Citadel macro expert: The only conclusion for the market when the Federal Reserve cuts interest rates amid such ample liquidity is to "increase risk appetite."

Against the backdrop of already loose financial conditions in the United States, the Federal Reserve still chose to cut interest rates, sending a positive signal to the market. Nohshad Shah, a macro strategist at Citadel Securities, recently stated that the Federal Reserve's dovish shift has "turned on the green light" for the performance of risk assets for the remainder of this year, and from the investors' perspective, "increasing risk appetite" is the only conclusion at present. Last week, the Federal Reserve initiated its so-called "preemptive rate cut," lowering rates by 25 basis points and confirming a dovish policy stance for the remainder of the year. According to the latest Summary of Economic Projections (SEP), policymakers' median forecast for interest rates in 2025 is three rate cuts, up from two in the June forecast, which means the market should view another 25 basis point cut in October and December as the baseline scenario. Powell confirmed in the post-meeting statement and press conference that "the downside risks to employment have increased." In response, Nohshad Shah pointed out that Powell's focus has clearly shifted to the weakness in the labor market, which has driven a change in the stance of core committee members. The article notes that the direct impact of this series of actions and statements is that the financial conditions, which have been continuously easing since the tariff shock in April, will become "even looser." Against the backdrop of robust macroeconomic fundamentals, the additional easing of monetary policy is creating a strong tailwind for risk assets. Powell's Shift in Focus: Employment First, Tolerating Higher Inflation Shah analyzes that Powell's latest statements confirm the Federal Reserve's tolerance for a certain degree of inflation, namely that "3% is the new 2%," which is increasingly becoming the new norm for global central bank officials. In the Federal Reserve's dual mandate, employment has clearly become the more favored side. The Fed's strategy seems to be to "front-load" this year's precautionary rate cuts to protect the labor market and prevent economic slowdown. The economic projections summary shows that decision-makers expect only one more rate cut by 2026 while raising their inflation and growth forecasts for 2026. This indicates that the Federal Reserve hopes to stabilize the labor market through this year's rate cuts, thereby paving a smoother path for policy and inflation to return to target (not expected before 2028). Shah believes that if the current concern is the labor market, then cutting rates now to counteract weakness is logical. Strong Economic Outlook, Easing Policy Injects New Momentum Shah emphasizes that the market should not overlook the strong outlook for U.S. economic growth, and he expresses skepticism about the likelihood of a recession occurring soon. He points out that a series of data and trends support his optimistic assessment: corporate profits remain solid (expected to grow 7.7% year-on-year in the third quarter), household balance sheets are healthy, consumption remains stable (retail sales control group data increased by 0.7% this week), and commercial loan growth is accelerating. In addition, the U.S. economy is benefiting from a once-in-a-generation AI capital expenditure boom (which has reached $400 billion and continues to grow) and government policies aimed at boosting the supply side of the economy (such as deregulation, energy infrastructure, and tax cuts) Shah believes that on top of such strong economic fundamentals, the combination of monetary and fiscal easing policies is an "exciting combination." "Risk Appetite" is the Only Conclusion In Shah's view, when financial conditions are so loose, the only conclusion is "risk appetite" (RISK-ON). This is a clear signal for risk assets to outperform the market. For the stock market, as the market becomes more optimistic about future growth prospects, cyclical stocks should continue to rise relative to defensive stocks. Additionally, the Federal Reserve's insistence on cutting interest rates despite inflation also supports interest-sensitive sectors, especially small-cap stocks and unprofitable tech stocks. Shah points out that the IWM index (Russell 2000 ETF), which represents small-cap stocks, still has room to catch up relative to the SPY index of the S&P 500. Despite the optimistic outlook, Shah also lists several potential factors that could disrupt the rise of risk assets. The first is a collapse in economic activity and the labor market leading to a severe recession, but he believes current data (such as the Dallas Fed WEI index and initial jobless claims) does not support this view. The second is overvaluation, but the earnings per share of the S&P 500 index have remained in sync with the index's performance. The third is accelerating inflation, which may become a concern in the future but is currently placed in a secondary position. Finally, a surge in long-term bond yields would require a trigger that does not currently exist