Fed will issue a interest rate resolution at 2 a.m. Beijing time on November 3. The market expects that the interest rate hike will reach 75 basis points.
If the Fed's interest rate resolution meets expectations, this will be the Fed's sixth rate hike this year and will also be the first time that it has raised interest rates by 75 basis points in four consecutive meetings.
Interest rate futures data show that the market currently expects that the probability of the Federal Reserve raising interest rates by 75 basis points in November is more than 85%. At the same time, many institutions such as CICC Macro, Swiss Pataca, Ping An Securities also believe that the Fed will raise interest rates by 75 basis points again in November.
Federal interest rate hikes may be close to 5%
Powell's attitude towards raising interest rates may be difficult to "soft"
The Fed will raise interest rates for the sixth consecutive time, and the market is also expected to slow down the Fed's interest rate hikes. What attitude will Powell take on austerity policy at this meeting?
Hu Jie, a professor at Shanghai Jiaotong University Shanghai Advanced Finance School , told Pengpai News that Powell will stick to the overall policy of hikes. However, the specific path and intensity will be appropriately adjusted as the economic data changes. At the same time, Powell may reiterate: inflation is still at a high level and interest rate hikes have not been completed; he is more confident in the path and effect of interest rate hikes; the possibility of an economy's "soft landing" is greater than a "hard landing".
Ke Dongming said that the Fed is more worried about consumers' stubbornness in 's inflation expectations. The expected end value of the University of Michigan's 21-year inflation rate in October is 5%, which is still high, which is why Powell is unlikely to promise the Fed to end the austerity policy now.
Ko Dongming pointed out that even if Powell may suggest slowing down the pace of rate hikes "at some point" it is unlikely that he will signal that the rate hike cycle will end at this meeting. This will contrast with the Federal Reserve's northern neighbor, the Bank of Canada, which suggests it may soon stop austerity.
"It is hard to believe that Powell may send a signal that austerity policy is about to end. The Fed's top priority is to fight inflation, and the recent data performance is not good enough." Ke Dongming said that as the economic outlook for 2023 becomes bleak, people may regret to find that the Fed's vision is too backward. Therefore, the risk of policy error, namely, the risk of excessive tightening, is rising, especially in an environment of high debt and market liquidity contraction, and the possibility of the Fed's "soft landing" is becoming less and less likely.
CICC Macro also stated that it is expected that Powell will maintain a high-pressure trend on inflation on Thursday. Regarding the subsequent interest rate hike path, he will continue to emphasize that it depends on the data. If a signal of slowing rate hikes is sent this week, it will be an unexpected surprise for the market.
"In fact, the Fed does not need to rush to make a statement on the interest rate hike in December now, because there is still a lot of time to the interest rate meeting from now to December 13-14, and the Fed can see more economic data. A safer approach is to wait until these data are released before communicating with the market, rather than sending a signal to slow down interest rate hikes now." CICC Macro said that the Fed can use a "slow-down plan" in interest rate hikes, but ensure that you are cautious at every step. This round of high inflation has damaged the credibility of the Federal Reserve. If you make mistakes in judging inflation and underestimate inflation, the consequences may be very serious.
In terms of US real estate, Ke Dongming said that issues regarding the deterioration of the US real estate market may be put on hold again because some Fed members believe this is a setback that must be experienced in the rise of real estate after the COVID-19 pandemic. Others welcomed the trend as deteriorating property could drive rents lower, which has been a major driver of U.S. inflation lately.
Ping An Securities stated that although the US real estate prices began to fall month-on-month, the year-on-year growth rate was still at a high level, and the growth rate of rent usually lags behind the growth rate of housing prices by 1-2 years. Considering that rents account for a high proportion of the core CPI in the United States, it is difficult for the core inflation pressure in the United States to significantly improve in a short period of time.
What is the pace of subsequent interest rate hikes?
Consumer inflation expectations rebounded
After the November interest rate meeting, the Federal Reserve has the last interest rate meeting on December 14 this year, and the first time next year will be held on February 1.
At present, interest rate futures data show that by May 2023, the highest interest rate of the Federal Reserve will reach nearly 5%, higher than the 4.6% median interest rate forecast that the Federal Reserve's September dot chart alluded to.
CICC Macro said that in the context of increasing financial risks and tightening liquidity at the end of the year, it is not ruled out that the Federal Reserve will adjust its interest rate hike pace in December. An important development since the September interest rate meeting was the increase in financial risk events. First, the UK's "tax cut" panic caused a sharp rise in treasury bond yield , causing the UK's pension to sell assets. Then a Credit Suisse storm occurred, causing the market's concerns about the "Lehman Moment". Although this concern proved to be excessive in the aftermath, market sentiment did not return to calm.
Since mid-October, US dollar liquidity has further tightened, and the yield of US bond once rose rapidly. CICC Macro said that in this case, the Fed should also consider the issue of rapid rate hikes that may cause financial risks. After all, in addition to the Fed, the central banks of other major economies are also raising interest rates. If the coordination is not good, a "synthesis fallacy" may be formed and financial instability may be increased.
"At present, the US inflation has not improved substantially, and the labor market is still relatively strong. It is best to maintain our determination to resist inflation at this time, so as not to repeat the mistakes of the US's "big stagflation" 50 years ago." CICC Macro said that even if it expresses a "dove" attitude to prevent financial risks, it is necessary to grasp a degree and do not leave the market with the wrong impression that it is no longer resistant to inflation.
US government debt ratio is the highest level since World War II
Regarding the subsequent interest rate hike path, Hu Jie said that the pace of interest rate hikes in December and the next three times is expected to be: 25-50, 25, 25 basis points respectively; the intensity and rhythm of the next three times depend on further data.
CICC Macro said that it is expected that the Fed's high of this round of interest rate hike may be close to 5%, which means that the Fed may still have 100 basis points of room after the interest rate hike this week. If the Fed prefers to raise interest rates before it, it will choose to raise interest rates by 75 basis points in December and raise interest rates by 25 basis points in February next year. But if the Fed is worried that the rate hike will trigger financial risks too quickly, it may choose to add 50 basis points in December and February next year.
Ping An Securities said that especially the interest rate hike in December, the Federal Reserve may find it difficult to express that it will slow down the interest rate hike, and it is more likely to remain a certain degree of ambiguity, leaving room for policy adjustments. For investors, they still need to be wary of market fluctuations in the short term, that is, the game between recession trading and tightening trading.
