Author: Zhao Yuhe, Li Dan, Du Yu, Fang Jiayao, Wall Street News
The Fed continued to hold its ground at the July FOMC meeting, deciding to keep the federal funds rate target range between 5.25% and 5.5% and continue to reduce securities holdings. Fed Chairman Powell said that it is reasonable to feel closer to a rate cut, and the FOMC may discuss a rate cut in September.
Both the Fed's resolution and Powell's press conference hinted at a possible interest rate cut in September. The "New Fed Megaphone" analyzed that the Fed's statement deleted the wording of "high attention" to inflation risks in the past two years. This change is of great significance, indicating that inflation may no longer be an obstacle to interest rate cuts, especially as the labor market continues to cool.
The S&P and Nasdaq saw their biggest gains in five months, with the S&P 500 rising more than 2% during intraday trading and the Nasdaq rising more than 3% at one point, both marking their best single-day performances since February.
The Fed's U-turn
On Wednesday, July 31, Eastern Time, the Federal Reserve announced after the FOMC meeting that the target range for the federal funds rate remains at 5.25% to 5.50%. The FOMC voting members of the Federal Reserve have voted unanimously in favor of the interest rate decision for the 17th consecutive meeting.
So far, the Fed has not raised interest rates for eight consecutive meetings in this round of tightening cycle that began in March 2022. Since raising interest rates in July last year, the Fed has kept the policy interest rate unchanged at a high level in more than two decades.
As expected by the market, the Federal Reserve continued to maintain high interest rates, but at the same time released a signal that it may cut interest rates in September: the Fed further confirmed that it has made progress in reducing inflation. In addition to inflation, the Fed began to emphasize attention to avoiding employment risks.
The resolution statement was amended to say that inflation was "somewhat" high, "some" further progress had been made in reducing inflation, employment growth had "slowed somewhat", and the unemployment rate remained low but "had risen somewhat".
The resolution statement no longer says "still paying close attention to inflation risks", but instead says it is paying attention to the risks facing the dual missions of employment and inflation.
The resolution statement continued to reiterate that it is not appropriate to cut interest rates until there is greater confidence in reducing inflation, and the risks to employment and inflation continue to be more balanced.
The "New Fed News Agency" stated that the Federal Reserve has cleared the way for a rate cut in September by treating employment and inflation targets more equally for the first time in two years. This major shift means that inflation may no longer be an obstacle to rate cuts.
After the resolution was announced, Timiraos published an article calling for a September rate cut, with the title "Fed clears the way for a September rate cut." The article pointed out that although the interest rate remained unchanged, Fed officials made an important shift this time, emphasizing a more equal focus on the dual goals of employment and inflation, and they hinted that they were getting closer to a rate cut.
George Goncalves, head of U.S. macro strategy at Mitsubishi UFJ Financial Group, commented that the Fed's decision statement showed that the Fed had modified enough elements and they had carefully considered how to express the beginning of the shift to easing.
Some analysts also said that the resolution was slightly less dovish than expected and did not express greater confidence in reducing inflation.
Powell hints at September rate cut
Federal Reserve Chairman Powell said it is reasonable to feel closer to a rate cut and the FOMC may discuss a rate cut in September.
He said the Fed will continue to make decisions on a meeting-by-meeting basis because reducing policy restrictions too early or too much could reverse progress on inflation, while reducing policy restrictions too late or too little could unduly weaken economic activity and employment.
Powell said the FOMC will carefully assess the latest data, the evolving outlook, and the balance of risks.
If the economy remains sound and inflation persists, the Fed can maintain the current target range for the federal funds rate for as long as appropriate. If the labor market weakens unexpectedly or inflation declines faster than expected, the Fed is also prepared to respond. The Fed's policy is prepared to respond to the risks and uncertainties in the pursuit of its dual mandate.
In the subsequent Q&A session, Powell said that the market's feeling that the FOMC is closer to a rate cut is reasonable. He said that a rate cut may be an option at the September FOMC monetary policy meeting, and the FOMC will choose to cut interest rates as early as September. He revealed that the general view of the FOMC is that it is approaching the time point for a rate cut, but it has not yet reached that point.
The following are the highlights of Powell's press conference:
Rate cut prospects: The market's sense that the FOMC is getting closer to cutting rates is reasonable, and the earliest it will choose to cut rates is September, and the risks of acting too early must be weighed against waiting too long. Therefore, "zero to several rate cuts this year" are all conceivable scenarios.
Inflation: The current decline in inflation is better and more broad-based than in 2023. As we receive good data, our confidence in the continued decline in inflation towards our 2% target has increased.
Employment: Labor market conditions have returned to pre-pandemic levels, strong but not overheated. Downside risks to the labor market are actually low. Particular attention is paid to employment demand in the private sector.
Election: I absolutely believe that the potential Fed rate cut in September has nothing to do with political factors. The Fed has never used (policy) tools to oppose a party or election results, nor will it decide FOMC policy based on the results of the US election.
Digital Currency: The FOMC did not discuss (whether to issue) the Federal Reserve’s digital currency at all. Progress on the central bank digital currency (CBDC) has not been significant, and there are no plans to discuss this issue with Congress.
Market surge: S&P and Nasdaq rose the most in five months, Nvidia soared nearly 13%, and oil prices jumped 4%
Both the Federal Reserve's decision and Powell's press conference hinted at a possible interest rate cut in September. U.S. stocks, U.S. bonds, crude oil, gold and the yen rose, and market expectations for a rate cut increased.
CME's Fed Watch tool shows that traders expect the Fed to cut interest rates three times before the end of the year, a total of 70 basis points this year, compared with the previous forecast of 64 basis points. There are calls for rate cuts in the market, with "new bond king" Gundlach and U.S. Senate Democratic member and "antitrust fighter" Warren Warren urging a rate cut now.
Rate cut expectations initially fell, then surged
U.S. stock indices continued to rise as a whole, setting a new intraday high during Powell's press conference at around 3 a.m. Beijing time. The Nasdaq, which is dominated by technology stocks, rose as high as nearly 3.2% in late trading and led the major stock indices; the S&P 500 index rose as high as more than 2.1%; the Dow Jones Industrial Average, which is closely related to the economic cycle, rose as high as more than 1.1%; and the Russell small-cap index rose as high as more than 2.5%.
Chip stocks rebounded sharply, with the Nasdaq rising more than 3% during intraday trading and the S&P rising more than 2% at one point. Nvidia rose nearly 13%, the chip index rose 7%, and the small-cap index rose 10%, the best result of the year.
Powell hinted at a rate cut as early as September, and U.S. Treasury yields plummeted, with the two-year yield falling 9 basis points and a cumulative drop of more than 48 basis points in July.
At the end of the trading day, the yield on two-year U.S. Treasury bonds, which is more sensitive to monetary policy, fell 8.87 basis points to 4.2698%. It rose to a daily high of 4.3894% when the FOMC interest rate decision statement was released at 02:00 Beijing time, and then fell to a daily low of 4.2554% at 03:59 (only one minute left before the close of the U.S. stock market) at a time of tense geopolitical relations in the Middle East. It has fallen 48.36 basis points in July.
The yield on the benchmark 10-year U.S. Treasury bond fell 10 basis points, hitting a daily low of 4.0392%, and has fallen 35.31 basis points in July.
