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· Overview ·
The Federal Reserve kept interest rates unchanged. On January 31, 2024, the Federal Reserve announced that it would keep interest rates unchanged for the fourth consecutive time since September 2023 that interest rates will remain unchanged in the range of 5.25%-5.50%.
Fed Core Attitude. Regarding economic inflation, the Fed statement stressed that the economy is expanding steadily, and that inflation has eased somewhat, but pressure remains. Emphasizing that the risks to achieving employment and inflation targets are leveling off. Fed Chairman Jerome Powell also said that the economy has made good progress, inflation has eased, and the Fed remains focused on the dual mission of employment and inflation.
On the one hand, the Fed's statement removed the reference to further tightening, and Powell also pointed out that the policy rate has clearly entered restrictive territory, and the policy rate may have reached a peak, and it may be appropriate to adjust monetary policy at some point during the year. This means that the Fed may not tighten on the margin, and a rate cut this year is a high probability event.
On the other hand, the Fed statement stressed that it would not be appropriate to cut interest rates until the Fed has greater confidence that inflation will continue to move closer to 2%. Powell has also repeatedly stressed that it is not appropriate to cut interest rates until he is convinced that inflation is moving towards 2% in a sustainable way. This means that the Fed is balancing the risks of both overtightening and secondary inflation from premature easing, and may not cut rates so quickly.
According to CME's observation, as of February 1, the market expects that the Fed will most likely not cut interest rates in March, and the timing of interest rate cuts will be in May, and it is still expected that there will be about 6 interest rate cuts.
In our view, under the influence of the slower downturn in the US economy, the decline in core inflation in the US may not be smooth sailing, and the Fed still needs to wait for interest rate cuts.
Risk warning: U.S. monetary policy adjustment exceeded expectations.
1
Leave interest rates unchanged
Keeping interest rates unchanged for the fourth time in a row. On January 31, 2024, the Federal Reserve's January FOMC meeting decided to continue to maintain the federal funds rate range at 5.25%-5.50%, which was unanimously approved. This is the fourth consecutive time since September 2023 that the current interest rate has been maintained.
As planned, the Fed will continue to reduce its holdings of U.S. Treasuries, agency debt, and agency mortgage-backed securities, capped at $95 billion per month ($60 billion in Treasuries and $35 billion in MBS).
2
Statement: The economy is stable and inflation is high, and the statement has changed slightly compared to December 2023. On the economic front, it was emphasized that the economy is expanding steadily. The phrase "growth in economic activity has slowed from a strong pace in the third quarter" was revised to "economic activity has been expanding steadily". Maintain the statement that "job growth has slowed but remains strong, and the unemployment rate has remained low".
Fed Chair Jerome Powell also said that the economy is making good progress, the labor market remains tight, job growth remains strong, and labor demand continues to outstrip supply. However, higher interest rates have put pressure on corporate fixed investment, with nominal wage growth slowing and job openings decreasing.
On inflation, it was stressed that inflationary pressures remain high. For example, "inflation has eased over the past year, but remains elevated", and "the economic outlook is uncertain and the Committee remains highly concerned about inflation risks". However, the Fed emphasizes the dual mission of monetary policy. For example, "the Committee seeks to achieve maximum employment and 2% inflation over the long term" and "the Committee judges that the risks of achieving the employment and inflation targets are becoming balanced". Powell also said that inflation has eased, but it is still above target, and evidence of continued downward inflation is still needed.
Regarding monetary policy, it was stressed that interest rate cuts still need to wait. On the one hand, it reiterates that "in considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess new data, the changing outlook, and the balance of risks", and deletes expressions such as "in determining the extent of any additional policy tightening, the Committee will consider the cumulative tightening of monetary policy, the lag in which monetary policy affects economic activity and inflation, and economic and financial developments", i.e., the Fed may not tighten again at the margin. On the other hand, it suggests that "it is not appropriate to lower the target range until there is greater confidence that inflation will continue to move closer to 2%", that is, the Fed may have to wait for interest rate cuts.
In addition, the relevant statement of Bank of America has been deleted. Removed "the U.S. banking system is robust and resilient" and "tighter credit conditions for households and businesses are likely to weigh on economic activity, employment and inflation, the extent of which remains uncertain".
3
Powell: Interest rate cuts need to wait for interest rates, Fed Chairman Powell pointed out that the policy rate has clearly entered restrictive territory, the risks of achieving the dual goals of employment and inflation are gradually balancing, and the impact of tightening policy on inflation has been seen. He also stressed that the policy rate may have reached its peak. This means that the Fed will not tighten any more at the margin. Regarding rate cuts, Powell noted that adjusting monetary policy at some point during the year may be appropriate, and that cutting policy rates too late could weaken the economy too much, with almost all committee members agreeing that a rate cut this year is appropriate. This means that it is a high probability event for the Fed to cut interest rates this year. However, Powell further said that inflation is still high, that there is still "uncertainty" about whether inflation will continue to make progress, that it is prepared to maintain the current policy rate for a long time if necessary, that a premature rate cut could lead to a reversal of inflationary progress, and that he does not believe that the Fed may cut rates in March. This means that the Fed is worried about the risks of overtightening and secondary inflation from premature easing, and is balancing the risks of the two, and the rate cut may not be so fast. In addition, Powell noted that balance sheet reduction has progressed well so far, that there will be an in-depth discussion of the balance sheet at the March meeting, and that there is no need to wait until the overnight reverse repo is completely down to zero before slowing down the balance sheet reduction process. This means that the Fed may adjust the balance sheet reduction process ahead of schedule. According to CME's observation, as of February 1, the market expects that the Fed will most likely not cut interest rates in March, and the timing of interest rate cuts will be in May, and it is still expected that there will be about 6 interest rate cuts. In our view, under the influence of the slower downturn in the US economy, the decline in core inflation in the US may not be smooth sailing, and the Fed still needs to wait for interest rate cuts.
Risk warning: external demand has fallen, and the policy is less than expected.
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