How to follow the policy path after July?, The Federal Reserve launches a new round of "hawk pigeon battle" to tighten | Report | A new round

This week, the Federal Reserve has entered a period of silence before its interest rate meeting.

As inflationary pressures further ease, the question before the Federal Open Market Committee becomes whether the tightening cycle needs to end, and the recent divergence of positions among officials may mean that the suspense will not be immediately resolved.

Goldman Sachs released a report predicting that the Federal Reserve may complete the final rate hike of this tightening cycle in July and lower the probability of recession to 20%.

Eagles insist on raising interest rates twice within the year

Affected by the base effect, the US Consumer Price Index increased by 3.0% year-on-year in June, marking the 12th consecutive month of decline. As a barometer of upstream costs, the core producer price index increased by 2.4% in June, reaching a new low in nearly three years.

As the main target of this interest rate hike cycle, the fall in prices has given the Federal Reserve more policy space to assess the situation: whether the economy has fully absorbed the impact of aggressive monetary tightening so far, or is it just beginning to adjust. In the former scenario, further interest rate hikes may be necessary in the future to ensure the continuation of the anti inflation trend. In the latter scenario, further weakening price pressure is already brewing, and taking more measures may cause unnecessary damage to the economy and job market.

The interest rate chart updated in mid June shows that Federal Reserve officials expect two more rate hikes before the end of the year. Federal Reserve Chairman Powell has previously revealed on multiple occasions that there are also many within the committee who support future interest rate hikes more than once.

Richmond Fed Chairman Barkin stated last week that the current situation still leaves a question of whether inflation can be resolved while consumers are still consuming and the labor market remains so strong. In his eyes, the data for June was not enough to convince him that inflation was steadily decreasing.

As the last member of the vote to speak out before the silence period, Federal Reserve Director Waller reiterated his hawkish stance. He believes that the current tightening policy cannot be expected to further slow down demand and inflation. Although recent inflation data is encouraging, a single data point cannot become a trend. He emphasized, "I think there is no reason not to raise interest rates for the first time at the meeting later this month, and the timing of the second time depends on the data. If there are no signs of a significant slowdown in economic activity, then it should be done as soon as possible." During the Q&A session, Waller emphasized that the September resolution was an "on-site meeting.".

The main stance of other Federal Reserve officials who insist on retaining the interest rate hike option is that they cannot give the outside world room for speculation that the Fed has ended its actions, thereby causing loose financial conditions to weaken previous efforts to combat inflation.

Pigeon Pie and Soft Landing

The dovish committee believes that the Federal Reserve can achieve its inflation target while achieving a soft landing, so it should patiently observe economic performance while keeping interest rates unchanged after the July rate hike.

With the release of the latest data, there is evidence that inflation is moving in the right direction. For example, the issue of supply chain bottlenecks continues to improve, the New York Federal Reserve's indicator of global supply chain pressure is close to the lowest level since 2008, the import and export price index released last week was better than expected, and the continuous decline in commodity inflation is becoming an important driving force to suppress prices.

As one of the few dovish members within the Federal Reserve, Atlanta Fed Chairman Bostic stated earlier this month that data may be shifting in a direction favorable to the Fed's expectations, but policymakers need time to accept what they believe to be the real situation and "lean" towards the idea that a soft landing may be imminent. Bostic believes that there is a long lag in policy operation, and therefore tends to maintain stable interest rates after July.

"The improvement in core service inflation will not prevent the Federal Reserve from raising interest rates later this month, but if the cooling trend of inflation continues, it should persuade the Federal Reserve to exercise restraint after July and ultimately start cutting interest rates again in the first half of next year," wrote Ashworth, Chief US Economist at Capital Economics

Federal funds rate futures show that the potential probability of a second rate hike remains below 50% after the July rate hike is fully priced. Goldman Sachs lowered the probability of a US economic recession to 20% in a report released on Monday, and believed that July would be the end of this tightening cycle.

Goldman Sachs Chief Economist Hazius also lowered the probability of the US economy falling into recession in the next 12 months, from 25% to 20% in his report. The report states that the possibility of a recession being lowered is mainly due to recent data that has given Goldman Sachs more confidence in predicting that the Federal Reserve can lower inflation rates to an acceptable level without causing a recession.

Goldman Sachs stated that given the slowdown in the month on month growth of actual disposable income for consumers in the future, especially after the resumption of student loan repayments from October, coupled with a decrease in bank loans that will also drag down the economy, the US economic growth may accelerate to some extent in the following quarters, thereby consolidating the fundamentals of inflation's decline. At the same time, the relaxation of the financial environment, the rebound of the real estate market, and the continued enthusiasm for factory construction all indicate that the US economy will continue to grow, but the growth rate will be lower than the trend level.