The interest rate hike is full of suspense! Fed enters "silent period" before July decision
Over the past few years, Wall Street has become accustomed to a norm: They can accurately predict the Fed's next move weeks before the Fed's interest rate meeting. However, people may have entered a new era now - the new Federal Reserve Chairman Kevin Warsh, uncharacteristically, instead of guiding the market to digest the results of the upcoming meeting in advance, has remained silent on the Federal Reserve's next action plan.
Over the past few years, Wall Street has become accustomed to a norm: They can accurately predict the Fed's next move weeks before the Fed's interest rate meeting. However, people may have entered a new era now - the new Federal Reserve Chairman Kevin Warsh, uncharacteristically, instead of guiding the market to digest the results of the upcoming meeting in advance, has remained silent on the Federal Reserve's next action plan. This rare silence has plunged investors and analysts into collective speculation - even since last weekend, the Federal Reserve has officially entered a period of silence before the July interest rate meeting: this usually means the beginning of the countdown to the interest rate decision... Objectively speaking, the Fed does have reasons to keep interest rates unchanged in order to continue the policy inertia this year - on the one hand, inflation is showing signs of cooling; on the other hand, Warsh has not shown a willingness to radically raise interest rates when talking about interest rate policy in the past. But at the same time, several other Fed officials have publicly signaled support for raising interest rates. Therefore, it is not ruled out that Wash will bring unexpected changes to investors and policymakers at the last moment. "With Warsh taking office, the situation has become a bit more subtle and elusive. Because he will not necessarily provide deterministic forward guidance to the outside world like the previous Fed leadership. At this time in the past, people usually assume that the Fed will 'set the tone' for the market in some way-either guiding the market to price an interest rate hike, or signaling a pause," commented Jeremy Schwartz, senior U.S. economist at Nomura Securities. Derek Tang, co-founder of LH Meyer/Monetary Policy Analytics, also believes that the market is currently shrouded in lingering doubts. "I think people are in a state of anxiety because they're not sure if he's going to do something unexpected and shocking." Douglas Porter, chief economist at BMO Capital Markets, noted in a note to clients that Warsh's congressional testimony last week "created some heat, but did not shed any light on the outlook for interest rates." During two days of hearings on Capitol Hill, Warsh's rhetoric was anything but hawkish. He made it clear that the Fed has "zero tolerance" for high inflation and vowed that the high inflation in the past five years "will be history." However, he has never made a clear stance on the core issue of whether to support an immediate interest rate hike. Meanwhile, other Fed officials have been more vocal in their support for raising interest rates. Dallas Fed President Logan last week publicly declared that interest rates should be raised, becoming the first official to break his silence. "I currently believe that a moderate increase in interest rates will better help the Fed balance future prospects and risks between the dual goals of strong employment and stable prices," Logan said in a speech last Thursday. Cleveland Fed President Hammack posted on LinkedIn last Friday that on the one hand, she heard the business community strongly urging the Fed to raise interest rates to curb inflation. On the other hand, she also personally felt the struggle of ordinary consumers on the edge of making ends meet and the deepening despair caused by soaring prices. Some senior observers of the Federal Reserve, such as former Richmond Fed President Jeffrey Lacker, also firmly believe that the time has come for the central bank to raise interest rates. Lacker pointed out that Warsh is fully capable of recruiting and building a coalition of "center hawks" internally to implement this initiative. "I will advocate taking action at this (July) meeting and decisively raising interest rates. Raise interest rates and take practical actions. What I mean is that the current policy game has reached a point where it is a bit 'all talk but no practice'. The outside world is questioning: Since the inflation problem is so serious, why have you not taken substantive action?" Lacker pointed out in an interview with the media last Thursday. Aditya Bhave, head of U.S. economic research at Bank of America Global Research, said Warsh "can easily get enough votes in the FOMC to push for a rate hike."
In June, the Fed's "dot plot" forecasts for interest rates showed a sharp shift toward tightening policy, with nine officials expecting at least one rate hike this year and six expecting more than one. Just three months ago, no official predicted that interest rates would be raised this year. Bhave noted that he believes five of the Fed's 12 voting officials currently support raising interest rates. However, despite the overwhelming clamor for a rate hike, there are also strong reasons for the Fed to remain on hold at this month’s meeting. The Fed's dot plot last month also revealed the existence of another camp - nine officials believe that the Fed can be patient enough when dealing with inflation. In addition, as the "third person" of the Federal Reserve, New York Fed President Williams publicly stated last week that he has captured several positive signals indicating that inflation has peaked and is falling. At the beginning of last week, market expectations for an interest rate hike in July were once high after Fed Governor Waller warned that "higher interest rates may be needed if inflation remains high." However, the inflation data released subsequently were milder than expected, pouring cold water on market expectations of interest rate hikes. The current consensus expectation has shifted back to "it is too early to raise interest rates in July." Bank of America's Bhave predicts that Warsh is more likely to adopt a no-holds-barred strategy until September, followed by three consecutive rate hikes before the end of the year. Currently, traders in the derivatives market are betting that the probability of raising interest rates at the September meeting is still over 50%. However, a considerable number of economists still hold the opposite view and believe that the Federal Reserve will not press the button to raise interest rates at all this year because they expect inflation to maintain a downward trajectory in the coming months. “For Wash, maintaining high-pressure deterrence in words, but choosing to stay put in action because of cooling inflation, is the worst of both worlds,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, pointedly pointed out. Barclays chief U.S. economist Marc Giannoni even predicted that the Fed will maintain current interest rates until the end of 2027. "We believe our baseline forecast is consistent with the FOMC's internal core view that inflation should gradually moderate in the second half of this year." Jeremy Schwartz, chief U.S. economist at Nomura, firmly believes that Warsh is actually more inclined to a low interest rate policy. "We think he's actually laid out a lot of the reasons why the Fed should stay on the sidelines, whether it's downplaying some of the high-inflation resurgence shown in recent data or emphasizing the potential disinflationary effects of higher productivity going forward," Schwartz said. "All in all, he has not given any clear signal from the beginning to the end that he prefers to raise interest rates."
In June, the Fed's "dot plot" forecasts for interest rates showed a sharp shift toward tightening policy, with nine officials expecting at least one rate hike this year and six expecting more than one. Just three months ago, no official predicted that interest rates would be raised this year. Bhave noted that he believes five of the Fed's 12 voting officials currently support raising interest rates. However, despite the overwhelming clamor for a rate hike, there are also strong reasons for the Fed to remain on hold at this month’s meeting. The Fed's dot plot last month also revealed the existence of another camp - nine officials believe that the Fed can be patient enough when dealing with inflation. In addition, as the "third person" of the Federal Reserve, New York Fed President Williams publicly stated last week that he has captured several positive signals indicating that inflation has peaked and is falling. At the beginning of last week, market expectations for an interest rate hike in July were once high after Fed Governor Waller warned that "higher interest rates may be needed if inflation remains high." However, the inflation data released subsequently were milder than expected, pouring cold water on market expectations of interest rate hikes. The current consensus expectation has shifted back to "it is too early to raise interest rates in July." Bank of America's Bhave predicts that Warsh is more likely to adopt a no-holds-barred strategy until September, followed by three consecutive rate hikes before the end of the year. Currently, traders in the derivatives market are betting that the probability of raising interest rates at the September meeting is still over 50%. However, a considerable number of economists still hold the opposite view and believe that the Federal Reserve will not press the button to raise interest rates at all this year because they expect inflation to maintain a downward trajectory in the coming months. “For Wash, maintaining high-pressure deterrence in words, but choosing to stay put in action because of cooling inflation, is the worst of both worlds,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, pointedly pointed out. Barclays chief U.S. economist Marc Giannoni even predicted that the Fed will maintain current interest rates until the end of 2027. "We believe our baseline forecast is consistent with the FOMC's internal core view that inflation should gradually moderate in the second half of this year." Jeremy Schwartz, chief U.S. economist at Nomura, firmly believes that Warsh is actually more inclined to a low interest rate policy. "We think he's actually laid out a lot of the reasons why the Fed should stay on the sidelines, whether it's downplaying some of the high-inflation resurgence shown in recent data or emphasizing the potential disinflationary effects of higher productivity going forward," Schwartz said. "All in all, he has not given any clear signal from the beginning to the end that he prefers to raise interest rates."