In the early morning of September 21 (Thursday), Beijing time, the Federal Reserve will announce its monetary policy resolution for September. The market does not expect the Fed to change its interest rate policy stance, nor make any clear statement on the immediate future.
Currently, the CME Fed's monitoring tool shows that the suspension of interest rate hikes in September was almost a “foregone conclusion”. The probability of choosing to raise interest rates by 25 basis points is only 1%.
The probability of suspending interest rate hikes in November is 69%, the probability of raising interest rates by 25 basis points is 30.7%; the probability of suspending interest rate hikes in December is 58.1%, and the probability of raising interest rates by 25 basis points is around 36.8%.
Four major highlights
However, before the meeting was held, Fed observers said that what they should focus on would be the Fed's economic forecasts, and they were trying to find some clues about the Fed's views on the economy and interest rate prospects from the “Economic Forecast Summary.”
Bank of America (Bank of America) senior US economist Aditya Bhave said:
“For the market, the Economic Forecast Summary is arguably the most important aspect of the September meeting.”
Among them, economists are most concerned about the four things:
1. Will the Fed maintain the forecast of cutting interest rates four times in 2024?
Federal Reserve officials have insisted that they intend to keep the benchmark interest rate high to continue to lower the inflation rate. Currently, the federal funds rate target range is 5.25%-5.0%.
In June of this year, Fed officials expected that next year it would be equivalent to cutting interest rates four times, by 25 basis points each time. Some economists believe that the Fed will not cut interest rates that many times.
Bhave said that the Fed may predict that interest rates will only be cut three times next year, by 25 basis points each time.
“They've been promoting the idea of 'keeping interest rates higher for a longer time', and I think they'll go further in this direction. They will say that since the economy is still stable, interest rate cuts are not that necessary anymore.”
The median of the bitmap may even show that interest rates have been cut less frequently.
“If this were to happen, it would be an austerity stance that far exceeds expectations for the market.”
2. How many Fed officials think interest rates have peaked?
In June of this year, out of 18 Fed officials, only 6 believed that the Fed had completed raising interest rates.
Evercore ISI Vice Chairman Krishna Guha said he believes the total number of officials holding this view will rise to nearly half of the committee.
“We think Powell will call this situation evenly matched, rather than a clear inclination to raise interest rates further, thus keeping market expectations around 50-50.”
3. What adjustments will the Fed make to the economic forecast?
Bank of America economists believe that given the strong momentum of the economy, the Fed's forecast for economic growth in 2023 will be raised from 1% to 2%.
As far as inflation is concerned, the Fed is likely to lower the core personal consumption expenditure price index (PCE) inflation forecast from 3.9% to 3.7%. However, given the economy's steady performance, the core inflation rate forecast for 2024 is likely to rise to 2.8%.
The Federal Reserve is likely to predict that inflation will hit 2% in 2026.
4. Will the Fed's forecast of neutral interest rates begin to rise?
Economists think the Fed may increase its estimate of longer-term neutral interest rates. This is even more significant at a deeper level. Yelena Shulyatyeva, senior economist at BNP Paribas (BNP Paribas), said this meant “an increase in the overall interest rate level.”
This means that Americans may not have seen the ultra-low mortgage and other loan interest rates that were commonplace after the 2008 global financial crisis.
Currently, the Fed expects a neutral interest rate of 2.5%, but estimates range from 2.375% to 3.625%.
Powell's speech or disrupts the market
However, it is worth noting that although the Fed is expected to keep its policy interest rate unchanged this week, Powell's remarks may still disrupt the market.
The market expects Powell's statement to follow what he said at the Jackson Hole, Wyoming seminar in August and the Federal Reserve's press conference in July, but market analysts say that the question-and-answer session with reporters and the latest “bitmap” of interest rate predictions by policymakers may provide information affecting the market.
Steve Sosnick, chief strategist at Interactive Brokers, said that people generally think this conference will stand still, and that doesn't mean it's irrelevant.
Currently, investors expect that the Fed may start cutting interest rates again before the middle of next year. Analysts said that any factor that might dispel their thinking would suppress the US stock market while boosting US Treasury yields and the trend of the US dollar.
Charles Schwab chief market strategist Liz Ann Sonders said that the Q&A session at the press conference after the Fed meeting may reveal some clues; the market influence of the Q&A session is usually greater than Powell's speech.
“This 45-minute to 1-hour session is often more likely to influence market trends. The key is their views on maintaining high interest rates over a longer period of time and expectations of interest rate cuts in 2024, and whether Powell will refute this.”
Since the beginning of August, more and more data suggests that the US economy may finally begin to respond to the pressure brought about by the Fed's most aggressive interest rate hike since the 1980s.
There are also signs that the booming post-pandemic labor market may begin to cool down. According to the US Department of Labor's monthly employment report, there were less than 200,000 new jobs in August. The data for the previous two months was also revised down, and the unemployment rate rose to 3.8%. Meanwhile, the CPI increase has been increasing for two consecutive months.