The basis for adjusting the Fed's policy is often prepared in advance, and this time may not be an exception.
Although the Federal Reserve insists that it is not in a hurry to cut interest rates, it has multiple ways to influence the economy and may soon begin to use more subtle tools to lower interest rates, which will still have a real impact on businesses and households. Product structure, 10-30 billion yuan products operating income of 401/1288/60 million yuan respectively.
The Federal Reserve controls short-term interest rates most directly by setting a target range for the federal funds rate, that is, the overnight interbank lending rate. On Thursday morning, the Fed kept its target rate unchanged and expected to cut rates only once this year, less than the three expected in March.
However, even without cutting interest rates, the Fed can influence important other interest rates that are also important for the overall operation of the economy, such as the yield on U.S. government bonds. All these interest rates may be indirectly affected by expectations of the Fed's interest rate path, in both the short and long term.
In a sense, this process has already begun. Over the past few weeks, the yield on 10-year U.S. Treasury notes has fallen from 4.7% at the end of April to its current level of 4.27%. On Thursday morning, the yield briefly rose to 4.33% after the Fed's dot-plot chart showed only one rate cut this year, but later in the day, it fell back to around 4.27% after weak performance in the producer price index (PPI).
The yield on 10-year U.S. Treasury notes has a huge impact on long-term loan rates (such as mortgages or large-project loans provided to real estate developers), which in turn affect the U.S. real economy.
What is important is that the Fed policymakers' expectations for future rate cuts were formed after unexpectedly weak May consumer price index (CPI) reports were released on Wednesday. The data further demonstrated that while inflation remained stable at the start of the year, it was declining steadily. The core CPI, which excludes food and energy, has remained unchanged or declined year-on-year for 15 consecutive months.
Krishna Guha, global policy and central bank strategy chief at Evercore ISI, wrote in a report on the Fed's outlook: "The interest rate path appears a bit inertial and stale," policymakers are reluctant to "change their expectations based on the latest CPI data".
Fed Chairman Powell said in a news conference on Thursday, "We need to see more good data to give us confidence that inflation is moving up to our 2% target." More such good data may appear in the next two monthly CPI reports, prompting the Fed to start expressing an open attitude towards rate cuts.
The key focus of economists and investors now is whether the Fed will take action in September or later (possibly December) for its first move. But between now and then, the Fed will have plenty of opportunities to make its intentions clearer.
Most notable is the next policy-making meeting, which will end on July 31. The Fed will not update its rate expectations, but will issue a policy statement outlining its view of recent economic conditions, and of course, Powell will hold another news conference. Both of these things can be used by the Fed to express increasing confidence in the weakening of inflation.
Although the Fed will not meet in August, the highly anticipated Jackson Hole Economic Policy Symposium will be held that month, where Fed officials will gather with key economists and others to discuss monetary policy and the global economic situation. Fed presidents have historically used speeches at this forum to signal major shifts in Fed plans or thinking.
The reality is that at least since former Fed Chairman Ben Bernanke served, the Fed's actual policy adjustments have often just been a formality, with the groundwork already laid. This time may be no exception.