Note that the dollar may cut rates more than expected. There is a 93% probability that the Federal Reserve will cut rates in September, which basically confirms that this rate cut may be completed in a very special form and cultivate retail investors in the process.
It is already evident that East University is watching closely, waiting for the Federal Reserve to start cutting rates. Recently, some popular domestic policies seem completely unrelated, but when connected they show a tendency to hunt whales.
National-level mega-projects are being launched one after another, with the Ya River Hydropower Station and the New Tibet Railway ready to start construction. The central government has clearly proposed to curb involution, prohibit low-price disorderly competition, and require all enterprises to fully pay social security. The payment of social security has completely shifted from negotiable to legally rigid, increasing the cost of labor for enterprises. Prohibiting low-price competition and supporting asset prices through large-scale infrastructure.
These unrelated matters can be summarized in one sentence: raising the prices of production factors. All these hot policies will, without exception, raise the prices of production factors. As a global manufacturing base, if domestic production factor prices rise, it will inevitably export inflation, hunting the impending inflation cycle in the United States.
The reason the Federal Reserve has been slow to cut rates is due to concerns about a resurgence of inflation. For the Federal Reserve to cut rates and inject liquidity, it needs to set up a pool for the U.S. dollar, guiding these funds into the pool to avoid inflation. According to traditional economic theory, cutting rates benefits risk assets like the stock market, turning the stock market into a pool that accepts liquidity.
It was only in September 2024 that the Federal Reserve began its rate-cutting cycle, and it cut rates by 50 basis points in one go. The Nasdaq not only did not rise but instead plummeted, falling from nearly 21,000 points to below 18,000 points, a decline of 14%. The sharp drop in U.S. stocks shocked the Federal Reserve, which led to the subsequent halt of rate cuts, hence the so-called hawkish stance of the Federal Reserve.
If the U.S. stock market cannot become that pool for liquidity, the result of cutting rates would be widespread inflation, coupled with competitors lurking nearby, like East University, waiting for you to show signs of inflation.
A friend asked, since there is inflation, can we not cut rates? That really cannot happen; the top leader does not want it that way. Trump hopes to use rate cuts to lower government bond interest rates, allowing him to issue bonds at a lower cost for financing. With financing, you need resources to compete in the economy and secure votes; do not forget that next year is the midterm election.
You can imagine that if Trump, as the top leader during his second term, loses the advantage in the Senate or House of Representatives in the midterm elections, the remaining two years will essentially be a lame-duck period for him, a garbage time. The midterm elections must be discussed; everyone saw him using various means to repeatedly call for the Federal Reserve to cut rates and stirring up corruption suspicions regarding the renovation of the Federal Reserve building, which cost 2.4 billion dollars.
As a businessman from the real estate industry, Trump understands all the twists and turns involved. Additionally, he is using the nomination power for the Federal Reserve chairmanship to bring rate-cutting advocates to power, employing various means solely for the purpose of rate cuts, as rate cuts are tied to performance, competing for the upcoming midterm elections.
In summary, there are two certainties now: Trump definitely wants the Federal Reserve to cut rates, and a rate cut by the Federal Reserve will definitely lead to inflation, which is a result that no one wants to face. So what to do? Fei Bagge has been observing the Federal Reserve's comments for a long time; I will skip the intermediate process and just mention the results.
Ultimately, it is highly likely that after starting to cut rates, the Federal Reserve will cut rates faster and more aggressively than expected. This is reflected in Goldman Sachs' recent prediction of a possible 50 basis point cut in September, and JPMorgan's prediction of three rate cuts this year. After a rapid decline in interest rates, the White House quickly issued a large amount of government bonds for financing during this very short window of rate cuts.
The initial transmission of inflation takes time. The Federal Reserve wants to quickly shift its stance and release rate hike expectations before inflation fully takes off, to control inflation and reshape the value of the dollar. This is also the reason why the dollar has been so weak this year. In the first half of the year, before the Federal Reserve even began cutting rates, the dollar had already fallen by more than 10%. If the rate cut in September really happens, there is still room for the dollar to decline.
Behind the continuous decline, the market has already factored in a rapid rate cut for the dollar, while the Federal Reserve has quickly shifted from extreme dovishness to hawkishness, likely creating a batch of retail investors in the stock market. While you still hold dreams of a loose rise, the guillotine has already fallen from the sky. These details should be discussed in the live studio; regarding these expectations and possibilities, some things must be guarded against.