On the 20th local time, the two-day Feder 9 monetary policy meeting will officially kick off in Washington.
According to the latest federal funds rate futures, investors in expect the probability of hiking 75 basis points in September is 85%, and the probability of hiking 100 basis points is 15%. After the inflation data of was released last month, many institutions, including Nomura, expected the Federal Reserve to raise interest rates by 100 basis points this month. Former U.S. Treasury Secretary Larry Summers also suggested that the Federal Reserve consider increasing credibility by raising interest rates by 100 basis points.
On the other hand, the US economy is facing major tests. While suppressing consumer demand, the most radical austerity policies in recent years have also brought the risk of slowing expansion. Fed Chairman Powell faces the highest price pressure in 40 years and the still turbulent capital market, how will Fed Chairman Powell respond to questions about the soft landing of the economy become the focus.
At the same time, the upcoming forecast outlook will show the latest views within the Federal Reserve on the economic outlook, inflation expectations and interest rate paths in the next three years, which may bring storms to the market.
Australian tightening policy is unprecedentedly strong
Oxford Economic Research Institute Senior economist Bob Schwartz said in an interview with First Financial reporter that with the support of the labor market, the Federal Reserve's commitment to lower inflation "unconditionally" means further significant interest rate hikes. He expects the Fed to raise interest rates for the third consecutive 75 basis points. If price risks remain high, the possibility of 75 basis points will also be retained in November.
has entered the rate hike cycle , the Federal Reserve has always regarded controlling inflation as its top priority. Federal Reserve Chairman Powell reiterated his position this month when attending an event hosted by the Cato Institute, saying that in the future, he will be "firmly committed to" controlling inflation to the target level. The longer the inflation rate is above the target, the greater the risk that the public will regard this as normal. "We will continue to work until the work is completed."
's August inflation data released last week showed that the price cooling did not go as smoothly as expected. In addition to energy, the price levels of groceries, rents, household goods, health care and other categories have risen rapidly, and inflationary pressures are still spreading. Several Fed officials have previously made it clear that there is currently no reason to relax policy intensity. Federal Reserve Vice Chairman Lael Brainard previously said the Fed needs to further raise policy rates and keep interest rates at high levels for some time to convince the outside world that inflation is falling toward its target.
A healthy job market will give policy space for further interest rate hikes. Since the July interest rate meeting, more than 800,000 new non-farm jobs have been added to the United States, with the labor force participation rate reaching 62.4% in August. More job seekers joining the workforce will help maintain employment growth in the coming months. Under the tight supply and demand situation, the Atlanta Fed wage tracking report shows that the annual growth rate of U.S. employee income as of August was 5.7%.
In addition to hiring interest rates, the Federal Reserve's balance sheet reduction has also reached the upper limit since this month. The monetary policy under the combination of "rate hike + balance sheet reduction " is a rare in recent decades. According to the previously announced implementation plan, starting from June this year, the Federal Reserve will no longer renew the partially mature US Treasury bonds and mortgage-backed securities MBS at a rate of $47.5 billion. The rate of balance sheet shrinkage in September will double to $95 billion. As the rate of quantitative tightening is unprecedented, this has also become an important factor in recent asset price fluctuations.
economic outlook is facing test
The Federal Reserve will update economic forecast summary (SEP) while releasing the resolution statement, and the latest data forecast will be extended to 2025.
In terms of inflation expectations, price pressures in categories such as rent, medical care, and food will continue in the short term, and PCE expectations may be slightly revised in 2022. Considering the recent release of the New York Fed and the University of Michigan consumption survey results, the one-year and three-year inflation outlooks have improved. Institutions expect PCE expectations to be revised down in the next two years, while the long-term inflation target of 2% is expected to remain unchanged.
The Federal Reserve predicted in June that the end of the interest rate hike in this round is 3.8%, but the severe price situation may force the federal funds rate to be further revised in this round. CME FedWatch shows that the final interest rate range will reach at least 4.50% to 4.75%, close to the eve of the financial crisis at the end of 2007.
Goldman Sachs released a report saying that the fund interest rate will reach 4%-4.25% by the end of 2022, and will rise to the peak of 4.25%-4.5% in 2023, and then cut interest rates once in 2024, and cut interest rates twice in 2025, and the long-term interest rate will remain unchanged at 2.5%. Wells Fargo released a report saying that despite the tough wording, few Fed officials argue that the peak of federal funds rate is much higher than 4%. The median forecast for federal funds rate in 2023 is expected to be 4.125%. For 2024 and 2025, the decline in inflation is expected to promote the gradual relaxation of policies.
As interest rates continue to approach neutral interest rates and restricted ranges, economic pressure will become increasingly obvious. Powell said last month that rate hikes could cause a "continuously below trend growth period." The recent signs of a slowdown in the US economy have become increasingly obvious. Due to the decline in demand, the manufacturing and service industries, the purchasing managers index PMI has fallen below the boom and bust line . The forecast of the Atlanta Fed GDPNow tool shows that the economic growth rate in the third quarter continued to fall from its previous high of 2.1% to 0.5%.
2023 may become the trough of the US economy. Schwartz told reporters that the Fed's more aggressive monetary policy tightening and the negative spillover effects brought about by global economic weakness will jointly push the US economy into a moderate recession in the first half of 2023. His forecast for real GDP growth in 2022 remains unchanged at 1.7%, as economic momentum should remain resilient in the second half of 2022. But the forecast for 2023 is downgraded to zero.
The economic downturn will lead to an increase in the unemployment rate. Schwartz pointed out that as a key part of slowing business activity, as demand at home and abroad weakens and pressure on wage growth remains, falling corporate profit margins and slower sales revenue will lead to companies reducing hiring and capital expenditures. By the end of 2023, the unemployment rate will rise to 4.8%.
In addition, Diane Swonk, chief economist at KPMG , released a report saying that pessimistic expectations of the economic outlook will mean that the unemployment rate will be corrected to at least 4.5% next year. Former U.S. Treasury Secretary Summers believes that for the Federal Reserve, the unemployment rate must rise to at least 5% in order to successfully achieve the goal of cooling inflation.
clues to future actions
For the Fed, the difficulty of achieving a soft landing is increasing as the fight against inflation is far from over. U.S. Treasury Secretary Yellen said earlier this month that (the recession) is a worrying issue. The Fed needs superb skills and some luck to achieve lower inflation while keeping the labor market strong. "
market focus will turn to the policy path prospects after September . At a press conference after the July meeting, Powell said that the speed of (rate hike) depends on future data and economic conditions, and the decision will be made at each meeting, not to provide clear guidance as before. First Financial reporter noticed that this point was subsequently reached within the Federal Reserve. Fed Director Christopher Waller pointed out that the future policy interest rate target of should be entirely determined by the data and the impact of interest rate hikes on economic activities, employment and inflation.
In order to achieve the inflation target, the Federal Reserve is also pouring cold water on the outside world's expectations of interest rate cuts. John Williams, the third person in the Federal Reserve and Chairman of the New York Fed, said recently that Interest rates need to remain restricted for a period of time to curb inflation before considering lowering interest rates. Cleveland Fed Chairman Loretta Mester said it would need to see several months of month-on-month declines to confirm the decline in inflation. Mester supports raising the Federal Reserve benchmark rate to more than 4%, and does not expect a rate cut next year.
reporter of the "New Fed News Agency" who became famous for predicting a 75 basis point rate hike in June published a report on Monday saying that although there is no clear forecast for the economy to fall into recession, Fed officials have previously expressed their willingness to tolerate recession.Powell no longer actively mentions avoiding a soft landing in recession, but instead positions reducing high inflation as a task the Fed wants to do "unconditionally" and warns that if inflation cannot be successfully suppressed now, he will face even worse consequences in the future.
The outside world will closely monitor Powell's latest statement at the press conference, and his statement on the risks of economic recession is worth paying attention to. There are also many market views that since inflation risks still cannot be ignored, the Federal Reserve Chairman will reiterate his tough policy stance by then. But in the face of downside risks to economic growth, he may reiterate that policies will depend on the economy and data and retain the possibility of slowing down the pace of interest rate hikes in the future.
CME FedWatch shows that the market expects the federal funds rate to reach 4.25%-4.50% by the end of the year, which means that 200 basis points will be required to raise interest rates at the remaining three meetings this year, including this month. The rate hike will slow down from next year. After reaching a peak of 4.50%-4.75% in March, the interest rate level will remain at least until July.
Schwartz told the First Financial reporter that historically, interest rate cuts may be longer in the period of this round of interest rate hikes at least half a year after interest rates reach their peak, because the Fed needs time to confirm the trend of decline in inflation. Given the Fed's firm determination to restore price stability, while an economic recession is not inevitable, the pre-rate rate hike has exacerbated this risk, especially in 2023.
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