On Thursday, June 23rd, Federal Reserve Chairman Powell's congressional semi-annual monetary policy hearing entered its second day. In front of the House Financial Services Committee, he reiterated the hawkish view that "the Fed's commitment to combat high inflation in the United States is unconditional."

Powell was asked on ThursdayWhen the Fed's interest rate hike slows the economy sharply but does not reduce inflation quickly, how will they deal with the trade-offs they may face? In this case, the central bank is reluctant to shift from raising interest rates to cutting them until it sees clear evidence that inflation is falling in a convincing way, Mr Powell said."We cannot fail in this respect. We really have to reduce inflation, and before we declare victory of any kind, we will want to see evidence that it is indeed falling. "

Asked how serious the Fed's commitment to fighting high inflation is, Powell said:

"[our commitment] is unconditional. The US labour market is a bit unsustainably overheated, and we are too far from our 2 per cent inflation target. "

Multiple analysts pointed out that Powell did not mention the word "unconditional" on the first day of the Senate hearing, although this important phrase existed in the central bank's semi-annual monetary policy report submitted simultaneously to Congress. Not mentioning the word is not as hawkish as the market expected.

From this it can be inferred thatMr Powell revived the word yesterday in an attempt to reiterate his hawkish position and send a signal that aggressive interest rate hikes will continue. Evercore ISI said"unconditional" means that the Fed is willing to accept higher unemployment and recession, as long as it eventually reduces inflation.

On the whole, Powell's hawkish posture is no different from that of the first day. He reiterated that the US economy could cope with higher interest rates and even predicted that growth in the second half of the year should still be "quite strong". As the economy normalizes, prices should fall and return to normal.

On the first day, Powell rarely admitted that aggressive interest rate hikes could plunge the US economy into recession. Although "the Fed's intention is to bring US inflation down to 2 per cent while maintaining the strong performance of the job market", achieving such a soft landing is quite challenging.

Yesterday, Maxine Waters, the Democratic chairman of the House Financial Services Committee, said she hoped the Fed would deal with inflation without sacrificing jobs. Many members mentioned this remark in the two-day hearing, which shows that the market is worried.

When talking about inflation, Powell repeatedly mentioned that the main function of the Fed is to use tools to influence the demand side, not the supply side, and that the current "high inflation in the United States is one of the consequences of very strong demand-side".

For two days in a row, he talked about the hindsight around the issue of high inflation.That is, "in hindsight, the Fed does underestimate the high inflation problem in the United States." some analysts said that this represented Powell's veiled admission that the Fed was behind the curve in its actions. He mentioned:

The Fed realised that the supply-side inflation problem showed no signs of slowing down and changed direction. The upward path of US inflation is becoming more and more challenging because of soaring food and fuel prices. The 'only way out' for high inflation in the US is to balance supply and demand. "

He also said that the US financial market is functioning well and the banking sector is in a good state of capital; the US housing market is emerging from a very hot state and is slowing down; and the concentration of the US economy has significantly increased. It is not the job of the Federal Reserve to solve this problem.

Mr Powell said the Fed wanted to stick to its plan but would be flexible if necessary and had to keep inflation expectations at a truly stable level. According to some analysts, the emphasis on the words "flexible" and "appropriate" is like putting soft gloves on the iron fist to combat inflation. Powell and several members of this year's voting committee did say that the pace of interest rate increases in September and beyond needs to be based on economic data and changing prospects.

He said recently that he would not speculate on the Fed's highest policy interest rate under the "worst-case scenario"; that the Fed had not yet decided whether / when to start selling its mortgage-backed securities (MBS); that the Fed refused to raise its inflation target from 2% to 3%; and agreed with President Joe Biden that recession was not inevitable in the United States.

During the Powell hearing, U. S. stocks narrowed their gains, with the Dow and S & P 500 leading the way lower at midday. As he repeatedly reiterated the Fed's hawkish stance, markets continued to worry that aggressive interest rate hikes would inevitably plunge the economy into recession, with 10-year Treasury yields falling sharply in double digits for two days in a row, pushing low to 3% integer digits, erasing all gains since June 10.

The market is heavily repricing! The Fed is expected to end raising interest rates as early as this year and cut interest rates by 50 basis points next year.

On Thursday, the market carried out a massive repricing of the Fed's policy rate. The overnight interest rate swap market suggests that traders are starting to abandon any expectations that the Fed's FOMC will continue to raise interest rates after December 2022.

Traders expect the Fed to raise interest rates by 175 basis points for the rest of 2022, according to the latest data. That means the market expects the Fed to only need to raise interest rates by a whopping 75 basis points, and then policy will not be as aggressive as before.

The remaining 175 basis points in 2022 means two possible scenarios for raising interest rates: one is to raise interest rates by 75 basis points, 50 basis points, 25 basis points and 25 basis points respectively in July, September, November and December; the other is to raise interest rates by 75 basis points, 50 basis points and 50 basis points in July, September and November, respectively, and suspend interest rate hikes in December.

Although Powell said at a press conference after the June FOMC meeting that it was possible to raise interest rates by 75 basis points or 50 basis points in July, based on market expectations and public statements by several senior Fed officials over the past week, a 75 basis point rate hike in July is a high probability event.For example, Federal Reserve Governor Michelle Bowman said on Thursday that she supports the Fed raising interest rates by 75 basis points in July, followed by several increases of 50 basis points. Chicago dove Fed Chairman Evans said Wednesday that it makes sense to raise interest rates by 75 basis points in July.

Eurodollar spreads mean the market expects the Fed to cut interest rates by even a single 50 basis points in 2023.

Last week, the Fed raised interest rates by 75 basis points at its June meeting, the biggest since 1994. The target range of the federal funds rate rose from 0.75% 1.00% to 1.50% 1.75%. The Fed is strongly committed to reducing inflation.

According to the bitmap released by the Federal Reserve in June, officials have sharply raised their expectations of US policy interest rates this year. All officials expect to raise interest rates to more than 3% by the end of this year, and one expects to cut interest rates next year. In terms of the specific interest rate path, officials expect the federal funds rate to rise to 3.4% by the end of 2022, up 1.5 percentage points from the 1.9% expected in March; the federal funds rate is expected to be 3.8% by the end of 2023 and 2.8% in March; the federal funds rate is expected to be 3.4% by the end of 2024 and 2.8% in March.

Many recent economic data in the United States also show weakness.The newly released US Markit manufacturing PMI in June hit a 23-month low, the manufacturing output index fell below the 50 dividing line for the first time in two years, and the initial PMI of the service sector hit a five-month low. Economists said the PMI survey showed that US GDP grew at an annualised rate of less than 1 per cent in June. The data also prompted traders to believe that the US rate hike cycle would end by the end of the year and that market expectations for future rate increases had fallen sharply.