The Fed's interest rate meeting is about to take place, and the market focuses on the timing of interest rate cuts and policy uncertainty
Special Topic: The Federal Reserve’s interest rate decision is coming, and the market is divided on expectations of interest rate hikes. On July 28, the Federal Reserve’s new Federal Open Market Committee (FOMC) interest rate meeting is about to be held. Currently, Wall Street and global financial markets are paying close attention to the interest rate path signals released by Federal Reserve Chairman Kevin Warsh and the Policy Development Committee. Affected by the escalation of the situation in the Middle East and the fluctuation of international energy prices, the market has diverged expectations on whether to maintain the current interest rate policy at this meeting. The Federal Reserve's decision-making process and external communication face complex challenges. Regarding the core decision-making of this meeting, the mainstream view in the financial market was that the Federal Reserve would continue to maintain the current interest rate level of 3.5% to 3.75%. In the past few weeks, policymakers, including many senior Fed officials, had signaled that discussions on further interest rate hikes had been postponed to September this year due to lower-than-expected inflation data in June. Warsh himself did not give clear guidance to the market on raising interest rates this month at a congressional hearing two weeks ago. However, as the recent collapse of the ceasefire agreement between the United States and Iran triggered another rise in international crude oil prices, the market's internal sentiment has changed significantly, and some investors have begun to bet on the possibility of raising interest rates in July. The latest market data shows that futures market traders estimate that there is about a one-in-three chance of a rate hike this week. Analysts pointed out that if the Federal Reserve keeps interest rates unchanged as scheduled, the outside world will focus on whether there are dissenting votes within the decision-making committee. This will be seen as an important indicator of disagreements within the committee over its assessment of inflationary pressures. If the Fed unexpectedly chooses to raise interest rates, it will not only overturn the policy framework previously set by many Fed officials, but will also have a profound impact on the political level. The White House has continued to claim that inflation is under control over the past year and has repeatedly pressed for lower borrowing costs. As the Fed chairman nominated by the president, if Warsh insists on raising interest rates, it will be seen as his intention to demonstrate the independence of monetary policy and break the speculation that he is controlled by the executive branch. At the level of policy strategy, Warsh has repeatedly emphasized that its core mission is to end the situation in which the inflation rate has been consistently higher than the 2% target in the past five years, and reiterated that the Federal Reserve needs to bear the ultimate responsibility for price stability. But the tough stance is not without controversy within the Fed. The No. 2 person in the Federal Reserve and President of the New York Fed, John (John Williams) recently publicly pointed out that the credibility of the central bank should be based on optimal decisions based on economic data, rather than simply using monetary policy operations to show off policy determination. In addition, there are doubts about the actual effectiveness of raising interest rates. Warsh has previously admitted that short-term monetary policy is difficult to hedge against soaring energy prices caused by geopolitical shocks, and hopes that technological innovations such as artificial intelligence will bring long-term cost reductions. No matter what the Fed ultimately decides, Warsh's policy explanation after the meeting will be the key to determining the subsequent direction of the market. If it keeps interest rates unchanged, the market will question its logic of staying put despite the renewed threat of inflation; if it chooses to raise interest rates, it will need to clearly define whether this is a systematic correction of inflation that has not reached its target for a long time, or a temporary measure to deal with short-term external shocks. Economist Stephen Juneau warned that against the backdrop of relatively benign inflation data in recent times, any interest rate hike without adequate explanation could trigger severe turbulence and cognitive confusion in financial markets. Looking ahead, the interest rate decision in September will still be highly dependent on the trend of a series of inflation and employment macro data in the summer. Currently, the superposition of external uncertainties has further increased the difficulty of U.S. macroeconomic policy control.