Some investors may be concerned as the US stock market approaches historical highs and the Federal Reserve considers a significant interest rate cut. This has raised concerns in the market about whether policy makers are seeing underlying economic issues.

According to the Zhongtong Finance and Economics APP, "I don't think a recession is close," said Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock and Head of Global Asset Allocation. In a phone interview, "The economy is slowing down, but it is still in relatively good shape."

During the COVID-19 pandemic, the US Federal Reserve has been raising interest rates to curb inflation. However, inflation has gradually cooled down. Despite the Fed's previous concerns about economic recession or financial crisis leading to a significant 50 basis point rate cut, Rieder said that this time, a similar rate cut does not mean a recession is imminent.

Investors are preparing for the interest rate decision that the Federal Reserve will make on Wednesday. Market expectations have been fluctuating between a 25 basis point and 50 basis point rate cut. The probability of a higher 50 basis point rate cut is favored this week.

"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 already been raised, which may make it easier for the Fed to choose a larger rate cut. "If the Fed lowers rates by only 25 basis points, the market may feel disappointed."

On Monday, the Dow Jones Industrial Average reached a new record 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 CME FedWatch Tool, traders expect a 65% probability of a 50 basis point rate cut and a 35% probability of a 25 basis point cut at this week's meeting. Looking ahead, traders anticipate a cumulative 125 basis point cut by the end of the year.

Rieder stated that while the decision of a 25 or 50 basis point rate cut by the Federal Reserve on Wednesday is important, it is more crucial how the Fed communicates its pace to lower the federal funds rate to 4% or below. The market may expect 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 focus points is whether the Fed will adjust its risk balance on inflation and employment targets in its policy statement. In addition, with the recent rise in US unemployment rate, the market will also closely monitor Fed Chair Powell's views on the labor market, as any concerns may indicate an acceleration of the rate cut pace.

The Fed will release the "dot plot" in the summary of economic projections on Wednesday, showing rate expectations from different officials. In the previous dot plot, the median for the federal funds rate by the end of 2024 was 5.1%. Currently, the Fed's target range for the benchmark rate is 5.25% to 5.5%, a high level maintained since July 2023 to combat high inflation.

Rieder stated that the market will closely monitor whether the Fed will significantly lower its rate expectations. If officials anticipate larger and faster rate cuts, it will have a significant impact on the market.

As market expectations for a Fed rate cut heat up, interest rates in the bond market have declined this month. The yield on the 10-year US Treasury bond has fallen to 3.622%, the lowest level since June 2023.

Rieder believes that the current benchmark rate of the Fed is too high, especially considering that inflation in the United States has approached or even reached the target of 2%. According to the core Personal Consumption Expenditure (PCE) price index, which excludes food and energy prices, the annualized growth rate of core PCE has dropped to 1.7%.

He stated that if the Fed cuts rates by 50 basis points on Wednesday, it would reflect a "realignment" of its monetary policy as significant disinflation has left the current policy rate relatively high compared to economic conditions. If the federal funds rate were to be set based on the current economic conditions, it should be 100 to 200 basis points lower.

Rieder pointed out that he does not currently expect the economy to fall into a recession, so the BlackRock flexible income ETF he manages has allocated a large number of high-yield bonds in the global fixed income market. He said, "I am very bullish on high-yield bonds," and the fund is very active in the high-yield bond markets of the USA and Europe, trying to avoid companies undergoing restructuring or market segments with excessively high valuations.

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

The PE ratio of the S&P 500 is 21 times, far above the 10-year average of 18 times. Adam Turnquist, Chief Technical Strategist at LPL Financial, said that although high valuations are not a good time for short-term trades, when valuations are high, it may pose a higher entry threshold for buyers.

Turnquist believes that the outcome of the Federal Reserve's meeting could be a "key moment" for the US stock market, especially inTechnical Analysismarkets are approaching a crucial turning point.

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

Editor/Emily