In Washington, USA, a woman walked past an advertisement for house rental and sale.
(Xinhua News Agency)
After raising interest rates for 10 consecutive times and accumulating 500 basis points, the Fed finally "stepped on the brakes".
On June 14th, local time, after the monetary policy meeting, the Federal Reserve announced that it would keep the target range of 5% to 5.25% of the federal funds interest rate unchanged. This is the first time that the Federal Reserve has suspended interest rate hikes since March 2022, which is in line with previous market expectations. At the same time, the Fed also said that "staying put" is to wait and see the market changes, and hinted that there is a possibility of "further" interest rate hikes in the future.
The slowdown in inflation is an important reason for the Fed to press the "pause button" to raise interest rates. On June 13th, local time, the US Department of Labor released the CPI data in May, which dropped from 4.9% in April to 4%, exceeding market expectations. This is the 11th consecutive decline of related indicators, setting a new low since March 2021. At the same time, the core CPI of the United States increased by 5.3% year-on-year in May, down from 5.5% in April. American consumers’ short-term inflation expectations have also improved. According to the latest monthly consumer expectation survey released by the new york Federal Reserve, the expected median inflation rate in the coming year dropped by 0.3 percentage points to 4.1%, the lowest level since May 2021.
The suspension of the US debt ceiling has also given the Fed more initiative in raising interest rates. Some analysts believe that after the debt ceiling agreement is reached, the US Treasury Department, which has recently "dried up its pockets", may borrow heavily, and it is expected that the debt scale will exceed $1 trillion in the coming months. This will further drain dollar liquidity, raise short-term financing interest rates and tighten economic flexibility. According to the estimation of Bank of America, its economic impact is no less than raising interest rates by 25 basis points, which also provides the Fed with more time to wait and see the market.
The Fed’s interest rate decision was in line with market expectations, but the unexpected hawkish remarks put pressure on the market. Federal Reserve Chairman Powell said that the effect of current policy tightening has not yet fully appeared, and almost all participants expected that further tightening of monetary policy was appropriate. After the announcement of the interest rate resolution, the three major US stock indexes fell in the short term. As of Wednesday’s close, the three major US stock indexes were mixed. Dow fell 0.68%, Nasdaq rose 0.39% and S&P 500 index rose 0.08%.
The bitmap of the Federal Reserve’s interest rate hike path predicts that the benchmark interest rate will rise to 5.5%— 5.75% interval. This shows that the Fed’s interest rate hike cycle is not over, and Fed officials expect that there may be one or two interest rate hikes this year. This also means that the pressure on the US economy still exists.
The first is inflation. Although inflation in the United States has eased, core services except rent and core goods such as used cars are still highly sticky, and the "second half" of the war against inflation may be even more arduous. Some people believe that on the one hand, the benefits brought by the improvement of supply are being exhausted, the current energy prices have basically stabilized, and the space for promoting inflation to continue to decline is limited. On the other hand, demand-driven inflation is still stubborn, and the still tight labor market makes the market demand strong. In the case of mismatch between supply and demand, the difficulty of falling inflation in the United States will further increase.
In the economic forecast released in June, the Federal Reserve significantly raised its inflation forecast for the core personal consumption expenditure price index (PCE) in 2023, from 3.6% to 3.9%. Powell stressed that there has not been much progress in the decline of core PCE, and there is still uncertainty about the impact of policy tightening on inflation.
The second is financial risk. At present, the market’s worries about the banking crisis have not eased. Last week, U.S. Treasury Secretary Janet Yellen said that the banking industry may merge again. As of the week of June 7, the use scale of the Federal Reserve Bank Term Financing Plan (BTFP) exceeded 100 billion US dollars, rising for five consecutive weeks. This shows that the US banking industry is still not out of the "liquidity dilemma". In addition, if the U.S. Treasury subsequently borrows a large amount of money to enrich its cash flow, it will not only aggravate the problem of deposit outflow in the banking industry, but also make banks face greater liquidity pressure, and may push up the interest rates of short-term loans and bonds, further increasing the financing costs of enterprises already under pressure in a high interest rate environment.
The third is the risk of recession. Historical data show that recession often goes hand in hand with interest rate hikes in the United States, especially after a sharp increase in interest rates in a short period of time. Earlier, many economists and market participants said that the US economy may fall into recession later this year due to the weakening of growth momentum, the aggressive interest rate hike by the Federal Reserve and the banking crisis. However, Powell still believes that there are ways to achieve a soft landing, and the gradual cooling of the strong labor market may help the economy achieve a soft landing. In terms of economic expectations, the Federal Reserve sharply raised its forecast for US GDP growth this year, from 0.4% in March to 1%.
Generally speaking, the current macro-environment in the United States is quite complicated, and the economy is still resilient, but there are many hidden risks. This time, the Fed chose to suspend interest rate hikes and guide the market to believe that it will raise interest rates in the future, which can not only observe the transmission effect of monetary policy, but also further alleviate the pressure of financial tightening. Properly slowing down can also leave some room for future interest rate hikes, thus prolonging the tightening cycle.
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