The Fed’s interest rate meeting is imminent. Why is the market still afraid to rule out an interest rate hike?
[With the Federal Reserve’s interest rate meeting imminent, why is the market still afraid to rule out an interest rate hike? ] As this week’s Federal Reserve interest rate meeting approaches, the U.S. stock market has become more volatile recently. Unlike many interest rate meetings in the past, before this meeting, the market did not completely rule out the possibility of raising interest rates. After Warsh became chairman of the Federal Reserve, he significantly weakened forward guidance. Although this retained greater flexibility for monetary policy, it also made it more difficult for the market to judge the direction of interest rates.
As the Federal Reserve’s interest rate meeting approaches this week, the U.S. stock market has become more volatile recently. Unlike many interest rate meetings in the past, before this meeting, the market did not completely rule out the possibility of raising interest rates. After Warsh became chairman of the Federal Reserve, he significantly weakened forward guidance. Although this retained greater flexibility for monetary policy, it also made it more difficult for the market to judge the direction of interest rates. Currently, the Federal Reserve maintains the target range for the federal funds rate at 3.50% to 3.75%. As of July 28, the Chicago Mercantile Exchange's FedWatch tool showed that the market expected that the probability of keeping interest rates unchanged at the July interest rate meeting was 66.3%, and the probability of raising interest rates by 25 basis points was 33.7%. Staying on hold is still the mainstream expectation, but before the interest rate meeting, the probability of raising interest rates is still more than 30%, which is rare in recent years. The question that the market is currently paying attention to is whether it is still necessary for the Federal Reserve to take a "precautionary interest rate hike" when inflation has cooled down; if it does not take action in July, whether September will be a window to tighten policy again. There is a high probability of no action in July From July 28th to 29th local time, the Federal Reserve will hold a Federal Open Market Committee meeting. In the early morning of July 30, Beijing time, the Federal Reserve will announce its interest rate decision, and then Warsh will hold a press conference. Judging from the forecasts of most institutions, the Federal Reserve will most likely keep interest rates unchanged in July. Recently, U.S. inflation and employment data have shown signs of cooling. The U.S. consumer price index rose 3.5% year-on-year in June, down from the previous value; the core consumer price index rose 2.6% year-on-year, unchanged from the previous month. At the same time, the number of new non-agricultural jobs has slowed down significantly, and the employment data for the first two months have also been revised downwards. With inflation and employment cooling simultaneously, many institutions believe that there is no urgent need for the Federal Reserve to raise interest rates. CICC believes that June’s inflation data supports the Federal Reserve’s decision to keep interest rates unchanged at its July interest rate meeting. Barclays Bank and Swiss Pictet Wealth Management also predict that the Federal Reserve will continue to maintain interest rates at 3.50% to 3.75%, and the policy statement will not change significantly compared with the June meeting. The recent situation in the Middle East has been volatile, and international oil prices have risen significantly for a time, rekindling market concerns about inflation risks. However, some institutions believe that the rise in energy prices driven by geopolitics is first of all a supply shock. The Fed typically does not adjust interest rates based solely on short-term energy price fluctuations before oil prices are further transmitted to goods, services and wages, creating broader inflationary pressures. Why the unexpected interest rate hike is still being discussed Although keeping interest rates unchanged is still the market's benchmark judgment, compared with the past, institutions are still unwilling to completely rule out the possibility of unexpected interest rate hikes. Currently, the market expects that the probability of the Federal Reserve raising interest rates by 25 basis points at this interest rate meeting is about 33%, which is significantly higher than the low level after the release of June inflation data. In the past, when Powell was in charge of the Fed, major policy adjustments were usually signaled in advance through official speeches and other methods. The market rarely still had such clear differences on policy outcomes on the eve of a meeting. After Warsh took office, he no longer provided clear guidance on interest rates, making it difficult for the market to determine the outcome in advance based on officials' previous statements as in the past. At the same time, the situation in the Middle East has repeatedly pushed up oil prices and provided a basis for discussions on interest rate hikes. U.S. inflation is still higher than the Fed's long-term target of 2%, and although the labor market has cooled somewhat, it has not yet stalled significantly. Swiss Patek Wealth Management believes that the risk of unexpected interest rate hikes cannot be completely ruled out, but the probability of interest rate hikes currently priced in by the market may be on the high side. Fed Board of Governors members appear more inclined to wait for more inflation data and are less likely to take the initiative to push for a rate hike at this meeting. Still, Warsh could sway the divided committee if he favors immediate action. Castle Securities predicts that the Federal Reserve may unexpectedly raise interest rates by 25 basis points. It believes that rather than waiting until September, the Fed's actions now will help strengthen its determination to control inflation and stabilize the market's medium- and long-term inflation expectations. CICC said that the outlook for energy inflation may still fluctuate, and the boost of artificial intelligence investment to upstream hardware prices, software and related product prices and total demand may keep core inflation somewhat resilient. Although June data supports the Fed's continued wait-and-see approach, the threshold for further interest rate hikes has lowered. Standing still does not mean the risk has been eliminated
Even if the Federal Reserve does not raise interest rates at this meeting, market concerns about subsequent policy tightening may not subside. Currently, the market expects that the probability of the Federal Reserve raising interest rates by 25 basis points in September has exceeded 50%. If inflation data strengthens again in the next one to two months, the option of raising interest rates may once again enter the center of policy discussions. Since no new economic forecasts and interest rate dot plots will be released at this interest rate meeting, the voting results, policy statements and Warsh's press conference will become the main basis for the market to judge the subsequent direction. Barclays predicts that two to three officials may support a 25 basis point interest rate hike at this interest rate meeting. If the hawkish opposition mainly comes from regional Fed presidents, the market may regard it as a normal difference of opinion within the committee; if Fed governors also support raising interest rates, it means that the core decision-makers' judgment on inflation risks is changing. How the policy statement describes energy prices, inflation expectations and the resilience of the U.S. economy also deserves attention. Even if interest rates remain unchanged, if the wording is more cautious, the market may still interpret this interest rate meeting as a hawkish pause. Therefore, market analysts believe that if the July resolution results in keeping interest rates unchanged, it cannot simply be regarded as a dovish result. If there are more votes against raising interest rates, the policy statement continues to emphasize the risk of inflation, and Warsh refuses to rule out action in September, the policy signal released by the Fed may still be interpreted as hawkish by the market.
Even if the Federal Reserve does not raise interest rates at this meeting, market concerns about subsequent policy tightening may not subside. Currently, the market expects that the probability of the Federal Reserve raising interest rates by 25 basis points in September has exceeded 50%. If inflation data strengthens again in the next one to two months, the option of raising interest rates may once again enter the center of policy discussions. Since no new economic forecasts and interest rate dot plots will be released at this interest rate meeting, the voting results, policy statements and Warsh's press conference will become the main basis for the market to judge the subsequent direction. Barclays predicts that two to three officials may support a 25 basis point interest rate hike at this interest rate meeting. If the hawkish opposition mainly comes from regional Fed presidents, the market may regard it as a normal difference of opinion within the committee; if Fed governors also support raising interest rates, it means that the core decision-makers' judgment on inflation risks is changing. How the policy statement describes energy prices, inflation expectations and the resilience of the U.S. economy also deserves attention. Even if interest rates remain unchanged, if the wording is more cautious, the market may still interpret this interest rate meeting as a hawkish pause. Therefore, market analysts believe that if the July resolution results in keeping interest rates unchanged, it cannot simply be regarded as a dovish result. If there are more votes against raising interest rates, the policy statement continues to emphasize the risk of inflation, and Warsh refuses to rule out action in September, the policy signal released by the Fed may still be interpreted as hawkish by the market.