The Federal Reserve's interest rate cut in October is imminent: The game and opportunities in the global capital markets.

On October 16, Beijing time, the CME "FedWatch" tool shows that the market has almost fully priced in a 25 basis point rate cut by the Federal Reserve at its meeting on October 28-29, with a probability as high as 99.4%. This near "certainty" expectation is backed by the continuous weakness in U.S. economic data and the strong policy signals released by the Federal Reserve's senior officials. Historical experience indicates that every policy shift by the Federal Reserve stirs up significant waves in global markets, and this rate cut is not only related to the short-term recovery of the U.S. economy but also signifies a profound adjustment in the global capital flow pattern.

1. Three Core Logics of Interest Rate Cut Expectations

1. Labor market 'loss of momentum'

The ADP employment data for September in the United States (commonly known as "Little Nonfarm") unexpectedly decreased by 32,000, far below the expected increase of 51,000, becoming the last straw that broke the market's confidence. Although the official nonfarm data has not been released due to the government shutdown, data from private recruitment platforms shows that job vacancies have decreased by 40% compared to the peak of the pandemic, and the trend of corporate layoffs or natural attrition is spreading. Federal Reserve Chairman Powell stated in a public speech in Philadelphia: "Negative signals in the labor market are increasing, and employment risks have risen significantly."

2. The "dilemma" of inflation and employment

The current core PCE inflation rate is 2.9%, which is higher than the Federal Reserve's 2% target. However, Powell emphasized that this figure is mainly affected by the "one-time tariff shock." In contrast, the deterioration of the job market is seen as a more pressing risk. Federal Reserve Governor Christopher Waller clearly stated, "Stabilizing employment is a top priority as long as inflation is under control." This shift in policy balance makes interest rate cuts an inevitable choice.

3. Consistency Output of Policy Signals

The Federal Reserve's senior officials have recently released a series of dovish signals. Newly appointed governor Stephen M. Mulan publicly advocates for "substantial anti-inflation measures in the coming year" and supports a single rate cut of 50 basis points; New York Fed President John Williams emphasizes that "action must be taken to preserve employment." The formation of this internal consensus further strengthens market expectations. Notably, Powell rarely mentioned the "possibility of halting balance sheet reduction," and this "double easing" combination will release long-term liquidity and inject confidence into the global market.

2. The Chain Reaction of the Global Asset Market

1. U.S. stocks: Structural differentiation intensifies

Interest rate cuts usually boost stock market valuations by lowering the discount rate, but historical data shows that on the day of the announcement, U.S. stocks often fall due to profit-taking. The current market focus is on the divergence between technology stocks and traditional industries: leading AI hardware companies like Nvidia are pressured by tariffs impacting the supply chain, while cyclical sectors such as non-ferrous metals and semiconductors are expected to benefit from liquidity easing. Investors need to be cautious of short-term fluctuations where "good news leads to bad news" upon realization, while in the long term, it is essential to pay attention to the valuation recovery potential of growth stocks in a low-interest-rate environment.

2. US Dollar and Non-USD Currencies: Long and Short Game Intensifies

The US dollar index may face downward pressure due to interest rate cuts, while non-US currencies such as the RMB and Euro welcome a window for appreciation. As of October 18, the RMB central parity has broken 7.10, reaching a nearly one-year high. Emerging market countries may attract a return of foreign investment, but caution is needed as some economies with high debt may fall into passive depreciation due to capital outflows.

3. Gold and Cryptocurrency: The Dual Logic of Hedging and Speculation

The gold price has surpassed 4200 yuan per gram, hitting a historical high, driven mainly by the decline in real interest rates and the central bank's demand for gold. The cryptocurrency market, on the other hand, has shown a "roller coaster" trend: Bitcoin plummeted in the early stages of rising interest rate cut expectations, but rebounded somewhat after liquidity was restored. Investors should note that high-leverage trading is prone to trigger a wave of liquidations amidst fluctuations in policy expectations, so it is essential to carefully assess risk exposure.

Three major uncertainties in the future policy path

1. The risk of "blind flying" during the data vacuum period

The U.S. government shutdown has caused delays in the release of key data such as non-farm payrolls and CPI, forcing the Federal Reserve to rely on alternative indicators (such as ADP employment and consumer confidence index) for decision-making. If the data released after the shutdown unexpectedly shows strong numbers (such as over 60,000 new non-farm jobs), the Federal Reserve may quickly shift to a hawkish stance, triggering a sharp market correction.

2. The "undercurrents" of internal policy differences

Despite the high consensus in market expectations, there are still divergences within the Federal Reserve. The dot plot shows that 9 out of 19 officials do not support aggressive rate cuts, while the "50 basis point faction" led by new governors like Milan may push for unexpectedly accommodative policies. This divergence could lead to "asymmetric rate cuts" at the December meeting (with both 25 basis points and 50 basis points probabilities coexisting).

3. The Game of Political Intervention and Independence

The Trump administration pressured the Federal Reserve through personnel appointments, demanding a quicker rate cut to stimulate the economy. Although the Federal Reserve maintains its independence, political factors may intensify market concerns about policy uncertainty. Investors need to closely monitor the dot plot and economic forecasts updates after the October meeting to capture subtle changes in policy stance.

IV. Investor Response Strategies

1. Short-term layout: Seize the window of liquidity easing

At the beginning of the interest rate cut cycle, attention can be paid to assets benefiting from low interest rates:

A-shares heavily held by foreign capital: non-ferrous metals, AI computing power, brokerage sector;

Gold ETF: It is recommended to invest through dollar-cost averaging instead of chasing highs, with the position controlled within 10% of household assets.

Floating rate borrowers: Choose to convert contracts to lock in low rates.

2. Medium to long-term vigilance: Repeated inflation and policy lag

The stimulus of interest rate cuts to the real economy takes 3-6 months to take effect, and the market may be overly optimistic in the short term. If tariff policies drive up core commodity inflation, the Federal Reserve may be forced to slow down the pace of interest rate cuts, needing to hedge against "stagflation-like" risks in advance. Retain cash and highly liquid assets, and avoid chasing volatile assets such as gold and cryptocurrencies.

3. Risk Hedging: Options and Diversified Allocation

Utilize stock index options and currency futures to hedge against market fluctuations while increasing the allocation of anti-inflation assets (such as REITs and commodities). For cross-border investors, it is important to pay attention to the impact of RMB exchange rate fluctuations and the narrowing of the US-China interest rate spread.

Conclusion: The "Butterfly Effect" of Policy Shift

The Federal Reserve's interest rate cut decision is not only a "preventive brake" on the current economy but also a landmark event marking the shift of policy focus from "anti-inflation" to "stabilizing growth." In the context of a highly interconnected global economy, this decision will reshape the path of capital flows and test the wisdom of policymakers in various countries. For investors, it is essential to embrace the short-term dividends of "liquidity easing" while also being vigilant of the medium and long-term risks posed by "policy lag" and "data reversal." Only by maintaining rationality in dynamic games can one seize certain opportunities amid the storms.