Before the Federal Reserve's interest rate decision was announced, Bank of America's Chief Strategist Michael Hartnett warned that a significant rate cut could lead to a resurgence of inflation risks, and that gold would be the best hedge against accelerating inflation by 2025.

Looking at the market performance after the Fed's 50 basis point rate cut on Wednesday, aside from Bitcoin, gold indeed turned out to be one of the best-performing assets.

However, almost all assets are rising, except for the 10-year U.S. Treasury bonds, which is almost the opposite of the traditional performance of "safe-haven" assets during a financial environment easing.

The last time the Fed fell after a 50 basis point rate cut was during the financial crisis in October 2008.

Regarding the reason for this euphoric rise, Hartnett explained in his latest Flow Show report "Cutting Rates by 50 Basis Points for Small Businesses," that Wall Street loves "panic rate cuts" when there is no panic (at least not yet).

At the same time, the Fed wants to cut rates by 50 basis points so that the real interest rates can drop from the highest level of this century, preventing layoffs in the small business sector, which is already in recession.

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After the rate cut announcement, Fed Chairman Powell said "re-calibrate" ten times at the monetary policy press conference, which means that the Fed is adjusting its monetary policy stance to adapt to the current economic situation.

Hartnett said that Wall Street's interpretation is that the Fed may be "ahead of the curve," expecting a 250 basis point rate cut by the end of 2025, which could prompt a 25-20% increase in earnings per share (EPS) of U.S. stocks.

However, Powell seemed a bit vague when explaining whether the Fed is "behind the curve."

Note that the last time the Fed cut rates by 50 basis points when credit spreads were so low was in January 1981, and the U.S. stocks reached an all-time high in April 1986.

Historical data shows that after the first rate cut, inflows into money market funds usually last for 9 months.

However, the aggressive easing policies in 2009 and 2020 led to a sharp decline in funds, which could be a signal of market bubble risk.

Recently, global stock markets, especially U.S. stocks, have seen a large-scale outflow of funds, while the bond market continues to attract inflows, especially investment-grade bonds and high-yield bonds.

This indicates that in the prospect of declining interest rates, bonds are still seen as an attractive investment option, and the expectation of an economic recession is still deeply rooted.

The report shows that since 1970, the Fed has carried out 12 rounds of rate cuts, which can be divided into three categories based on the first rate cut and market reaction: "Soft Landing": After the Fed's rate cut, the U.S. enters a "soft landing," such as in 1984, 1995, 2019... which is beneficial for stocks and bonds, with the S&P 500 index rising by 10% within 6 months after the first rate cut, and the 10-year U.S. Treasury yield falling by 56 basis points; "Hard Landing": After the Fed's rate cut, the U.S. enters a "hard landing," such as in 1973, 1974, 1980, 1981, 1989, 2001, 2007; which is not favorable for stocks, with the S&P 500 index falling by 6% within 3 months, but favorable for bonds, with the 10-year U.S. Treasury yield falling by 38 basis points within 6 months; "Panic Rate Cut": The Fed cuts rates due to Wall Street crashes/credit crises, such as in 1987 and 1998... which is very risky, with the S&P 500 index rising by 20% within 6 months after the first rate cut.

Hartnett believes that the current market's reaction to the Fed's 50 basis point rate cut seems to be following the script of a "soft landing" or a "panic rate cut."

In anticipation that the Fed can prevent the number of new jobs from falling below 100,000 and the default rate from rising, Wall Street has carried out the classic "Fed pivot" trade, see the asset rise when the Fed lowered interest rates from 9% to 4% between 1975-1976, laying the foundation for the next more intense surge in inflation.

Hartnett warns that the U.S. stock and credit markets are now digesting the expectation of a 250 basis point rate cut by the Fed and an 18% increase in earnings growth of S&P 500 index constituents by the end of 2025, "risks are not going anywhere, so investors are forced to chase" the rise, "bubble risk" is coming back, and now is the time to buy bonds and gold on dips.

If new job additions remain between 125,000 and 175,000, it will indicate that the U.S. has achieved a "soft landing," Hartnett believes that stocks outside the U.S. and commodities are better investment targets, with the latter still being one of the common means of hedging against inflation.

Finally, here are the best market "indicators" Hartnett uses to determine whether the upcoming landing is hard, soft, or no landing: Soft Landing: If the price of private equity ETF (PSP) exceeds $70, this may mean that the market expects the Fed's significant rate cut to be beneficial to the macroeconomy.

No Landing: If certain specific ETFs, such as SPDR S&P Global Natural Resources ETF (GNR), Regional Bank Index ETF (KRE), and Emerging Markets ETF (EEM), exceed $60 and $45 respectively, this may indicate that Wall Street's inflation expectations will spread to a broader economic area, i.e., "Main Street."

Hard Landing: If the yield on 30-year U.S. Treasury bonds remains below 3.75% even in the face of debt, deficit uncertainty, and inflation, this may indicate that the market expects the economy to enter a recession.