On September 20, local time, the Fed decided to keep the current interest rate unchanged, but it is expected to raise interest rates again before the end of the year. Fed Chairman Jerome Powell went on to say the core inflation target of 2% was unchanged and that the U.S. economy could have a soft landing.
It is worth noting that from the dot plot, the Fed will implement a tighter monetary policy than previously expected by 2024, and the potential rate cut in 2024 will shrink from 100 basis points to 50 basis points.
After Powell's speech, the US stock market staged a "diving" market at the end of the day.
The Fed paused the pace of interest rate hikes as scheduled
The dot plot shows that another rate hike may be made this year
On September 20, Eastern time, the US Federal Reserve (Fed) announced that it would keep the target range of the federal funds rate unchanged at 5.25% to 5.5%, in line with market expectations.
At the Federal Open Market Committee (FOMC) meeting, the regular monetary policy meeting on September 19-20, participants presented their projections of the most likely outcomes of real gross domestic product (GDP) growth, unemployment and inflation for each year from 2023 to 2026 and over the long term. Each participant's forecast is based on information available at the time of the meeting, as well as their assessment of appropriate monetary policy – including the path of the federal funds rate and its long-term value, as well as assumptions about other factors that may affect economic outcomes.
A statement issued after the FOMC meeting said recent indicators indicate that U.S. economic activity has been expanding steadily. Job growth has slowed in recent months but remains strong and unemployment remains low. Inflation remains high.
The statement said the U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses could weigh on economic activity, employment and inflation. The extent of these effects remains uncertain. The Committee remains highly concerned about inflation risks.
The statement said the FOMC seeks to achieve maximum employment in the long term and keep inflation at 2 percent. In support of these targets, the FOMC decided to maintain the target range of the federal funds rate at 5.25% to 5.5%. The FOMC will continue to assess more information and its implications for monetary policy.
The statement also pointed out that while ensuring that the degree of monetary policy tightening can control inflation at the target level of 2%, the FOMC will consider the continuous tightening of monetary policy and the lagging impact of monetary policy on economic activity, inflation and economic and financial development. In addition, the Fed will continue to reduce its holdings of Treasury and agency debt and agency mortgage-backed securities as outlined in its previously announced plan. And reiterated that the FOMC is firmly committed to returning inflation to its target of 2%.
On the same day, the Federal Reserve released a summary of its economic forecasts, which attracted much attention from financial markets. Compared with its June summary, the Fed raised its median real gross domestic product (GDP) growth forecast for this year by 1.1 percentage points to 2.1 percent, and lowered its inflation forecast for this year, the median core personal consumption expenditures (PCE) price index by 0.2 percentage points to 3.7 percent. The dot plot of the rate hike path in the summary shows that the federal funds rate is expected to reach 5.6% by the end of 2023, unchanged from the previous period; The federal funds rate is expected to fall to 5.1 percent by the end of 2024, up 0.5 percentage points from the previous period.
Fed Chairman Jerome Powell said at a press conference after the monetary policy meeting that current interest rates are restrictive and have put downward pressure on economic activity, employment and inflation. Given the progress that has been made in the past, "we do have the ability to be cautious in moving forward". He said the Fed is prepared to raise rates further if appropriate and intends to keep monetary policy at a restrictive level until it can be confident that inflation is continuing to decline toward the set 2 percent target.
The closely watched dot plot of the rate hike path suggests that the Fed is likely to raise rates again this year, raising the target range for the federal funds rate to 5.5% to 5.75%. There is a big divergence in the judgment of the level of interest rates in 2024.
Each shaded circle represents each participant's judgment of the target range for the U.S. federal funds rate. One participant at the meeting did not present a long-term forecast of the federal funds rate.
The dot plot shows a 70.6% probability of the Fed leaving interest rates unchanged in the 5.25%-5.50% range in November, and a 29.4% probability of raising rates by 25 basis points to the 5.50%-5.75% range. The probability of keeping interest rates unchanged in the 5.25%-5.50% range by December is 56.1%, the probability of a cumulative rate hike of 25 basis points to the 5.50%-5.75% range is 37.9%, and the probability of a cumulative rate hike of 50 basis points to the 5.75%-6.00% range is 6.0%.
Since the launch of the current rate hike cycle in March last year, the Fed has raised interest rates 11 times. The next regular monetary policy meeting will be held from October 31 to November 1.
Brokerage Fireline interpretation
CICC: U.S. interest rates may stay high for a long time
CICC research report pointed out that the Fed's September FOMC meeting stood still, in line with expectations. Officials have sharply raised their forecasts for GDP growth this year, and a "soft landing" may have become a baseline scenario. The dot plot preserves the possibility of a rate hike in the fourth quarter, with expectations of a rate cut of 50 bp next year and a clear signal of higher for longer. The meeting also conveyed an important message that the Fed believes that the real neutral rate may have been raised, and that the widening term premium has also driven interest rates higher. We believe that under the superposition of many factors, US interest rates may stay high for a long time, and the market should no longer linger on the era of low interest rates that will eventually pass.
CITIC Securities: The probability of the Fed not raising interest rates in November is still relatively high The first interest rate cut may be postponed to the second half of next year
CITIC Securities Research Report pointed out that the Fed's September interest rate meeting kept interest rates unchanged, in line with market expectations. The dot plot shows that the end rate of interest rate hikes this year is still 5.6%, but compared with the annual interest rate target level after the June interest rate meeting, it once again sends a "higher for longer" signal to the market, and the economic forecast has significantly improved this year's growth forecast. Powell's speech was generally neutral, focusing on balancing market expectations, but mentioned that neutral rates could rise. We maintain our previous judgment that the probability of the Fed not raising interest rates in November is still relatively high, but the first rate cut may be postponed until the second half of next year. In the short term, we expect the US dollar index and US Treasury interest rates to remain volatile at high levels, and US stocks may remain prone to fall and difficult to rise.
Deppon Securities: It is expected that it will be difficult for the Fed to start cutting interest rates before the second half of 2024
Lu Zhe, chief economist of Deppon Securities, believes that in the short term, the recovery of commodity prices and the strike of US auto manufacturing workers may bring upside risks to inflation, or push up the probability of raising interest rates in November again. In the medium and long term, the tail risk of a second rise in inflation from energy, replenishment, supply chain and demand resilience means that there is still a distance to cut interest rates, and it is expected that the Fed will not be able to start cutting interest rates before the second half of 2024.
Caitong Securities: There is still a possibility of a recession, when interest rates may be passively cut
Chen Xing, chief analyst of Caitong Securities, believes that the asset book losses of financial institutions caused by interest rate hikes are difficult to properly solve before interest rate cuts, and the banking crisis is not over. Although the Fed's use of liquidity tools has fallen recently, it is still at a high level, and existing risks are more concentrated in the small and medium-sized banks and non-bank institutions. As restrictive interest rates continue, there is still the possibility of a recession, at which time interest rates may be passively cut.
Source: Securities Times, China Fund News, CICC, CITIC Securities, Deppon Securities, Caitong Securities
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