1. Expectations of interest rate cuts
An important reason why the Federal Reserve has not yet started to cut interest rates is that the central bank's series of policies to combat inflation have been effective over the past two years, and judging from current data, employment, a key indicator of the US recession, has not deteriorated.
The current core PCE annual rate has dropped from its peak of 5.4% in 2022 to 2.6%, while the Fed's target is 2%. They hope to continue to move closer to this target and are worried that inflation will rebound if interest rates are cut too early.
The U.S. labor market has cooled from its earlier hot streak, with the unemployment rate rising to 4.1% in the past few months. New data on Wednesday showed wage pressures easing as well.
Now that the Federal Reserve no longer regards inflation as its primary issue, it regards the rising unemployment rate as the primary consideration when formulating its policy path, which means that the next employment data is crucial.
Morgan Stanley economist Sam Coffin said economic growth will slow to 2% in the second half of 2024, and he expects the Fed to cut interest rates by a quarter percentage point at each of its meetings for the rest of the year. His team believes the Fed will cut rates four more times in 2025, lowering the policy rate by another percentage point.
2. The impact of the interest rate meeting on the market
Short-term Treasury yields fell during Powell's speech in the early morning as investors increased their bets on interest rate cuts this year. Futures market traders expect two or three rate cuts this year, with the first cut in September, but the probability of three cuts in December has increased to 96%.
The two-year Treasury yield, which is closely tied to interest rate expectations, fell 0.1 percentage point to 4.26%, the lowest level since February. The benchmark 10-year yield, which is closely tied to inflation and growth expectations, also fell to its lowest level since February, falling 0.11 percentage point to 4.04%.
#PCE数据 #降息期待
