In the first quarter of this year, the U.S. CPI rose month by month year-on-year, slowing down in April and May, but the downward trend is not solid enough. Recent employment-related data signals are disordered: ADP employment and JOLTs weakened, and the unemployment rate rose, but the non-farm data in May was stronger than expected, and the market's expectations for the Fed's policy reversed several times. On June 12, Eastern Time, the Federal Reserve maintained the policy interest rate level unchanged at its June meeting. The latest economic forecasts raised inflation expectations for 2024 and 2025, and the dot plot showed that the rate cut this year will be revised down to only 25 basis points.
The key points of the Fed's meeting resolution and Powell's speech after the meeting include:
1. The Committee maintained the benchmark interest rate range unchanged at 5.25% to 5.5% for the seventh consecutive time.
2. The post-meeting statement pointed out that recent indicators showed that economic activity continued to expand steadily, the job market became more balanced, and there was slight progress towards the inflation target in recent months, but the inflation rate was still too high.
3. Powell said in the press conference after the meeting that the overall economic growth is stable, the job market is gradually returning to balance, and demand is gradually cooling down, which is what we are happy to see. He said that it is not yet time to announce the date of the interest rate cut, and more reasons may be needed to support the easing of monetary policy; he also emphasized that the entire interest rate path is important, not just the first interest rate cut; he also downplayed the importance of the interest rate dot chart, emphasizing that uncertainty is high and all trends will depend on changes in future data.
4. The latest forward economic guidance and interest rate dot plot were released at this meeting: compared with the forecast of the March meeting, the committee maintained this year's GDP growth rate at 2.1% and maintained the unemployment rate at 4.0%; the overall PCE was revised up from 2.4% to 2.6%, and revised up to 2.3% in 2025; the core PCE was revised up from 2.6% to 2.8%, and revised up to 2.3% in 2025.
The latest interest rate dot plot shows that four members believe that there should be no interest rate cut this year, seven believe that it should be cut once, and the remaining eight believe that it will be cut twice; the median forecast of the members for the interest rate landing point in 2024 is 5.1%, 0.5% higher than the March meeting. The median forecast of the interest rate in 2025 was raised from 3.9% to 4.1%, and the median forecast of the interest rate in 2026 remained unchanged at 3.1%. The long-term neutral interest rate was revised up to 2.8% from 2.6% in March.
Morgan Asset Management believes that the Fed's decision to keep the target range of interest rates unchanged at this meeting is in line with market expectations, but the rate cut this year was revised down to 25 basis points, which is slightly beyond expectations. The statement of this meeting highlights that the inflation target has made progress compared with the previous period. The updated economic forward guidance has raised the inflation expectations for this year and next year, and raised the forecast of the long-term neutral interest rate level, indicating that the committee believes that inflation will remain stubbornly sticky and interest rates need to be maintained at a restrictive level for a period of time. The overall tone is slightly hawkish, but the committee has increased the median estimate of the rate cut next year from three in March to four, which may indicate that the pace of rate cuts has been delayed.
In view of the fact that in the May CPI report released by the U.S. Bureau of Labor Statistics before the meeting, the overall inflation rate dropped from 3.4% to 3.3%, and the core inflation rate dropped from 3.6% to 3.3%, we remain cautiously optimistic about the moderate expansion of the U.S. economy and the continued downward trend in inflation this year, and we expect that the Federal Reserve may still have room to cut interest rates 1-2 times this year.
In general, the moderate growth outlook and easing inflation provide a good environment for US stocks and fixed-income assets, focusing on high-quality growth opportunities that benefit from cyclical recovery and artificial intelligence development trends, but investors should be aware of the risk of overvaluation in the short term. In addition, the expansion of the US economy is conducive to global growth and Asian exports, providing some support for Asian stock markets. In terms of US Treasuries, there is still short-term exposure to lock in higher yield levels, and given that the Federal Reserve is still likely to start cutting interest rates this year, investors holding long-term US Treasuries should remain patient rather than sell.
Risk Warning: The above information does not constitute investment advice, or an offer or invitation to subscribe for any securities, investment products or services. The information published is from sources believed to be reliable, but please verify the relevant information yourself. Investment involves risks. Different asset classes have different risk characteristics. Past performance does not represent future performance. Please refer to the details contained in the sales documents, including risk factors, before investing. Views and forecasts represent only the views at the time and may change in the future.
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