Expectations of interest rate cuts are heating up, and the Federal Reserve has released a major signal that the market is active

Investor.com

2024-08-03 08:05Published on the official account of Beijing Investor Network

"Investor's Network" Xie Yingjie

The Federal Reserve's July interest rate meeting attracted attention from the outside world. The market speculates what decision the Fed, which has entered the "last mile" of the current interest rate hike cycle, will make: it will keep the policy rate unchanged and wait for more economic data for subsequent judgment; There will still be another 25 basis point rate hike.

At its July 31 monetary policy meeting, the Fed announced that it would keep the target range for the federal funds rate unchanged between 5.25% and 5.5%, and "if the fight against inflation continues to make desired progress, the Fed may announce a rate cut at its September meeting."

After the news was released, the three major U.S. stock indexes opened higher and closed higher, with the S&P and Nasdaq rising the most in five months, the S&P 500 rising more than 2% intraday, and the Nasdaq rising more than 3% at one point, both recording the best one-day performance since February.

Leave interest rates unchanged

As the market expected, the Fed released a "dovish" signal at the July monetary policy meeting, and the market "danced".

Since the start of the current rate hike cycle in March 2022, the Fed has raised the target range for the federal funds rate from near zero to 5.25%-5.50% at a pace not seen in more than 40 years, reaching the highest level in 23 years.

After accumulating 525 basis points of rate hikes, the Fed's tightening policy has brought United States inflation back from its peak. However, some economic activity in the United States has not fully cooled as expected, which has added to the complexity of the Fed's subsequent policymaking.

Previously, the market had been expecting United States inflation to continue to decline under the Fed's tightening policy, and the Fed would cut interest rates three or four times in 2024 before the United States economy weakened.

However, the Consumer Price Index (CPI) exceeded market expectations and the previous reading, causing this rate cut to fall sharply. At present, the market expects the Fed to reduce the number of rate cuts to one or two times this year, and the timing of the first rate cut will also be delayed. The high interest rate policy environment in the United States may last longer, and some investors even expect that the tone of the Fed's policy outlook for the Fed to start cutting interest rates may be reversed.

The upward trend in inflation is mainly due to the increase in house prices and gasoline prices, and further seasonal increases in gasoline prices are still likely to follow. Recently, there have also been new price increases in the United States, such as rising electricity prices caused by strong research and development of AI, and these upside inflationary risks have offset the disinflationary factors brought about by the recovery of global supply chains.

While inflation remains resilient, economic data such as employment and consumer spending in United States remain moderate and strong. In recent public speeches, many Fed officials have sent a strong signal that they are not in a hurry to cut interest rates.

Powell's last speech before the interest rate meeting released a "dove sound", saying that the Fed has been getting good data to boost confidence recently. The United States Federal Reserve Governor, the "big hawk" Waller, has emphasized the need for high interest rates to ensure that inflation comes down for two years, saying that as long as there are no major surprises in inflation and employment, interest rate cuts are coming.

Against the backdrop of higher-than-expected inflation in United States, a number of economic data indicators continuing to be strong, and the strengthening of the US dollar has triggered shocks in the global exchange rate market, the Fed's judgment and statement on the outlook for United States inflation and the future direction of interest rates have attracted particular attention from the market.

In its July 31 monetary policy statement, the Fed acknowledged that in recent months, the Fed has made some progress towards its 2% inflation target. At the same time, the Fed also removed the long-standing phrase "highly concerned about inflation risks" in its monetary policy statement, and instead acknowledged that policymakers are now "concerned about risks on both sides of its dual mandate."

At the same time, the Fed announced that it would keep the target range for the federal funds rate unchanged between 5.25% and 5.5%. Markets reacted positively to the change in the Fed's attitude.

At the close of trading on July 31, United States stocks rose across the board. The Dow Jones closed up 99.46 points, or 0.24 percent, at 40,842.79, the S&P 500 rose 1.58 percent to 5,522.30 and the Nasdaq surged 2.64 percent to 17,599.40.

The Fed is about to cut interest rates

Continued interest rate hikes have made interest costs in the United States very expensive. Coupled with the bipartisan split in the United States Congress, which has stalled to raise the debt ceiling and launch the fiscal year 2024 budget, rating agencies Fitch and Moody's have downgraded United States' long-term ratings to warn of the seriousness of United States' fiscal problems.

It is worth noting that the Q2 GDP data shows that the United States economy remains resilient. On July 25, the first estimate data released by the Bureau of Economic Analysis (BEA) of the Ministry of Commerce of the United States Ministry of Commerce showed that real gross domestic product (GDP) in the second quarter of 2024 United States grew at an annualized rate of 2.8% quarter-on-quarter, far exceeding market expectations of 2% and significantly higher than the 1.4% in the first quarter.

But the recent slowdown in the United States has been flickering. Recent indicators suggest that job growth is slowing and the unemployment rate is rising but still low. Inflation has slowed over the past year, but remains slightly elevated.

The Fed's July Beige Book showed that economic activity in most parts of the United States maintained modest to moderate growth during the reporting period from late May to early July, with three regions reporting flat or declining economic activity from the May Beige Book. The report also said United States economic growth will slow in the next six months.

Given the unpredictable nature of the neutral interest rate and the lag in the impact of monetary policy on economic activity, it is also difficult for the Fed to determine whether the current monetary policy has reached a sufficiently restrictive level and whether the previously accumulated tightening policy has been fully effective for economic activity.

This also makes it more difficult for the Fed to weigh risks between monetary policy. If policy tightening is not strong enough to curb inflation, it will need to pay a higher price to fight persistent inflation; But if policy is too tight, it could cause unnecessary damage to the economy. As a series of recent jobs data showed that supply and demand in the United States labor market are becoming more balanced, some in the industry are firmly betting that the Fed will keep its policy rate unchanged.

JPMorgan Chase CEO Dimon expects that United States interest rates may be in the range of 2% to 8% in the future, because there are a lot of inflation factors in the United States, including continued fiscal spending, global remilitarization, global trade restructuring, capital needs for the new green economy, etc., and these factors will continue.

In the view of Michael Feroli, chief United States economist at JPMorgan Chase, the Fed will not rashly cut interest rates at the sensitive stage when the 2024 United States election enters the second half of the sensitive stage. If there is no rate cut in July, then the Fed may not cut rates until December, which is after the presidential election.

Nomura's global macro director Su Bowen judged that the United States' disinflation process has returned to the right track, and United States' economic growth has also cooled, which will make the Fed more willing to start the interest rate cut cycle. Nomura currently predicts that the Fed will cut rates once in September and December 2024 and 100 basis points in 2025.

Weighing a number of factors, the market tends to believe that at some point in 2024, the Fed is bound to start cutting interest rates, even though inflation has not yet come to the Fed's target level. (Produced by Thinking Finance)■

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