(II) The expectations for the unemployment rate and inflation rate have not changed much, and they do not agree that the US economy will decline. According to the expectations of major economic indicators this time, compared with June this year, the Federal Reserve's expectations for the unemployment rate and inflation rate in 2022-2025 have not changed significantly. For example, the inflation rate in 2022-2024 has increased from 5.2%, 2.6% and 2.2% in June this year to 5.4%, 2.8% and 2.3%, and the unemployment rate expectations have increased from 3.7%, 3.9%, and 4.1% in June 2022 to 3.8%, 4.4% and 4.4%. 
This means that the Fed is not particularly pessimistic about future inflation and employment levels, especially in terms of inflation. Since entering the interest rate hike cycle in March this year, the market has been trading the recession of the fundamentals of the US economy, but based on data such as strong employment rates, the Federal Reserve does not seem to agree that the recession cycle of the US economy will definitely come. For example, although it lowered the actual economic growth rate in 2022 from 1.70% to 0.2%, it still believes that the real economic growth rate of the United States will reach 1.2% and 1.7% in 2022 and 2023.
(III) The expectation of a rate hike is significantly increased: at least another 100BP is raised this year, and the end point is approaching 5%
Compared with June 2022, the biggest change in this interest rate meeting is that it has greatly increased the expectation of a future rate hike, that is, the expected rate hike is 100BP higher than in June this year. That is, the Federal Reserve expects the target interest rate value of the federal funds to reach the range of 4.1-4.4% this year. This means that compared with the current level of 3.00-3.25%, the interest rate hike of the two interest rate meetings in the next year should be between 100-150BP.
At the same time, according to the dot chart, we expect that in this round of Fed rate hike, the final value of the target interest rate of the US federal funds should be between 4.5-5.0%, and the beginning of the Fed's interest rate cut cycle may have to wait until 2024, that is, the United States will be in a high interest rate cycle before the end of 2023.
2. The market response exceeded expectations: According to the logic of raising interest rates by 100BP, the interpretation of
(I) The bond market and foreign exchange market are the most obvious, and the offshore RMB has exceeded 7.1
Although the Fed's interest rate hike this time is within the market expectations, the market response is relatively fierce, obviously according to the logic of raising interest rates by 100BP.
1. Since August this year, the yields of 1-year, 2-year, 3-year and 10-year U.S. Treasury bonds have risen by 115BP, 117BP, 117BP and 91BP respectively, reaching 4.08%, 4.02%, 3.98% and 3.51% respectively. After this interest rate meeting, the yield on the 2-year U.S. Treasury bonds has exceeded 4.10%.
This means that the market is actually trading the expected target interest rate of the US federal funds to reach more than 4.10% and is in a high interest rate cycle before the end of 2023.
2. Before this interest rate meeting, the US dollar index and the offshore RMB hovered at points around 109 and 7.07 respectively. After the interest rate meeting, the US dollar index broke through 110 and continued to approach the 112 point. The offshore RMB also broke through 7.10 points intraday after a few hours of confusion.
3. Considering that the Fed's interest rate hike this year will reach at least 100BP, the final target value of the US federal funds rate in this round of interest rate hike cycle may fall within the range of 4.5-5.0%, which means that the US dollar index still has room for continued upward trend, and correspondingly, non-US currencies should continue to maintain a weak trend.
Since the beginning of this year, the fluctuation of the offshore RMB has exceeded 12%, with the minimum, maximum, and median and averages respectively 6.31, 7.10, 6.67 and 6.60. Therefore, based on the fluctuation range of about 15%, the key point of the offshore RMB depreciation in this round is expected to be 7.20 (the highest point of the offshore RMB depreciation in recent years is 7.19). Therefore, for the RMB, 7 and 7.1 are not obstacles, 7.20 is the case. That is, 7.20 should be the key point for the central bank to actively interfere with the exchange rate .
(II) The currency war has entered a white-hot stage: the vast majority of non-US currencies have depreciated a large depreciation
1. Since the beginning of this year, affected by the sharp appreciation of the US dollar (the US dollar index has risen by more than 16% since 2022), except for the currency of Brazilian and Mexico still maintaining a certain strength against the US dollar and the Hong Kong dollar is protected to a certain extent due to the linked exchange rate system, most non-US currencies have experienced a relatively obvious depreciation against the US dollar. For example, since the beginning of this year, Brazilian real and Mexico have appreciated 5.45% and 2.48% against the US dollar respectively.
2. Specifically, the depreciation of the currencies of Sri Lanka and Venezuela exceeds 40%, the depreciation of the Japanese yen exceeds 20%, the depreciation of the British pound and Swedish kroner exceeds 15%, the depreciation of the Korean won, Norwegian kroner , the euro, New Zealand dollar , Danish kroner , New Taiwan dollar , New Taiwan dollar , and the depreciation of the RMB exceeds 10%, the depreciation of the South African rand , the Thai baht, and the Australian dollar exceeds 9%, and the depreciation of the Swiss franc , the Indian rupee and the Canadian dollar exceeds 5%.
3. Considering that the Federal Reserve will raise interest rates by at least 100BP in the future, the target interest rate of the federal funds may fall within the range of 4.50-5.00%, and the United States will be in a high interest rate cycle before the end of 2023, which means that the US dollar index will remain at a high level for a period of time, and the weak pattern of non-US currencies will continue to remain and bear the pressure of cross-border capital flows brought by the US high interest rate cycle.
(III) Super Central Bank Week: Global financial markets continue to turmoil
This week, central banks of economies such as Japan, Switzerland , the United Kingdom, Turkey , Brazil, etc. will also announce interest rate decisions, which means that the global central bank interest rate hike will continue to take turns, disturbing the global financial market.
In fact, except for China and Russia, most economies around the world have entered the ranks of interest rate hikes, and some economies have even raised interest rates many times, and the rate hike ranges from 25-100BP. This means that most economies are currently tightening monetary policies to combat the high inflation levels and the unstoppable depreciation of their own currencies, and to some extent, they are even willing to sacrifice economic fundamentals.
Content source: Ren Bo Macro Ondao
