Will it become the rest of this interest rate hike cycle? The Federal Reserve may raise interest rates by 25 basis points tomorrow morning. CPI | Market | Rest

The Federal Reserve will release its interest rate resolution at 2am Beijing time on July 27th. Currently, the market expects a 25 basis point rate hike in July, and the federal funds rate will rise to the 5.25% -5.5% range.

In terms of inflation, data released by the US Bureau of Labor Statistics on July 12th showed that the US CPI increased by 3% year-on-year in June, slightly lower than market expectations of 3.1%, with a previous value of 4%. This is the 12th consecutive month of decline in the US CPI year-on-year increase since reaching a 40 year peak of 9.1% in June 2022, the smallest increase since March 2021. The core CPI of the United States increased by 4.8% year-on-year in June, lower than market expectations of 5%, with a previous value of 5.3%.

According to Bai Xue, an analyst at the research and development department of Dongfang Jincheng, the rapid decline in CPI inflation in June was mainly due to the significant drop in core commodity prices such as energy and used cars due to the impact of the ultra-high base in the same period last year; In addition, the slowdown in housing rent has a more prominent impact on overall inflation and the decline in core inflation. The Federal Reserve's focus on core services other than housing has also seen a month on month decline in inflation, indicating that the marginal cooling of the labor market is beginning to have an impact on inflation.

The Federal Reserve is highly likely to raise interest rates by 25 basis points in July

"Although the inflation rate CPI in the United States has significantly decreased at a high point, the core inflation rate remains high and difficult to maintain. At the same time, the United States has not yet released the PCE price index for June, and based on data from May, the PCE is still at a high level." Wang Jinbin, Executive Deputy Secretary and Vice Dean of the Party Committee and Professor of the School of Economics at Renmin University of China, told Paper that the probability of the Federal Reserve raising interest rates by 25 basis points at the July meeting is relatively high.

From a data perspective, the PCE price index in May increased by 3.8% year-on-year, while the core PCE increased by 4.6% year-on-year, still significantly exceeding the Federal Reserve's inflation target of 2%.

"There is a high probability of a 25 basis point interest rate hike," Hu Jie, a professor at the Shanghai Advanced School of Finance at Shanghai Jiao Tong University, also told The Paper. Currently, the US market has high interest rates, with a 30-year mortgage rate of 6.9% and the optimal working capital loan rate of 8.25%. In this environment, the economy will definitely slow down and the price index will definitely decline. If interest rates are raised again in July, the downward trend of inflation will be more stable.

At present, the market has fully priced the decision to raise interest rates by 25 basis points at the July meeting.

From the perspective of the Federal Reserve, Huatai Securities Research Institute stated that although inflation in June exceeded expectations and declined, there is currently no need to change the latest guidelines just released in June. It is estimated that the Federal Reserve will emphasize the importance of not overly relying on individual data and the need to observe more data to determine whether interest rates will be raised again in the future.

Pay attention to the discussion on the conditions for stopping interest rate hikes

With full expectations for a rate hike in July, market attention will shift to whether the Federal Reserve will continue to raise interest rates thereafter.

"The key lies in how to express confidence in achieving inflation targets and warning of economic downturn." Hu Jie said that he expects the meeting minutes and Powell's speech to convey confidence in achieving inflation targets to the market, but does not explicitly indicate that the interest rate hike cycle has ended, in order to leave room for flexibility for future policies.

Hu Jie also stated that the Federal Reserve is highly likely to prompt the market to anticipate an economic slowdown and reduce the psychological impact of policies on the market.

CICC Macro stated that the Federal Reserve's July meeting may discuss stopping interest rate hikes. Considering the significant slowdown in CPI inflation in June, the Federal Reserve has obtained a relatively good window period, allowing for a more comfortable observation of inflation and economic changes in the next two months. Federal Reserve officials are expected to discuss the conditions for stopping interest rate hikes at this meeting.

CICC Macro pointed out that Powell may have hinted at the press conference that stopping interest rate hikes may be appropriate if inflation data in the coming months can continue to slow down like in June. This may be interpreted by the market as dovish rhetoric, and investors tend to believe that this round of interest rate hikes may have ended.

"But Powell will also leave room for further rate hikes, not ruling out the possibility. From the perspective of Federal Reserve officials, they do not want the market to interpret the discussion of stopping rate hikes as dovish at this time. Therefore, we expect Powell to also emphasize that monetary policy is flexible, not ruling out further rate hikes." CICC Macro also stated that in fact, due to the recent rebound in real estate and consumer confidence, some Federal Reserve officials have become more vigilant about the sustainability of inflation.

In Powell's speech, Wang Jinbin expressed that firstly, he pays attention to his tone on price changes; Secondly, its assessment of the current economic situation in the United States; The third is the judgment of the labor market. The Federal Reserve suspended interest rate hikes in June, marking its entry into a phase of balancing inflation and employment. At present, the Federal Reserve needs to observe the lagging effects of monetary policy and balance inflation, employment, and growth.

"However, any statements made during the meeting will soon become outdated. The Federal Reserve's annual Jackson Hole Economic Symposium will be held in late August, and two employment and inflation data will be released before the September Federal Open Market Committee meeting. This will provide more information on the outlook for monetary policy," said Cui Xiao, senior economist at Swiss Baida Wealth Management in the United States, to Paper.

Will July's interest rate hike become the end of this round of interest rate hikes?

Looking ahead to the interest rate outlook, Hu Jie stated that after the Federal Reserve raised interest rates in May, it paused once in June to observe whether the rate of inflation reduction met expectations. Subsequently, inflation data for May was released, indicating a slower decline in core CPI after excluding energy and food. Some Federal Reserve officials lack patience with the timing of reaching the 2% target, leading to expectations of another one to two rate hikes.

"After the interest rate hike in May, a downward channel for inflation has formed, and achieving the 2% policy target is a high probability event. The optimistic timing is expected to be in the middle of next year, while the conservative prediction is expected to be by the end of next year. The recent release of inflation data in June shows that the core CPI is slowing down faster, which should alleviate some Federal Reserve officials' doubts about insufficient policy tightening. I expect the July interest rate hike to become the end of this round of interest rate hikes," Hu Jie said.

Wang Jinbin stated that the Federal Reserve has the opportunity to avoid economic recession while keeping inflation within a tolerable range. But the Federal Reserve will not wait until inflation reaches 2% before implementing a shift in monetary policy. It may consider adjusting monetary policy once the PCE enters the 3% range. According to the new monetary policy framework released by the Federal Reserve in August 2020, what the Federal Reserve requires is inflation slightly above 2%, rather than below 2%.

Cui Xiao said that given recent signs of deflation and slowing employment growth, July's interest rate hike may become the last of this cycle. The hawkish policy bias still exists, but it may be in November rather than September. Meanwhile, interest rate cuts will not be seen until at least 2024.

CICC Macro also stated that "loose trading" is still too early to say. Since the end of last year, the market has been skeptical that the Federal Reserve will continue to raise interest rates, and even believes that the Federal Reserve will soon cut rates. But the fact has proven that the Federal Reserve is right. In the first half of this year, the rate of decline in US inflation was slower than expected, coupled with better than expected economic performance, which led to the Federal Reserve raising interest rates all the way to July, and US bond yields remained high.

"Recently, there have been signs of a rebound in US demand data, and at this time, we cannot underestimate the resilience of the US economy. We need to be more vigilant about the stickiness of inflation. Therefore, we suggest not to race early on 'loose trading'. Our benchmark scenario is still that US interest rates will remain high for a long time until the economic fundamentals data weaken comprehensively." CICC Macro said.

The cooling of US inflation in the second half of the year may enter a plateau period

From the trend in the second half of the year, Bai Xue stated that the trend of further slowdown in overall CPI inflation in the future is relatively certain: recent retail sales, consumption of automobiles and some durable goods have further slowed down, indicating that commodity inflation will continue to remain weak in the future; Driven by the continuous decline in housing sub items, core services will also further decline. Meanwhile, weak global demand also means that oil prices are unlikely to be the main factor hindering the decline of CPI.

Bai Xue also stated that considering the fading of the base effect starting from July, the labor market will remain tight in the short term, and the resilience of service consumption and wage stickiness still exist, the resilience of core service prices should not be underestimated. The rapid downward trend of inflation in June should not be linearly extrapolated. The cooling of US inflation in the second half of the year may enter a plateau period, and the process of de inflation may still have some twists and turns. If calculated with a month on month growth path of 0% -3%, it is expected that the year-on-year CPI in the third quarter will fluctuate at a level of 3% -4%, and it will be difficult for CPI inflation to fall below 3% year-on-year within the year.

Wang Jinbin also stated that in the future CPI downturn, the downward space for food and energy prices is relatively limited, so CPI may remain at a relatively high level. The core PCI will also experience a downward trend in the future, but it may be relatively slow.

Regarding the overall prediction of the US economic trend, Hu Jie stated that inflation may continue to decline in the second half of the year, economic growth will slow down, and the unemployment rate will slightly rise. It is highly likely that inflation control targets can be achieved while avoiding economic recession.

"It is expected that the CPI will reach below 2.5% by the end of this year, the core CPI will reach around 3%, and there is hope that both parties will achieve the target of 2% by the middle of next year. The year-on-year growth rate of GDP this year will be significantly lower than last year's 2.1%, dropping to around 1%; among them, the IMF predicts 1.6%, which I think is optimistic. The unemployment rate will slightly rise to around 4.0% by the end of this year." Hu Jie said.

Bai Xue stated that based on the historical experience of the Federal Reserve's past interest rate hike cycles, it is often very difficult to achieve a "soft landing" while controlling inflation. This is mainly due to the "long-term variable lag" effect between monetary policy decisions and their impact on the economy, which means that the entire process from raising interest rates to having a comprehensive impact on the economy may take at least 1-2 years, and the long-term and unpredictable timing makes it difficult for the central bank to grasp the balance point between "controlling inflation" and "avoiding economic recession".

"This is particularly prominent in this round of interest rate hikes. Compared to other interest rate hikes in history, the inflation rate in the United States is higher, the rate and intensity of rate hikes are more intense, but the rate of inflation reduction is slower, which greatly increases the difficulty of the Federal Reserve's policy. While fighting inflation remains the top priority, with the support of the resilience of the US economy, the possibility of a deep recession is lower. However, a certain degree of mild recession will be a necessary cost for US inflation to fall back near policy targets." Bai Xue said.