But it's not over yet! What else will we do this year?, Federal Reserve Finally Stopped Officials | Interest Rates | Federal Reserve
After ten consecutive interest rate hikes, the Federal Reserve finally stopped.
On the 14th local time, the Federal Reserve announced that it will maintain the target range of the federal funds rate at 5% to 5.25%, which is in line with general expectations.
But this is just a pause, not an end. Based on the currently disclosed information, it is expected that the Federal Reserve will raise interest rates twice more this year.
Raising growth rate expectations, core inflation remains high in the short term
Cheng Shi, Chief Economist of ICBC International, stated that in the first half of 2023, the resilience of the US economy was better than expected. From the perspective of leading indicators, the overall resilience of US private consumption, economic prosperity, and PMI index remains strong.
According to the latest economic forecast summary released by the Federal Reserve, compared to March, the median expected real GDP growth rate in the United States this year has increased by 0.6 percentage points to 1%, and the median core personal consumption expenditure price index has increased by 0.3 percentage points to 3.9%.
Ping An Securities Chief Economist Zhong Zhengsheng pointed out that the forecast given by the Federal Reserve this time has undergone several major changes compared to March: a significant increase in economic growth expectations for 2023, a significant decrease in unemployment rate expectations for 2023, and a significant increase in core PCE inflation rate expectations for 2023.
Cheng Shi believes that in the long run, whether US inflation can return to the target level of 2% depends on the degree of decrease in inflation stickiness and the cumulative impact caused by large-scale "water release" in the early stage.
Specifically, as the number of high paying workers in the United States decreases and the range of claims for unemployment benefits increases in the third quarter, the marginal deterioration of the job market or the weakening of wage stickiness will further drive inflation to gradually decline.
"On the other hand, it is estimated that the current rate of money supply in the United States needs to maintain a negative growth level until the end of this year in order to effectively digest the monetary impact of the previous large-scale 'water cutting' by the Federal Reserve. Therefore, the target level of inflation falling back to 2% is expected to be achieved next year," said Cheng Shi.
What else will the Federal Reserve do after suspending interest rate hikes?
Although the Federal Reserve has stopped its continuous interest rate hikes, the latest rate hike path chart shows that the federal funds rate is expected to reach 5.6% by the end of 2023, an increase of 0.5 percentage points from before, suggesting that there may be two more rate hikes within the year.
Federal Reserve Chairman Powell said that the core PCE price index has been above 4.5% for the past six months and has not truly declined. "We hope to see reliable evidence that inflation has peaked and fallen," he said.
He stated that considering the lagging impact of monetary policy on the economy and the potential adverse effects of credit tightening, Federal Reserve officials have decided to suspend interest rate hikes. However, almost all officials with voting rights on monetary policy believe that further interest rate hikes are still necessary.
Cheng Shi mentioned that in response to the disagreement between the Federal Reserve and the market, Powell expressed in the Q&A session that the Federal Reserve needs to first raise the interest rate cap to a level sufficient to cope with the next recession in order to maintain its hawkish stance. In other words, considering the impact of past zero interest rate policies on the US economy, the Federal Reserve needs sufficient monetary policy space to effectively address potential future risks.
Meanwhile, the overall hawkish stance of the Federal Reserve still primarily considers the complex impact of inflation stickiness on real inflation. In the context of consistently strong inflation stickiness, there is still a possibility of a phased rebound in actual inflation in the United States in the future. Therefore, maintaining higher and more sustainable interest rate levels is expected to be beneficial for long-term stable market risk appetite.
Zhong Zhengsheng noticed that Powell stated that currently he does not pursue "speed" in interest rate hikes, but still focuses more on "height". He avoids using the phrase "skipping interest rate hikes" to convey that the Federal Reserve has not yet made a decision on the July meeting. As for future interest rate decisions, Powell has not discussed further interest rate hikes, but emphasized that interest rates should not be lowered this year, and may be lowered after inflation falls next year to "maintain" real interest rates unchanged.
Zhao Yaoting, global market strategist at Jingshun Asia Pacific, believes that although the dot matrix has been updated, the Federal Reserve is unlikely to raise interest rates by another 50 basis points. The dot matrix chart is just a policy prescription for each member of the Federal Reserve, and sometimes errors may occur, and significant changes may occur over time. "This dot matrix may be to avoid the market thinking that there will be any interest rate cuts this year, with the aim of preventing financial conditions from tightening."
When will the tightening of monetary policy come to an end?
What will the Federal Reserve do under the "multiple tasks" of not letting economic growth problems occur, not letting financial markets explode risks, and smoothly completing the monetary tightening cycle?
Zhao Yaoting said that if the Federal Reserve tightens its monetary policy twice this year, it will really face the risk of excessive tightening, leading to a serious economic recession. "This is the largest scale of contraction we have experienced in the shortest period of time. More importantly, due to the lag of monetary policy, the US economy has not yet shown significant impact."
Cheng Shi stated that considering the impact of credit tightening risks on financial stability, the Federal Reserve may attach great importance to the pace of interest rate hikes, which suggests that the remaining two rate hikes within the year will not be operated continuously. According to his team's prediction of the tightening path of US credit conditions, higher benchmark interest rates have pushed 30-year mortgage rates to above 7% and continued to drive borrowing rates soaring.
In the future, once the risk of credit tightening significantly increases, industrial and commercial loans will decline first, further leading to a decline in commercial real estate loans and transmitting it to a decline in residential loans. This will lead to a sustained contraction of overall credit, weaken the stability of the US financial market, and ultimately affect the real economy, causing economic activity to enter a recession cycle.
Zhong Zhengsheng stated that the Federal Reserve's decision to temporarily suspend interest rate hikes and guide the market to believe that interest rate hikes will continue in the future can alleviate financial tightening pressure without causing financial conditions to relax too quickly, which is a temporary solution.
"We still tend to believe that the Federal Reserve will complete its final interest rate hike in July and not cut rates within the year, but the Fed may still retain the option of raising rates again in September." Zhong Zhengsheng said that in the second half of the year, the improvement in US inflation data may be smaller, and the decline in inflation needs to be based on economic cooling. The Federal Reserve may intend to make the final interest rate hike "unresolved", effectively prolonging the tightening cycle.