Fed's rate cut may provide more room for other central banks to adopt loose monetary policies, thereby reducing global interest rate levels and stimulating investment and economic growth.

After the Fed's rare rate cut of 50 basis points, many places around the world have started a wave of rate cuts.

The Hong Kong Monetary Authority, the Central Bank of Kuwait, the Central Bank of Bahrain, the Central Bank of the United Arab Emirates, the Central Bank of Qatar, and others have collectively announced rate cuts.

On September 19th, the three major A-share indexes opened collectively higher, and then the trend was first suppressed and then raised, with a sharp pull-up in the middle of the day, and the ChiNext index rose by more than 2% at one point.

As of the end of the day, the three major A-share indexes were all red.

As the Fed's rate-cutting cycle begins, it may promote the re-allocation of global funds.

Under this background, foreign capital-heavy stocks and companies that are expected to benefit from the appreciation of the renminbi have become the focus of institutional analysts' recommendations.

However, it is necessary to be vigilant that the Fed's rate cut at this time point, even if it cut by 50 basis points for the first time, the federal funds rate is still as high as 4.75%-5.00%, far higher than the domestic deposit interest rate level.

Fed Chairman Powell also emphasized that if appropriate, the Fed can speed up or slow down, or even pause the rate cut; if the economy remains robust, we can slow down the pace of rate cuts.

At the current point, the Fed's next rate-cutting rhythm may continue to be the focus of market attention.

According to the Fed's forecast, by the end of this year, the U.S. federal funds rate will reach 4.4%, that is, the target range of 4.25% to 4.5%, and it will drop to 3.4% by 2025, and is expected to drop to 2.9% by 2026.

Fed Chairman Powell expects that the era of cheap money will not return.

He emphasized: "We may not return to that era again, when tens of trillions of dollars of sovereign bonds and long-term bonds were traded at negative interest rates."