Source: Glonui.

On Friday evening, the Federal Reserve released its Monetary Policy Report for the first half of 2024 submitted to Congress.

The report summarized the state of the US economy in the first half of this year and the implementation of the Federal Reserve's monetary policy, which is almost consistent with the discussions of past Federal Reserve meetings.

In the report, the Federal Reserve stated that inflation slowed significantly last year, and has improved slightly so far this year, but still remains above the Federal Reserve's target of 2%. Employment growth is strong, the unemployment rate remains low, and the labor market has tended towards balance in the first half of the year.

The Federal Reserve believes that cutting interest rates is inappropriate before confidence in continued progress towards 2% inflation increases. Premature or excessive reduction in policy restrictions may cause inflation to reverse. At the same time, too late or too little reduction in policy restrictions may excessively weaken economic activity and employment. When considering any adjustments to the federal funds rate target range, the committee will carefully evaluate the upcoming data, changing prospects, and risk balance.

About the US economy...

Inflation: Despite the significant slowdown in personal consumption expenditure (PCE) price inflation last year and moderate progress this year, it still remains above the Federal Reserve's long-term target of 2%. In terms of year-on-year data, inflation of core commodity prices and housing service prices continued to slow at the beginning of this year, however, inflation of core non-housing service prices remained stable after a significant slowdown last year. However, long-term inflation expectations are still consistent with the Federal Reserve's policy goals.

Labor market: In the first half of this year, the labor market continued to rebalance and maintained a strong momentum. While employment growth was stable and the unemployment rate remained low, labor demand weakened slightly. Vacancies in many areas began to decrease, and labor supply continued to increase with the support of 'strong immigration.' The balance between labor supply and demand seems to be similar to that before the new crown epidemic.

Economy and finance: After strong growth in the second half of last year, the growth rate of real gross domestic product (GDP) in the first quarter slowed slightly. The main reason for the economic slowdown is that the volatile net export and inventory investment categories have significant negative effects; the growth of domestic private final purchases (including consumption expenditure, business fixed investment, and residential investment) also declined slightly in the first quarter, but still remained strong overall.

Overall, the fiscal situation is somewhat restrictive. Since the beginning of this year, US Treasury yields and market implied federal funds rate expected paths have increased net, while large-cap stock indexes have risen. Most households and businesses can still obtain credit, but interest rates are high, putting pressure on financing activities. The delinquency rate of small business loans is slightly higher than before the epidemic, and the delinquency rates of credit card, auto, and commercial real estate loans continue to rise, exceeding the long-term average level.

Financial system: The balance sheet of non-financial enterprises and households remains strong, and the ratio of comprehensive credit to GDP is close to the lowest level in 20 years. Corporate debt continues to decline in real value, and most listed companies' debt-paying ability remains robust, largely due to strong profits, sufficient cash buffers, and low borrowing costs of existing debt.

However, there are also signs of fragility in the financial system. In terms of asset markets, the interest rate spreads of corporate bonds are narrowing, stock price gains are faster than expected returns, and residential property prices remain high relative to market rents. In addition, in the banking industry, some banks' fair value losses on fixed-rate assets are still quite considerable, although most banks continue to report robust capital levels. In addition, some banks' commercial real estate investment portfolios are under pressure. Some banks still rely heavily on uninsured deposits.

International situation: After the weakness in the second half of last year, foreign economic activity seems to have improved in the first quarter of this year. In developed foreign economies, although growth remains at a medium level due to the impact of restrictive monetary policy, the lower inflation rate has increased actual household income. In emerging market economies, export recovery and the continuous growth of global demand for high-tech products have driven economic growth, particularly in China, where economic activity increased significantly in the first quarter.

Since the middle of last year, foreign overall inflation rates have continued to decline, but the pace of deflation is slow and uneven between countries and economic sectors. Despite this, many foreign central banks have noticed the progress in lowering inflation rates, and some central banks have begun to cut policy rates. A notable exception is Japan, which ended its negative interest rate policy and yield curve control in March despite sustained high inflation. The US dollar trade-weighted exchange rate has risen significantly, consistent with the widening gap between US and foreign interest rates.

About monetary policy

About the mmf policy.

Interest rate policy: Since July 2023, the Fed has kept the policy rate target range at 5.25%-5.5%. Although the risks of achieving employment and inflation targets have become more balanced over the past year, the committee believes that the economic outlook is uncertain and highly attentive to inflation risks.

The Fed emphasized that they do not consider a rate cut appropriate until they have greater confidence that inflation will continue to move toward 2%. The Fed stressed that premature or excessive rate cuts could lead to a reversal of inflation progress. At the same time, too little or too late rate cuts could inappropriately weaken economic activity and employment. When considering any adjustment to the federal funds rate target range, the Fed will carefully assess upcoming data, changing outlooks and risk balances.

Balance sheet policy. The Fed continues to significantly reduce its holdings of U.S. Treasury and agency securities in a predictable manner. Starting in June 2022, principal payments on securities held in the System Open Market Account will only be reinvested to the extent that they exceed monthly caps. Under the policy, the Fed has reduced its securities holdings by about $1.7 trillion since beginning to shrink its balance sheet.

The Fed said it intends to maintain the level of securities holdings consistent with the effective execution of monetary policy with adequate reserve balances. To ensure a smooth transition of reserve balances from abundant to ample, the Federal Open Market Committee slowed the pace of securities holdings reduction in early June and intends to halt the reductions when reserve balances are slightly above the level judged to be consistent with committee determination of ample reserves.

It is worth noting that Fed Chairman Powell will testify before the Senate Banking, Housing, and Urban Affairs Committee next Tuesday and before the House Financial Services Committee next Wednesday.

At that time, lawmakers may pressure Powell on two major issues: rate cuts and significant reforms to bank capital regulations.

Editor/Lambor