At the July interest rate meeting, we expected that this year's Fed rate hike will likely exceed 4%. After laying the groundwork for the Jackson Hall meeting at the end of August, the meeting in the early morning was considered "the picture was revealed". 2022 hike to 4.5%, and further to 4.75% in 2023 (based on the upper level of the policy interest rate range) .
This means that there will be another 125bp rate hike this year. Combined with the Fed's expectations for inflation, the actual US policy interest rate will turn significantly positive in 2023, and the economic recession will no longer be a sufficient condition for policy shifts. Affected by this, the US dollar index was on the 111th, and the US stock continued to fall in amidst sharp fluctuations. We believe that there are three key points of this meeting:
1. The rate hikes in 2022 and 2023 are "higher and longer". Compared with the June meeting, the Fed finally paid more attention to the severity of inflation, consistent with our previous expectations. The September meeting comprehensively raised the policy interest rate levels in 2022 and 2023: another rate hike of 125bp to 4.5% in 2022, and an overall rate hike of 25bp to 4.75% in 2023.
In addition to the dot matrix chart that exceeds expectations, it may be more noteworthy that will not have obvious interest rate cuts in 2023 at least from the level at the end of the year, which is a big difference from market expectations. : After the federal funds rate futures priced, the interest rate will be raised by 50bp in September, and finally, after raising interest rates by 25bp in March 2023, the interest rate will be stopped, and interest rate cuts will be started in the future.
This also means that the actual policy interest rate will significantly turn positive in 2023. According to the Fed's forecast, PCE and core PCE will fall back to 2.8% and 3.1% in 2023, and according to our forecast, core CPI will also fall back to around 4% in 2023. Considering the policy interest rate of 4.75% at the end of 2023, the actual interest rate level will turn significantly positive, which will have a significant impact on the economy and the market.
Second, it basically confirmed the policy attitude of "raising interest rates until recession". In addition to the rate hike signal revealed by the dot map, Powell said at a press conference that " interest rate level will be more restrictive (to the economy) or will be at a restrictive level for longer," and in this case, "the possibility of a soft landing of the economy is likely to disappear ". An economic recession will no longer be a sufficient condition for this round of Fed turn.
Third, inflation is still the top priority of the Federal Reserve's monetary policy, and there are no preset conditions for slowing down or turning interest rates. It is worth noting that after the September meeting, Powell mentioned 19 inflation (inflation) in his speech at the press conference. We have repeatedly stated in previous reports that the Fed needs to control inflation by tightening the domestic financial condition index. In order to avoid repeating the mistakes after the July meeting, although Powell still stated that it is appropriate to slow down interest rate hikes at a certain point in the meeting, it did not point out the conditions for slowing interest rate hikes in the future or policy shifts.
From an asset perspective, the expectation difference and uncertainty of the interest rate path may be one of the most important potential risks in the market. The market still has great fantasies about the sharp interest rate cuts in the 2023 economic recession. Considering the stubbornness of US inflation and the lag of the Federal Reserve's monetary policy transformation since the epidemic (for example, the persistence of the temporary theory of inflation in 2021), we expect that this expected adjustment in the market in the future will gradually become an important source of market volatility.
US bond : The yield may not have peaked yet. As shown in Figure 5, referring to historical experience, the remaining time in 2022 to the beginning of next year, the trend of the 10-year US Treasury yield will basically be consistent with the market's expected level of policy interest rates in 2023. Even if the maturity premium factor is not taken into account, the current level of 10-year US Treasury yields is still lower than this "interest rate anchor".
USD: Continue to maintain relatively strong. In previous reports, we have repeatedly explained our views and logic about the US dollar. There are at least three reasons for supporting the US dollar to continue to remain relatively strong: the market's re-adjustment of the Fed's policy interest rate path; there is little possibility that China and European economies will enter economic recovery together in the next six months; the risk of overseas economic recession continues to rise.
US stocks: Entering the stage where it is better to hold "cash" than to buy stocks.In addition to further pressure on the US stock price-to-earnings ratio, from the perspective of asset allocation, under the current high volatility, dividends obtained by holding stocks are becoming less attractive than cash-like assets (Figure 6-Figure 7), which also means that the turning point of the stock market is still coming.
Risk warning: The mutation of the new coronavirus has caused the vaccine to fail, and the outbreak of confirmed cases has led to the US economy returning to blockade; the situation in Russia and Ukraine has lost control, causing commodity price fluctuations
This article comes from the financial industry
