On September 18th local time, the Federal Reserve announced a 50 basis point cut to the target range of the federal funds rate, bringing it down to a level between 4.75% and 5.00%. This marks the first rate cut by the Federal Reserve since 2020. According to mainstream market forecasts, the Federal Reserve will continue to lower rates in the fourth quarter, with expectations that the U.S. federal funds rate will reach 4.4% by the end of the year, within a target range of 4.25% to 4.5%, and it is projected to drop to 3.4% by 2025 and 2.9% by 2026.

Historically, the Federal Reserve's first 50 basis point rate cut has typically been a measure to address significant economic crises. For instance, at the beginning of this century, the tech bubble led to a sharp decline in the U.S. stock market, constraining consumer spending and business investment, prompting the Federal Reserve to start cutting rates in January 2001. In 2007, the bursting of the real estate bubble led to the initiation of a rate-cutting cycle in September 2007 to prevent the spread of financial risks. Both of these rate-cutting cycles began with a 50 basis point cut. Since 2024, the U.S. inflation rate has gradually approached the 2% target, and the economy has not shown any significant crisis. Why did the Federal Reserve start this rate-cutting cycle with a 50 basis point cut?

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On one hand, the decision takes into account the level of inflation and the state of the labor market. According to data released by the U.S. Department of Labor, the U.S. CPI rose by 2.5% year-on-year in August, narrowing by 0.4 percentage points from July, marking the smallest increase since March 2021. The Federal Reserve's September statement indicated that inflation has made further progress towards the committee's 2% target. At the same time, there are signs of deterioration in the U.S. employment situation. Over the past three months, the moving average of new non-farm employment in the U.S. is 116,000 people, gradually approaching the monthly average below 100,000 before the collapse of the tech-internet bubble in 2000 and the subprime crisis in 2007. At the Jackson Hole meeting in August, Federal Reserve Chairman Powell expressed that he did not want to see further deterioration in the labor market. Therefore, as the inflation rate gradually approaches the target, the Federal Reserve's focus will increasingly concentrate on the labor market.

On the other hand, the aim is to reverse market expectations of a U.S. economic recession. This year, under the circumstances of unclear monetary policy prospects of major global central banks and geopolitical turmoil, the global financial market has fluctuated between "rate-cutting trades" and "economic recession trades." Recently, the unwinding of yen carry trades has triggered severe fluctuations in the global market. At the same time, since August, multiple indicators have shown signs of the U.S. economic data exhibiting pre-recessionary signs, with unemployment rate data triggering the Sam Rule (according to the Sam Rule, once the three-month moving average of the unemployment rate is 0.5% higher than the low point of the past 12 months, it indicates that an economic recession may have already begun). To reverse the recession expectations, the Federal Reserve has taken a "preemptive" approach, using a more substantial rate cut to solidify the resilience of the labor market, avoid greater turmoil in the financial market, and strive for a soft economic landing.

So, will the price of crude oil, which has financial attributes, be affected by this Federal Reserve rate cut?

The theoretical logic suggests that the Federal Reserve's interest rate policy mainly affects crude oil prices through the interest rate mechanism, exchange rate mechanism, and information effect and market expectation mechanism. Generally, the U.S. federal funds rate has a negative impact on international oil prices. That is, expansionary monetary policy lowers the interest rate level. When the interest rate is below the marginal productivity of capital, investment demand expands, leading to an expansion of total demand and boosting crude oil prices. The Federal Reserve's rate-cutting policy also transmits to international oil prices through the exchange rate mechanism. Rate cuts lead to a reduction in the yield of the U.S. dollar, and investors are more inclined to invest in other currencies or assets, thereby lowering the U.S. dollar exchange rate. The international crude oil prices priced in U.S. dollars will change accordingly. The expectations of the Federal Reserve's interest rate decision meetings also have a significant impact on oil price changes. Assuming there is a discrepancy between the information held by the central bank and that held by market participants, when the central bank issues an announcement, it may have an information effect on market participants, affecting other entities' judgments on monetary policy, and thus adjusting and changing their behavior.

The main reason for the Federal Reserve's rate cuts is to address the downward trend of the economic fundamentals and sudden risks, generally divided into "gradual rate cuts" and "sharp rate cuts." However, in the case where consumption still has resilience and the possibility of a deep economic recession is not significant, there is also "preventive" rate cutting. For example, after the first rate cut, a pause is taken to observe the effects, rather than continuous rate cuts. Under different background environments, the impact of rate-cutting strategies on international oil prices is also different. From this year's actual situation, although the U.S. economy has potential recession risks, the inhibitory effect of high interest rates on economic activity is limited, and key economic data still has resilience. Therefore, the possibility of the U.S. economy facing a deep and sudden decline is low. If the Federal Reserve starts rate cuts within the year, it can be considered "preventive" rate cutting. Historically, before each round of "preventive" rate cuts, the U.S. faced certain economic downward pressures and generated significant negative externalities, and the economic growth rates of regions such as the Eurozone, Japan, and China were also affected and slowed down. Before the first rate cut, U.S. bond yields led the rise, and commodities faced demand-side pressure. After the rate-cutting policy was implemented, bond yields narrowed, and the rate-cutting policy would promote the rise in oil prices through the interest rate mechanism, exchange rate mechanism, and information effect and market expectation mechanism. However, this impact has a lag and timeliness. Once the market digests this premium, oil prices will quickly return to the normal range. Therefore, in the absence of significant changes in the supply and demand of the oil market and sudden large-scale geopolitical conflicts, it is expected that international oil prices may first fall and then rise in the short term, and will gradually return to the normal range in the long term. It should be noted that over the past 10 years, the trend of oil financialization has converged, and the negative correlation between the U.S. dollar and oil prices has weakened. Sudden financial risk events and events affecting oil supply and demand have caused the U.S. dollar and oil prices to move in the same direction multiple times; sudden events have short-term explosiveness and long-term impact inertia, which leads to uncertain fluctuations in crude oil prices.

In the first three quarters of 2024, international oil prices showed a wide range of "inverted V" fluctuations, with Brent futures ranging from $69.19 to $91.17 per barrel. From January to April, the spillover effect of geopolitical risks from the Israeli-Palestinian conflict continued to push up oil prices; from May to September, international oil prices fluctuated more intensely. Due to the poor execution of production cuts by OPEC+ member countries, the results of the production meetings were below expectations, China's crude oil imports decreased, and demand was weak, leading to an overall downward trend in international oil prices. Although the U.S. has entered a new round of rate-cutting cycles, it is expected to be difficult to effectively boost oil prices. In the fourth quarter, the oil market enters a seasonal demand off-season, and international oil prices will still face significant downward pressure.