Let’s take a look at what happened yesterday:
The Federal Reserve announced a 25 basis point rate hike, raising the interest rate range to 5.25%-5.5%. This is the 11th rate hike since the start of the rate hike in March 2022. The Fed made very few changes to the post-meeting statement (almost copied the June statement), and did not provide new guidance on future policy plans - it will continue to evaluate more information and its impact on monetary policy. Although the rate hike was 25 basis points, we still have to remain highly vigilant. Inflation remains high (inflation in June has fallen to 3%, and the Fed should be worried about the slow decline in core inflation); the description of economic growth has been raised from "moderate" to "mild" (this is more like a hesitant rate hike). At 2:00 am Beijing time, the moment the Federal Reserve announced the interest rate decision, there was almost no movement in the financial market, and the whole world seemed to be asleep: the S&P 500 and Nasdaq 100 indexes narrowed their losses, the US dollar and US Treasury bonds barely changed, and the swap contracts still showed a 50% chance of another rate hike. Traders in Asia who stayed up all night waiting for the decision even yawned. It can be called the quietest rate hike in the world. The three major U.S. stock indexes rose and fell. The Dow Jones closed up 0.24%, rising for 13 consecutive days, tying the longest record in history. The S&P 500 closed up 0.02%, and the Nasdaq closed down 0.12%. Finally, let's take a look at what Powell said at the press conference: 1. Fully focused on the dual mission, firmly committed to returning the inflation rate to 2% (although it is a slogan and has no substantive meaning, this sentence cannot be omitted, and it will be a big deal if it is not said); 2. The full impact of policy tightening has not yet appeared; 3. Take a data-dependent approach to future interest rate hikes. If the data shows that it is necessary, we may raise interest rates in September or keep interest rates unchanged. How to act in September depends on the data. We have not decided yet-this is the highlight of the entire press conference, mentioning the possibility of suspending interest rate hikes in September; 4. Decisions will continue to be made meeting by meeting (so it seems that the September meeting will not announce the end of the interest rate hike cycle); 5. It is a good thing that overall inflation has fallen so much. The key issue is to balance the risks of doing too much or too little. We hope that the core inflation rate will decline, but core inflation is still high. The core inflation rate is a better indicator of the overall inflation trend (when the United States releases inflation reports in the future, the focus will be on core inflation).6. There will be no rate cuts this year, but several FOMC members expect a rate cut next year (Fed officials may make comments on rate cuts in the future); 7. Fed staff no longer predicts a recession - this is the second highlight of Powell's press speech, and the Fed defines it as a "soft landing"; 8. It is expected that the inflation rate will not fall back to 2% until around 2025 (high interest rates will be maintained in the long term). The 25 basis points we are looking forward to have arrived as expected, and the probability of a rate hike in September is relatively small. The US Federal Funds Rate Futures show that the market expects the probability of another rate hike by the Fed this round to be 42%, of which the probability of a 25BP rate hike in September is 21.5%, and there will be at least one 25BP rate cut by May next year.
My analysis: First, regarding the Fed's rate hike, the main driving force is inflationary pressure. Although the inflation rate has dropped to 3% in June, it is still higher than the Fed's 2% target. However, core inflation (excluding changes in food and energy prices) is falling at a slower pace, so the Fed may continue to tighten its policy. Although we have seen a 25 basis point rate hike, the market should remain vigilant as inflationary pressure continues.
Secondly, the market reacted calmly to the Fed's rate hike, with the S&P 500 and Nasdaq 100 indexes narrowing their losses, while the US dollar and US Treasury bonds barely changed. This may be because the market has already anticipated this rate hike, so there has not been a big fluctuation. At the same time, the market's expectation of whether the rate will continue to rise in the future is also 50%, which shows that the market's expectations for the future are not clear.
Once again, Powell made it clear at the press conference that the Fed's policy will continue to focus on its dual mission of stabilizing prices and achieving full employment. He emphasized that policy will be data-dependent, and if the data shows it is necessary, they may raise interest rates in September or keep interest rates unchanged, which shows the Fed's policy flexibility.
Powell's comments suggest that the Fed may pause its rate hikes in the short term. The expected inflation rate will not fall back to 2% until around 2025, which also shows that high interest rates may be maintained in the long term. This stance of the Fed may put some pressure on the market because it means that corporate borrowing costs may continue to remain high in the short term. In addition, the fact that the Fed staff no longer predicts that the economy will fall into recession can also be seen as a positive assessment of the current economic situation.
In general, the Fed's interest rate hike and its statement on future policies show the Fed's determination to control inflation and its flexible attitude to adjust policies. Although the market's reaction to this rate hike was flat, investors should still remain vigilant and pay close attention to future economic data and the Fed's policy trends so as to make timely adjustments.
(Purely personal opinion, if you want to debate with me then you are right)
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