Ignoring the possibility of the Federal Reserve considering a significant rate cut, the US stock market continues to break records

Some investors may be feeling uneasy as a situation unfolds where the US stock market is nearing historical highs, while the Federal Reserve is considering a significant rate cut. This has raised doubts in the market about whether policymakers are seeing potential economic issues.

According to the financial news app, "I don't think a recession is near," Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock and Head of the Global Asset Allocation Investment Team, said in a phone interview, "The economy is slowing down, but still in a relatively good state."

During the COVID-19 pandemic, the US has been combating inflation by raising interest rates after it soared. Now, as inflation has gradually cooled down, despite the Fed previously starting with a significant 50 basis point rate cut in times of economic recession or financial crisis, Rieder stated that a similar rate cut this time does not necessarily mean a recession is imminent.

Investors are preparing for the rate decision the Federal Reserve will make on Wednesday, with market expectations swinging between a 25 basis point and a 50 basis point rate cut. This week, the market is leaning towards a higher probability of a 50 basis point rate cut.

"I think they might cut rates by 25 or 50 basis points, but I think it should be 50 basis points," Rieder said. He pointed out that market expectations have been raised, which may make it easier for the Fed to choose a larger rate cut. "If the Fed only cuts by 25 basis points, the market may be disappointed."

On Monday, the Dow Jones Industrial Average hit a new all-time high. On Tuesday, the S&P 500 index briefly surpassed the historical closing high set on July 16, but ultimately remained almost flat.

According to the CME FedWatch tool, Fed funds futures on Tuesday showed that traders expect a 65% probability of a 50 basis point rate cut at this week's meeting, with a 35% probability of a 25 basis point cut. Looking ahead, traders expect a cumulative 125 basis point rate cut by the end of the year.

Rieder stated that while the Fed's decision to cut rates by 25 or 50 basis points on Wednesday is important, more crucial is how the Fed communicates the speed at which it will lower the federal funds rate to 4% or below. The market may anticipate larger rate cuts in the future, but Fed officials may not be as aggressive based on the latest economic data.

He pointed out that one of the market's focuses is whether the Fed will adjust its risk balance on inflation and employment targets in its policy statement. Additionally, with the recent rise in US unemployment rates, the market will also closely watch Fed Chair Powell's views on the labor market, as any concerns could signal an accelerated pace of rate cuts by the Fed.

The Fed will release the "dot plot" in the Summary of Economic Projections on Wednesday, showing officials' rate expectations. In the last released dot plot, the median federal funds rate was projected to be 5.1% by the end of 2024. Currently, the Fed's target range for the benchmark rate is 5.25% to 5.5%, which has been maintained at a high level since July 2023 to combat high inflation.

Rieder mentioned that the market will closely watch whether the Fed will significantly lower its rate expectations. If officials anticipate a large and rapid rate cut, this will have a significant impact on the market As the market's expectations for a rate cut by the Federal Reserve heat up, bond market rates have fallen this month. The yield on the 10-year US Treasury bond has dropped to 3.622%, the lowest level since June 2023.

Rieder believes that the current benchmark interest rate of the Federal Reserve is too high, especially considering that the inflation trend in the United States has approached or even reached the 2% target. According to the core Personal Consumption Expenditures (PCE) price index, excluding food and energy prices, the three-month annualized growth rate of core PCE has fallen to 1.7%.

He stated that if the Federal Reserve cuts rates by 50 basis points on Wednesday, it would reflect a "readjustment" of its monetary policy, as the significant drop in inflation has made the current policy rate relatively high given the economic conditions. If the federal funds rate were to be set based on current economic conditions, it should be 100 to 200 basis points lower than the current level.

Rieder pointed out that a recession is not currently expected, so the BlackRock Flexible Income ETF he manages has a significant allocation to high-yield bonds in the global fixed income markets. He said, "I am very bullish on high-yield bonds," and the fund is very active in the high-yield bond markets in the US and Europe, trying to avoid companies in restructuring or market segments with overvalued valuations.

Meanwhile, the US stock market has seen double-digit growth so far this year. On Tuesday, the S&P 500 index edged up by less than 0.1% to close at 5634.58 points, up 18.1% year-to-date in 2024, just 0.6% below its all-time high closing level.

The P/E ratio of the S&P 500 is 21 times, much higher than the 10-year average of 18 times. Adam Turnquist, Chief Technical Strategist at LPL Financial, said that although high valuations are not a good timing for short-term trading, when valuations are high, it may pose a higher entry barrier for buyers.

Turnquist believes that the outcome of the Federal Reserve's meeting could be a "key moment" for the US stock market, especially in technical analysis, as the market approaches a key turning point.

Investors are highly anticipating not only a 50 basis point rate cut, but also hope to see the Federal Reserve continue cutting rates next year. All eyes will be on the press conference at 2:30 am Beijing time on Thursday, where Powell will attend and explain the Federal Reserve's rate cut decision, marking the beginning of the Federal Reserve's rate cut cycle