Interest rate cut expectations rise, is the market welcoming a turning point?

On October 17, the Federal Reserve signaled a "rate cut promotion and balance sheet tapering completion," causing gold to surge past $1950, and US Treasury yields fell by 30 basis points, boosting market sentiment.

This moment is worth pondering. Why is the Federal Reserve so eager to pivot during a vacuum period with the U.S. government in a shutdown and key data absent?

Liquidity Alarm Triggered
Looking back at the "repo crisis" of 2019: overnight rates once soared to 10%, and the money market was on the brink of collapse. Now a similar scenario is reappearing—SOFR rates jumped 10 basis points in a single day, and the size of the repo market has shrunk by 20% compared to four years ago. Although bank reserves have reached $2.8 trillion, they account for just over 10% of GDP, nearing the 8% systemic risk line warned by Morgan Stanley.

Economic slowdown promotes a shift
The data from the real economy supports this decision: the GDP growth forecast for the third quarter has been revised down to 1.2%, temporary job positions have declined for five consecutive months, and the manufacturing PMI has continued to fall for eleven months. The slowdown in economic momentum has provided room for a policy shift.

Will history repeat itself?
In the six months after the cessation of quantitative tightening in 2019, the S&P rose by 15% and gold increased by 18%. However, times have changed:

· Core PCE rose from 1.6% to 3.9%
· Government debt/GDP increased from 107% to 123%
Geopolitical risks have significantly escalated.

Prospects and Concerns
If the FOMC clearly stops tapering in November and the December dot plot strengthens the rate cut, the market may continue to be optimistic. However, easing cannot solve structural problems: the number of corporate bankruptcies has reached a 14-year high, and the impact of high interest rates on debt is still fermenting.

It is easy to release liquidity, but difficult to retract it. The current rise in assets may just be the beginning; the true test is: who will ultimately bear the cost of this easing?