How to deploy in the market's big drop? Attached interest rate schedule.

In the early hours of December 19, 2024, the Federal Reserve announced a 0.25% interest rate cut, lowering the target range for the federal funds rate to between 4.25% and 4.50%. In 2024, the Federal Reserve cut interest rates a total of three times, totaling a reduction of 1%, in line with market expectations.

With the announcement of the interest rate cut, there are speculations in the market regarding future rate cuts. The Federal Reserve's dot plot shows that the median interest rate expectation for 2025 is between 3.75% and 4.00%, indicating that there could be two more rate cuts in the future. Generally, we can predict rate cut expectations through the USA's PCE (Personal Consumption Expenditures), CPI (Consumer Price Index), and non-farm employment data. If these data exceed expectations, fall short of expectations, or meet expectations, they have an absolute impact on the space and frequency of rate cuts! Want to stay close to economic data for early deployment? Join Futubull to grasp key announcement dates and data, and you can even add them to your calendar to avoid missing important events!

What is a rate cut?

A rate cut, also known as interest rate reduction, refers to the action taken by a country or region's central bank or other institutions to lower the domestic benchmark interest rate. It is a common monetary policy tool in easing. Simply put, a rate cut means that banks/financial institutions can lend at lower costs, providing loans at lower interest rates to businesses and individuals, enabling them to access funds.

Reasons for rate cuts

The main reasons for the Fed's rate cuts include easing inflation pressures and slowing economic growth. By lowering rates, the Fed hopes to stimulate the economy and prevent potential recession risks.

As of now, there is temporarily no clear signal of a shift in the market. Investors usually pay attention to price and employment data. The recently released U.S. November Consumer Price Index (CPI) increased by 2.7% year-on-year, while core inflation rose by 3.3% year-on-year. These figures are in line with market expectations and previous values, showing that inflation pressures have not intensified, providing room for further rate cuts.

As for the non-farm payroll report, although the November job additions exceeded expectations, the overall unemployment rate was also higher than expected. Therefore, continuing rate cuts to support the job market is a reasonable course of action.

Reasons for the slowing pace of rate cuts

When formulating policies, the Federal Reserve must strike a balance between price stability and the job market. Acting too quickly may lead to inflation persistently exceeding the 2% target, while acting too slowly may impact the labor market resulting in a weakened situation. Therefore, the pace of rate cuts must be cautious. Current forecasts indicate that the Federal Reserve will slow down rate cuts in 2025, mainly due to concerns about inflation. According to the interest rate decision on the 19th, the Fed's outlook for next year's economic prospects is "overall strong economic performance," and it has raised GDP growth expectations for this year and next year and postponed the 2% inflation target to 2027.

These concerns about inflation are closely related to the uncertainty of Trump's policies. Policies such as comprehensive tariffs and substantial tax cuts may exacerbate inflationary pressures, making the Fed more cautious in cutting rates. In such an economic environment, investors should closely monitor the Fed's policy direction and its impact on prices and the job market. Reasonably adjusting investment strategies to cope with potential market volatility will help seize investment opportunities.

Why choose to cut rates despite concerns about inflation?

In the current economic environment, many investors do not understand why the Fed chooses to cut rates despite concerns about inflation. In fact, Trump's new policies typically take time from formulation to implementation to show their actual impact on the economy, rather than immediate results. This requires the Fed to carefully assess long-term implications when considering rate cuts. According to the Fed's latest forecast, the median of the long-term federal funds rate is 3%. The current rates are still below this value, providing room for rate cuts for future economic stimulus. This means that within a certain range, rate cuts can help promote economic growth without immediately causing a surge in inflation.

In addition, since the rate cut in September, U.S. Treasury bond yields have risen significantly, which may reflect the market's excessive concerns about inflation from Trump's new policies. If market sentiment is overly pessimistic, spontaneous downward adjustments may occur in the future, consistent with market expectations for future rate cuts.

Rate cuts in 2025 | USA Interest Rate Schedule

The FOMC (Federal Open Market Committee) holds 8 regular meetings every year, and the specific schedule for the Federal Reserve in 2025 is as follows.

What is the impact of the Federal Reserve's interest rate cut on various global assets?

The Fed's interest rate cut decision is not just about the rate cut itself, but also considers the overall economic situation. The ultimate goal of the policy is to promote economic growth. If the global economy is temporarily in a phase of no clear recovery this year, next year may enter a growth cycle. The implementation of rate cut policies will gradually show its positive impact on the economy, and economies previously affected by rate hikes and deleveraging will begin to regain growth momentum.

Is the Fed's rate cut globally a positive or a negative for all types of assets? Overall, rate cuts will promote economic growth and have different impacts on different types of assets:

• US Dollar: With the decrease in cost of capital and improvement in corporate profit expectations, US stocks usually rise.

• US Stocks: With the decrease in cost of capital and improvement in corporate profit expectations, US stocks usually receive a bullish impact.

• Bonds: Interest rate cuts will lead to a decrease in bond yields, thereby pushing up bond prices.

• Gold: As a hedge asset, gold is usually favored in a rate-cut environment, increasing the possibility of price rises.

• Crude Oil: Rate cuts help economic recovery, resulting in increased demand, which will push up crude oil prices.

Understanding the expectations for interest rate cuts in the USA.

Interest rate cuts in the USA have always been a topic of significant concern for investors, discussing every year 'Is there a high chance of rate cuts?' and 'When will the cuts happen?'. The Consumer Price Index (CPI) and Non-Farm Payrolls are key economic Indicators that determine the likelihood of rate cuts. We can analyze Historical Data on rate cuts and 30-day US Federal Fund Futures prices to forecast the likelihood of future interest rate decision changes by the Federal Reserve. However, the calculation process is complex, and not every investor can easily compute it.

Futu has launched a new Futubull membership plan, providing multiple visualized selected macroeconomic data to help you understand the past, present, and predict the future economic trends, including: the US FedWatch rate cut probability, CPI, non-farm employment data, and more. Investors can use these data to grasp the rate cut expectations and deploy investment strategies in advance!

How to deploy rate cut strategies

• In theory, the relationship between the stock market and the economic fundamentals has always been positive. Of course, the stock market in each market may be different: for example, the valuation of US stocks is already at a high level, so some of the earnings growth of companies may need to be used to digest the valuation; while Hong Kong stocks are at a low valuation, they may instead see valuation restoration.

• What about US Treasury Bonds? In the short term, there may be downward pressure, as mentioned earlier. However, from a medium to long-term perspective, with the increase in economic growth expectations and inflation expectations, the yield on US Treasuries may also rise, leading to a decrease in bond prices.

• The foreign exchange market? It might be a bit complicated. On one hand, Trump may expect a weaker US dollar in the short to medium term to promote exports, stimulate the economy, reduce trade deficits, and so on. However, on the other hand, policies such as tariffs may increase the uncertainty of the global economy, and the US dollar as a safe-haven asset may be boosted, so the trend of the US dollar may be more volatile. Due to possible tariff policies and the inversion of the US-China interest rate spread, the Renminbi may face depreciation pressure, but in terms of domestic policy space and economic strength, there is no need to be too pessimistic.

• The factors affecting the price of Gold are relatively complex. There are bearish factors, such as the slowdown in rate cuts (because gold has anti-inflation properties, so rate cuts are usually bullish for gold, therefore a slowdown in rate cuts is bearish). However, the core factors supporting the long-term rise in Gold are more fundamental, for example, in situations of international political and economic uncertainty, as a safe-haven asset, Gold will have continuous demand from central banks around the globe, as well as institutions and individual investors.

• It's rather difficult to predict the performance of Bitcoin, a virtual currency asset. It can be considered a risk asset or a safe-haven asset, and in an economically optimistic scenario, it may drive the rise of Bitcoin. However, its trend is heavily related to the expectations and implementation of Trump 2.0's policies, posing significant volatility risks.

However, the above is based on relatively optimistic expectations for the global economy. Still need to pay attention to some risk factors, such as the uncertainty of Trump's policies, intensification of geopolitical conflicts, and the global economy's failure to recover as expected (due to unexpected negative impacts such as public health incidents), all of which can cause significant disturbances to various types of assets that are difficult to predict.

What stocks benefit from interest rate cuts?

With the Fed opening the door to rate cuts, what impact will it have on the stock market? How to seize investment opportunities?

First of all, although under short-term pressure due to the slowdown in rate cuts, in the medium to long term, risk assets such as stocks may outperform safe-haven assets such as ​Bonds, Gold, and the US Dollar.

Generally speaking, interest rate cuts are used to stimulate the economy during recession or slowdown, which is also beneficial for the stock market. Looking at the market situation, during the period of interest rate cuts, Utilities Industry stocks, REITs and other stocks with relatively fixed dividend income are more favorable, as their dividend yield will be more attractive than bank deposit rates; property prices may also rise due to interest rate cuts, making them relatively favorable for real estate stocks.

In addition, interest rate cuts will reduce the financial pressure on Biomedical stocks and small-cap stocks that have higher financing costs, and will also elevate the valuation of more growth-oriented Technology stocks.

Will gold rise during interest rate cuts?

In addition to seizing opportunities in the stock market, you can also consider adding gold, Bitcoin, and US bonds to your asset portfolio to balance between risk assets and hedging assets.

Because in the current environment, although stocks may perform better than other assets under optimistic economic prospects, there are several points:

Under the risks of inflation and political-economic uncertainty, Gold can act as a hedge.

Impact of interest rate cuts on Bitcoin

Bitcoin also serves as an inflation-resistant and hedging asset, and its currency attributes and future applicability may bring greater growth potential.

The impact of interest rate cuts on bonds.

When other assets are more volatile, US bonds may remain relatively stable.

Historical data shows that during a rate-cutting cycle, when the Federal Reserve announces a rate cut, the coupon interest rate of newly issued US Treasury Bonds will decrease, generally leading to the following effects:

• Prices rise

• Yield decreases

The yield data after the last eight interest rate cut cycles shows that both short-term and long-term US Treasury prices have increased after the rate cuts, with the rise being more pronounced for long-term US Treasuries, which are more sensitive to interest rates.

• Hold until maturity.

• Capture the price difference

Performance of US Treasuries after the start of the interest rate cut cycle (%)

Further reading:How to invest in Bonds during a rate-cutting cycle?Further reading:How to invest in TLTW during a rate cut cycle?

Summary of rate cut investment strategies

Regarding specific allocation:

For example, in the US stock market, one can consider allocating a combination of value stocks and growth stocks, balancing valuation digestion and growth potential. In the Hong Kong stock market, focus on undervalued high-quality enterprises.

Gold allocation can account for a certain proportion, and if risk tolerance is not strong, it is advisable to participate in Bitcoin with a small allocation.

As for US bonds, long-term bonds may face downward pressure and volatility risks, so it may be appropriate to consider some short-term government bond assets.

Finally, I would like to remind everyone of two points: first, maintain a long-term investment perspective while being sensitive to opportunities and risks in the short term; and second, regardless of the type of investment assets, one can use tools such as ETFs and options to position opportunities.

Analyst's recommendations on rate cut deployment

In this round of rate cuts, the most crucial factor is the timing of the rate cuts. Especially entering 2025, with the new US policy under Trump's administration, a systematic protectionist and tax-cutting stimulus economic policy may lead to concerns about inflation, causing the rate cut timing to likely have frequent variations. The pace of rate cuts will significantly impact the deployment of the above assets' prices, and investors should pay attention to the volatility of asset prices, as well as the extent of asset prices' impact on market risks. Although government bonds performed modestly in 2024, if inflation concerns trigger stagflation again in 2025, there is still a chance for the bond market to present investment opportunities as seen in the fourth quarter of 2023 (with US long-term bond ETFs seeing a nearly 20% increase in the final quarter of that year), making bonds a good investment tool to avoid economic recession.

As for high-dividend stocks, gold, and Bitcoin performance, greater attention should be paid to market risks. If Trump's policies begin to pressure the US dollar, it will benefit the performance of gold and Bitcoin prices. Regarding high-dividend stocks, it is advisable to focus on high-dividend stocks in the Hong Kong market, mainly because their dividend-paying ability is less related to the risks in the US market. They will more fully benefit from the positive effects of rate cuts, but caution is advised regarding the weakness in commodity and energy prices. For high-dividend stocks, it is recommended to focus more on mainland Chinese financial stocks, specifically China mainland banking stocks and mainland insurance companies, which performed well in 2024.

Futu Securities Chief Analyst Tan Zhile

(The author is a licensed person of the SFC, and neither the author nor any related parties have any financial interest in the recommended issuers)

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