Author: Sina Finance
In the early hours of Thursday morning Beijing time, the Fed officials unanimously decided to keep the benchmark interest rate unchanged at 5.25%-5.5%, and the interest rate statement reiterated that more evidence of cooling inflation is needed before cutting interest rates. The Fed expressed new concerns about inflation, suggesting that it may maintain higher interest rates for a longer period of time, but will not raise interest rates again.
Powell said at a press conference, "So far this year, the data has not made us more confident about cutting interest rates. Inflation data is higher than expected, which means it may take longer than expected for us to have confidence in cutting interest rates." Powell said, "The Fed's next move is unlikely to be a rate hike. The premise for raising interest rates is that officials must see convincing evidence that monetary policy is not restrictive enough to bring inflation back to the central bank's 2% target. But we have not seen evidence to support this conclusion."
The comments calmed investors who had worried that the Fed might respond more aggressively to inflation. U.S. stock and bond markets both rose, and futures markets showed a slightly higher chance that policymakers would cut interest rates twice this year, rather than the one cut expected before the meeting. However, Powell did not signal that a rate cut was possible this year, nor did he suggest that interest rates had peaked.
Fed resolution: unanimously agreed to keep interest rates unchanged, reiterated that it would wait until it gained more confidence in inflation before cutting interest rates
① Inflation outlook: Lack of further progress in achieving the 2% inflation target in recent months
The latest statement of the Federal Open Market Committee (FOMC) reiterated the consistent statement since December that "inflation has slowed over the past year but remains high." But it added a sentence: "There has been a lack of further progress in reducing inflation in recent months."
Another change was the Fed’s statement that the risks to achieving its dual employment and inflation goals “have become more balanced over the past year,” using the past tense. The previous statement used the present tense, meaning “are becoming more balanced.”
② Balance sheet reduction: Starting from June, the pace of reducing Treasury holdings will be slowed down to US$25 billion per month, and the upper limit of MBS reduction will be maintained at US$35 billion per month.
Officials also outlined plans to slow the pace of balance sheet reduction, reducing the monthly limit on U.S. Treasury bonds that mature and are not reinvested from $60 billion to $25 billion starting in June. The limit on mortgage-backed securities (MBS) remains unchanged at $35 billion, but the Fed will reinvest principal payments above the limit in U.S. Treasury bonds rather than MBS.
On the balance sheet, policymakers largely agreed at their March meeting that a cautious approach should be taken to further shrinking the balance sheet. Officials stressed that the decision to slow the reduction was unrelated to the choice of interest rate cuts and their timing.
③ Reaffirming that employment growth remains strong
Although price pressures cool rapidly in the last few months of 2023, progress toward the 2% inflation target stalls in 2024. At the same time, a strong labor market and stable consumption and investment support continued economic expansion. The rate statement reiterated that employment growth remains strong and the unemployment rate is low, but the pace of economic growth is solid.
Powell conference highlights: It will take longer than expected to have confidence in rate cuts, and the next move is unlikely to be a rate hike
①Powell: The next move is unlikely to be a rate hike
Federal Reserve Chairman Jerome Powell said the next move is unlikely to be a rate hike after the central bank left interest rates unchanged and signaled new concerns about inflation. "I do think it's clear that policy is restrictive," Powell said. "We believe that over time it will be restrictive enough."
②Powell: It will take longer to increase confidence in falling inflation
Federal Reserve Chairman Jerome Powell said it may take longer than previously expected for policymakers to gain enough confidence about the trajectory of inflation to initiate rate cuts. “We have said that we do not believe it would be appropriate to lower the target range for the federal funds rate until we have greater confidence that inflation is on a sustainable path toward 2 percent,” Powell told a news conference. The U.S. central bank left its benchmark interest rate unchanged on Wednesday and signaled new concerns about inflation. “It may take longer than previously expected to increase that confidence,” Powell said.
③Powell: I am not very confident about whether there will be a rate cut this year
Federal Reserve Chairman Powell said, "I don't have much confidence in whether interest rates will be cut this year. I don't know whether inflation will drop enough to cut interest rates." Given the current situation, I think the Fed's policy stance is in a good place. Considering growth or inflation, it is believed that there is no problem of stagflation. After witnessing a year of very high productivity growth in 2023, potential economic output is likely to rise significantly.
④Powell: Committed to maintaining a restrictive policy stance for an appropriate period of time
Fed Chairman Powell said that the policy stance will remain restrictive for an appropriate period of time; the next policy rate adjustment is unlikely to be a rate hike. The policy focus is on how to maintain the restrictiveness of the policy. If the rate is to be raised, evidence must be seen that the policy is not sufficient to reduce inflation to our target level. We are concerned about the duration of the policy restrictiveness.
⑤Powell: Slowing the pace of quantitative tightening does not mean that the Fed's balance sheet will shrink more slowly than expected
Fed Chairman Powell said that slowing the pace of quantitative tightening does not mean that the Fed's balance sheet will shrink more slowly than expected, and slowing the pace of balance sheet reduction is not a policy easing. The decision to slow the pace of balance sheet reduction will reduce the possibility of monetary market pressure and ensure a smooth transition. The current slowdown in the pace of balance sheet reduction is to ensure a smooth process, rather than causing market turmoil like last time.
⑥Powell: As inflation falls below 3%, the Fed's employment goal has once again become the focus
Federal Reserve Chairman Powell said that with inflation falling below 3%, the Fed's employment goal has once again become a focus.
⑦ Powell: Unexpected weakening of the labor market may constitute a reason for a rate cut
Fed Chairman Jerome Powell said the timing of a rate cut would be data dependent, and an unexpected weakening of the labor market could be a reason for a rate cut.
⑧Powell: In the long run, the impact of immigration on inflation should be neutral. Federal Reserve Chairman Powell said that due to immigration, the potential output of the U.S. economy has experienced a "significant increase"; potential economic output may increase significantly. Immigration should have a neutral effect on inflation in the long run; immigration may initially create more supply than demand in the economy.
⑨Powell: As long as market rents remain low, housing inflation will slow down
Fed Chairman Powell said that market rents are barely rising now. It will take years for market rents to be fully reflected in renewal rents. I believe that as long as market rents remain low, this will be reflected in inflation.
⑩Powell responds to the US election: The election is not part of our consideration
Fed Chairman Powell said the Fed will always take action at the right time, regardless of other factors. The election is not a factor that the Fed is concerned about.
Market performance: Powell pours cold water on the possibility of rate hikes; US stocks, US Treasuries rise
U.S. stocks extended gains after the announcement of the Federal Reserve's decision, with the Nasdaq 100 index rising 1% to an intraday high, but subsequent gains narrowed. The Nasdaq 100 index once reached a 1.3% gain after erasing the FOMC meeting statement.
Investors piled into U.S. stocks and Treasuries, pushing yields lower, after the Fed left interest rates unchanged and Powell answered questions. Powell insisted that data had not yet convinced policymakers that inflation was falling to the Fed's 2% target, so a rate cut was unlikely for now. He also did not hint at the possibility of a rate hike. As he spoke, major U.S. stock indexes rose more than 1%.
U.S. Treasuries rose, with the gains mainly coming during Powell's press conference after the Fed kept interest rates unchanged. Powell poured cold water on the possibility of a rate hike, saying the next policy rate adjustment was unlikely to be a rate hike, which allowed the bond market to avoid the hawkish turn that was previously feared. It seems that short covering helped boost Treasuries to some extent, allowing them to extend the day's gains before the close.
Shortly after 3 p.m. New York time, the yield curve fell as much as 9 basis points from the short end to the middle, with the 2-year yield at around 4.95% falling to 4.923%. The steepening trend of the yield curve was basically maintained, and the 5s30s yield spread widened by about 3 basis points on the day.
The OIS contract, which is tied to the Fed's meeting period, turned more dovish, returning to a similar level before the release of the employment cost index on Tuesday; the market reflected a rate cut of about 33 basis points in December, which was 26 basis points at the close on Tuesday.
