Interest rate cut imminent Investors closely watching the Federal Reserve "soft landing" major test

According to the Smart Finance app, as the Federal Reserve is about to cut interest rates, investors are facing a new challenge: determining whether the Fed can adjust its monetary policy pace to achieve an "economic soft landing." This year's "soft landing" strategy has significantly boosted asset prices.

Federal Reserve Chairman Jerome Powell sent the strongest signal of a rate cut so far in his speech on Wednesday, stating that if inflation continues to cool, there is a high possibility of a rate cut in September. However, this signal did not provide investors with enough clarity. Market observers are beginning to question whether the Fed's maintenance of high interest rates for too long will affect the possibility of an economic soft landing, that is, reducing inflation without severely damaging economic growth.

On the other hand, investors are also concerned that monetary easing during a strong economy may trigger an inflation rebound, which could limit the Fed's room for further rate cuts. George Catrambone, Head of Fixed Income and Trading at DWS, pointed out: "There is reason to believe that a soft landing is still possible, but the risks are two-sided. A soft landing will not be achieved by waiting too long."

On Wednesday night, futures linked to the Fed's policy rate showed that the market expects a rate cut on September 25th with a probability as high as 87%. As a result, the U.S. stock market continued to rise significantly, with the S&P 500 index closing up 1.6%. Meanwhile, the yield on the two-year U.S. Treasury bond fell by about 8 basis points to 4.278%, the lowest in nearly six months; the yield on the 10-year bond also fell by nearly 4 basis points to 4.1%.

However, U.S. economic data, including employment data, indicates that despite interest rates being at their highest level in over 20 years, the economy remains resilient. However, the rise in the unemployment rate has caught the attention of policymakers, who hope to avoid a sharp increase in the unemployment rate typically brought about by high interest rates and slowing inflation.

Peter Baden, Chief Investment Officer of Genoa Asset Management, said: "You see the edges starting to wear, and the question now is whether this wear will evolve into a broad slowdown."

The U.S. employment data to be released this Friday will provide investors with an important economic overview, while the upcoming Jackson Hole Symposium later this month will provide policymakers with an opportunity for fine-tuning information.

Some investors are concerned that if cracks appear in the economy, rate cuts may take a long time to boost economic growth, increasing the risk of an economic recession. Jack McIntyre, Global Fixed Income Portfolio Manager at Brandywine Global Investment Management, said: "There are now lagging effects, and as the Fed initiates a loose cycle, some negative factors may be factored into the economy, even if rate cuts begin in September, it may not be enough to change the economic trajectory by 2025." In addition, some views believe that economic damage may have already begun to show. Former New York Federal Reserve Bank President Bill Dudley called for an immediate rate cut in a Bloomberg column, citing the so-called Sam rule, pointing out that the rising unemployment rate indicates that the economy is now close to a tipping point for recession.

Others are concerned that a rate cut may trigger an inflation rebound, similar to the consumer price increases earlier this year that caused market panic. Hans Mikkelsen, Managing Director of Credit Strategy at DWS, said this would make it difficult for the Fed to achieve the market's expectation of nearly 75 basis points of rate cuts this year.

Jack Janasiewicz, Chief Portfolio Strategist at Natixis Investment Managers, said that if the rate cut cycle is less than expected, it could hinder the market's shift to small-cap stocks and other rate-cut beneficiaries. At the same time, the strong rise in the U.S. stock market this year may indicate that much of the impact of the Fed's loose policy has already been absorbed by the market, limiting future upside.

CFRA research data shows that between the last rate hike of the previous cycle and the first rate cut of the new cycle, the S&P 500 index rose an average of 16.1%. However, in the 12 months after the rate cut, the index only rose by 4.8%. The S&P 500 index has already risen by 16% this year.

Tony Rodriguez, Head of Fixed Income Strategy at Nuveen, expects that the yield on 10-year Treasury bonds may remain around 4% in the first half of 2025, while the stock market valuation "overall looks quite full." He pointed out, "There aren't many new opportunities."