Reporter of the Economic Business: Cai Ding Reporter of the Economic Business Business: Lan Suying
At 2 a.m. Beijing time on November 3 (Thursday), the Federal Open Market Committee of the Federal Reserve (FOMC) will announce the interest rate resolution and policy statement, and then Fed Chairman Powell will hold a monetary policy press conference.
At present, the market generally expects that the Federal Reserve will raise interest rates by 375 basis points for the fourth consecutive time at this meeting, raising the federal funds rate to the range of 3.75% to 4.00%. If the Fed raises interest rates by 375 basis points tomorrow morning, the Fed's cumulative interest rate hike this year will reach 375 basis points. The interest rate range of 3.75% to 4.00% will also hit a new high since the global financial crisis in 2008.
At present, the focus of the market is on whether the policy statement of the Federal Reserve and Powell's press conference will send a signal of policy turnaround given the current high data including mortgage interest rates.
However, some institutions have relatively cautious views. Nomura believes that the FOMC does not seem to have reached a consensus on the extent of interest rate hikes in December, which limits Powell's ability to provide guidance.
Many economic data are weak, strengthening policy shift to expectations
There is no doubt that over the past month, many weak economic data, including inflation, have continuously strengthened the market's expectations for the Fed's policy shift. Against this background, the dollar index also continues to weaken. As of the close of November 1, the US dollar index fell by nearly 4% from the 20-year high of 114.79 that hit intraday trading on September 28.
First of all, price pressure is still difficult for the Federal Reserve.
As the inflation indicator that the Federal Reserve is most concerned about, the US PCE (personal consumption expenditure) in September increased by 6.2% year-on-year, the same as in August, and three times its long-term target. The growth rate of core PCE, excluding food and energy, rose to 5.1%, the highest since March this year.
Secondly, as the engine of the US economy, although consumers are still maintaining spending in the face of inflationary pressure, red flags are beginning to appear. As American households gradually exhaust government financial subsidies related to the epidemic, more and more recession remarks have made consumers more cautious.
Data released by the U.S. Department of Commerce last week showed that , in the third quarter, the growth rate of consumer spending in the U.S. slowed to 1.4% from 2% in the previous quarter, hitting a new low in the past two years, and consumer purchasing power continued to decline at a rate of 3%. Meanwhile, , according to the U.S. Bureau of Economic Analysis (BEA), the personal savings rate fell to 3.1% in September, a new low in nearly 14 years.
US personal savings rate fell to 3.1% in September, a new low in the past 14 years (Photo source: St. Louis Fed)
Once again, under the Fed's aggressive interest rate hike cycle , US mortgage interest rate has exceeded 7%, hitting a new high since 2000. The rising mortgage interest rates of have also discouraged potential home buyers, and potential sellers are also reluctant to sell.
House price data shows that in July, housing prices in 20 cities in the United States fell for the first time in a decade, and the decline in August continued, with the largest month-on-month decline during the financial crisis in 2009, and the year-on-year increase also "stripped the brakes". In August, the national housing price index in the United States increased by 13% year-on-year, with a growth rate of 2% lower than the previous month, setting the largest drop in history.
Finally, data released on November 1, Eastern Time showed that US ISM manufacturing purchasing managers index (PMI) fell to 50.2 in October, a new low since May 2020; the new order sub-index shrank for the fourth time in the past five months, and the price payment sub-index hit a new low in more than two years; the supplier delivery sub-index fell to 46.8, a new low since March 2009.
Oxford Economic Research Institute U.S. chief economist Oren Klachkin said in an interview with the reporter of "Daily Economic News ", "(ISM Manufacturing PMI data in October showed) Manufacturers' panic about the recession will not disappear soon. Looking ahead, as demand at home and abroad weakens, prices remain high, and interest rates are still at a high level, the manufacturing industry will bear more shocks. Inflation pressure is now more obvious, especially in the commodity production sector, however, inflation will not fall back to pre-epidemic levels in the short term.We expect non-durable goods manufacturing will suffer greater losses than the durable goods sector in the upcoming economic downturn. "
The market has obvious differences in the expectation of interest rate hikes in December
Although the market's expectations for the Fed's policy shift are constantly strengthening, the reporter of the "Daily Economic News" noticed that there are also many differences within the Fed regarding the potential monetary policy shift.
San Francisco Fed President Daley said that it is necessary to start discussing slowing down the rate hikes to avoid putting the economy into an "unforced downturn."
Kansas Fed President George believes that Monetary policy needs to be transferred to a restrictive range, and the intensity remains to be seen. Given the recent fluctuations in financial markets and the need for time to affect the economy, the Fed cannot act too hastily.
Some voters also explicitly voted against the policy shift.
Fed director Bowman believes that inflation is expected to show signs of decline before the rate hike is slowed down. St. Louis Fed President Brad also said that he hopes to raise the policy interest rate to a level and can impose meaningful downward on inflation. If inflation data does not cooperate, the Fed may be forced to raise interest rates to 5%.
According to the CME Group's "Feder Observation" tool, as of press time, federal funds futures market believes that the Fed has a 45% chance of raising interest rates by 50 basis points at its mid-December meeting, and the possibility of 75 basis points is as high as 48%, and the other 7% chance of raising interest rates by only 25 basis points. From the probability, it can be seen that traders are currently raising interest rates for the last time this year There are very obvious differences in the proposed rate hike.
Image source: CME
In addition, The futures market still believes that the Federal Reserve will end this round of interest rate hike cycle at its meeting on March 22 next year, and the federal funds rate range will reach 5.00%~5.25%.
Image source: CME
Barclays Senior Economist Jonathan Millar said in a comment email to a reporter from the Daily Economic News, "What the market is most concerned about at this conference is whether the FOMC statement or the post-conference press conference will provide signals on possible policy paths in December. According to the dot chart for September, 10 of the 19 participants are expected to raise at least 50 basis points in December after the 75 basis points rate hike. The dot chart shows that the cumulative interest rate hikes at the meetings in November and December were 125 basis points. However, we believe that the overexpected inflation data in September may raise the expected rate hike in December by another 25 basis points (i.e., 75 basis points hike). ”
Jonathan Millar believes that for this meeting, the focus of the market is whether the FOMC has enough confidence to put it on a track that can achieve a sufficiently "restrictive" policy stance to control the upward risk of inflation. "The inflation trend in the United States has been high, and PCE data in September shows that inflation pressure is still strong. Although there are signs that core commodities are slowing down as expected, the inflation growth rate of core services has reached its highest level since the early 1980s, which means price pressure will last longer than the market predicts. ” added Jonathan Millar.
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