Recently, the global financial markets have shown new trends. U.S. Treasury yields are on a downward trend, the dollar index is falling, while risk assets such as gold and Bitcoin are beginning to warm up. These signs seem to suggest that market participants are gradually increasing their expectations for an imminent rate cut by the Fed.

This expectation is not unfounded. Currently, the inflation rate continues to decline, the job market is beginning to cool down, and corporate financing costs remain high. These factors are prompting investors to reassess the future direction of monetary policy: Is the Fed about to end its tightening cycle?

Multiple economic indicators are signaling a cooling down. The year-on-year growth rate of the core Personal Consumption Expenditures (PCE) price index in September has dropped to 2.6%, not far from the Fed's 2% policy target. The job market has shown a slowdown for several months, with non-farm payroll additions falling short of expectations and wage growth stabilizing. These data indicate that inflation has not been fluctuating, while economic resilience is weakening.

Faced with this situation, the Fed finds itself in a dilemma: if it continues to maintain high interest rates, it may suppress consumption and investment, and even trigger debt risks; but if it lowers interest rates too early, it may lead to a rebound in inflation. However, the market often moves ahead of policy. The decline in U.S. Treasury yields, the weakening of the dollar, and the rebound in risk asset prices seem to reflect investors' judgment: the Fed may begin symbolic interest rate cuts in the first or second quarter of 2024.

The Fed's interest rate decisions have a significant impact on the global cost of funds. When interest rates rise, funds tend to flow back to dollar assets, putting pressure on risk assets; whereas when expectations for interest rate cuts increase, the anticipated improvement in liquidity drives funds toward higher-yielding areas, such as the stock market, technology sector, and cryptocurrency assets.

Historical experiences have repeatedly confirmed this mechanism. For example, the interest rate cut policy after the pandemic in 2020 triggered a simultaneous rise in the US stock market and Bitcoin. Currently, the market is closely watching every move of the Fed in hopes of grasping the direction of future asset allocation.