Financial Services Association, July 31 (Editor: Xiaoxiang) As time enters the second half of 2024, along with the temperature in the northern hemisphere, it is becoming more “hot”, as is the financial market's expectation that the Federal Reserve will cut interest rates during the year. Tonight, a high-profile moment in the global market will undoubtedly come: the Federal Reserve will announce the July interest rate decision at 2 a.m. Beijing time on Thursday.

Although Federal Reserve officials are unlikely to rashly adjust interest rates this week, this meeting will still be one of the most important interest rate meetings of the year. As Nick Timiraos, a famous journalist known as the “New Federal Reserve News Agency,” said, the Federal Reserve has already held four meetings in the first half of this year, and each meeting sees interest rate cuts as an issue to consider in the future. But this time around, inflation and labor-market developments should send a signal to officials — that interest rates are likely to be cut at the September meeting.

Currently, a full year has passed since the last time the Federal Reserve raised interest rates (July last year). Federal Reserve officials, including Chairman Powell, have actually always weighed the pros and cons of cutting interest rates too soon and waiting too long. While visiting Capitol Hill earlier this month, Powell even told lawmakers, “The goal of reducing the inflation rate to 2% by the Federal Reserve while maintaining the healthy development of the labor market is a top priority that keeps me up all night.”

So, has the current state of operation of the US economy and inflation met the conditions for the Federal Reserve to “predict” the imminent commencement of interest rate cuts? Tonight, will the Federal Reserve release the “ultimate trailer” for the September interest rate cut, as most market participants expected?

Are the conditions for the Fed to cut interest rates more mature?

In the past few weeks, many well-known market figures have called on the Federal Reserve to cut interest rates this week. Among these people, there is even no shortage of senior US Federal Reserve retired “veteran cadres” such as former Federal Reserve Vice Chairman Alan Binder (Alan Binder) and former New York Federal Reserve Chairman William Dudley (William Dudley).

Of course, based on current interest rate market expectations, the possibility that the Fed will rashly cut interest rates tonight is still minimal — CME's US Federal Reserve observation tool shows that this probability is only 4.1%, which can almost be completely ruled out...

However, no matter what angle you look at it from, the conditions for the Federal Reserve to cut interest rates are indeed becoming more and more mature now. Over the past few weeks, as the downward path of US inflation has returned to the right track, combined with the double risks facing the economy, the path of the Federal Reserve's policy shift has also become more clear. The pricing in the interest rate market has now completely “100%” locked in interest rate cuts in September. This also makes almost everyone in the market expect that at tonight's meeting, the Federal Reserve will be able to officially “open the door” to the September resolution six weeks from now...

At the macro level, the Federal Reserve's recent willingness to cut interest rates reflects three factors: good news about inflation, signs that the labor market is cooling, and changing considerations that weigh the risks of allowing inflation to be too high and causing unnecessary economic weakness.

On Friday, the US core PCE price index for June, which excludes food and energy prices, fell to 2.6% from 4.3% in the same period last year and 5.6% from a peak of two years ago. Even Williams, the No. 3 person in the Federal Reserve, acknowledged that the decline in inflation was comprehensive, and refuted concerns from the outside world that it would be extremely difficult to bring the inflation rate all the way back to the Fed's 2% target.

“This isn't the (anti-inflation) 'last mile' or some particularly difficult part. The different inflation indicators are moving in the right direction and are quite consistent,” Williams said.

At the same time, recent labor market conditions have actually given the Federal Reserve a greater sense of urgency to take easing action as soon as possible. The US unemployment rate has climbed from 3.7% at the end of last year to 4.1%, mainly because recruitment activity has slowed and new workers or those returning to the labor market take longer to find work. The 3-month average unemployment rate has risen 0.43 percentage points from its lowest point in the past 12 months, and is only one step away from hitting 0.5% of the famous recession warning indicator “Sahm Rule (Sahm Rule).” This has already caused many people to worry that “it will be too late” if the Federal Reserve does not cut interest rates again...

Some Federal Reserve officials have already predicted that they may use it as a reason to convince their colleagues that it is time to cut interest rates. “We set the current interest rate when the inflation rate was over 4%, but now we'll leave the inflation rate at 2.5%. This means that since we maintained this interest rate, we have tightened it drastically,” Chicago Federal Reserve Chairman Goulsby recently said in an interview. “You only want to maintain this restriction when necessary, but in my opinion, the current economic situation no longer seems overheated.”

What are the highlights of tonight's monetary policy statement?

For investors, given that the focus of tonight's Fed interest rate decision is not on whether interest rates will be cut this month, but on whether the Fed will forecast the next (September) meeting — especially whether interest rates will be cut at the next (September) meeting. Therefore, in the monetary policy statement issued at 2 a.m. Beijing time, any subtle changes in the details of the statement will be worth paying attention to.

Subadra Rajappa, head of US interest rate strategy at Société Générale, pointed out that the Federal Reserve is expected to change the wording in the statement to suggest cutting interest rates at the September meeting.

As explained in our preview yesterday, “New Federal Reserve News Agency” Nick Timiraos once said that the seemingly insignificant wording changes in the Fed's statement will be significant in outlining the prospects for interest rate cuts in September, including:

The first paragraph of the statement describes recent inflation and labor market developments; the second section describes the risk balance between returning the inflation rate to the Fed's 2% target and maintaining a strong labor market; the third paragraph, which includes key wording known as forward-looking guidance, will clarify the expectations of officials before cutting interest rates.

While looking ahead to tonight's Federal Reserve decision, we might as well first review what the Federal Reserve actually said in the June statement...

In the first paragraph of the Federal Reserve statement, industry insiders mentioned the two most likely changes to the terms: one is “modest” (modest) and the other is “elevated” (elevated). Regarding the term “moderate,” some industry insiders believe that the FOMC may not say that inflation has made “moderate” progress, as in June, but directly that further progress has been made. In terms of “elevated” (elevated), there are also people who think that the Federal Reserve may completely remove or revise the expression “elevated.”

Relevant text from the first paragraph of the Federal Reserve's June statement: Inflation has eased over the past year, but remains high. In recent months, further modest progress has been made in meeting the Commission's 2% inflation target.

Regarding the second paragraph of the statement, it is also worth paying attention to how the Federal Reserve will describe the risk balance between pulling the inflation rate back to the Fed's 2% target and maintaining a strong labor market. One change in Goldman Sachs's forecast is that the Federal Reserve will say “the risk of achieving employment and inflation targets over the past year is' in '(rather than' tending ') to a better balance.”

Relevant text from the second paragraph of the Federal Reserve's June statement: The Committee aims to achieve maximum employment and 2% inflation targets in the long term. The Committee believes there has been a better balance between the risks of meeting employment and inflation targets over the past year. The economic outlook is uncertain, and the Committee remains very concerned about the risk of inflation.

Regarding the third paragraph of the statement, if the Federal Reserve has more clear hints of interest rate cuts, then it may also revise the relevant guidelines. The committee may point out that there is more confidence that inflation is moving towards the 2% target, which indicates that it expects to cut interest rates soon. Some industry insiders also said that once the Fed begins to downgrade the description of inflation to a milder rhetoric than “elevated,” it may also cause the Fed to revise another key sentence in its current policy statement — that is, it is inappropriate to lower the target range of interest rates until there is greater confidence that inflation will continue to move towards 2%.

Relevant text from the third paragraph of the Federal Reserve's June statement: When considering any adjustments to the federal funds rate target range, the committee will carefully evaluate future data, changing prospects, and risk balance. The committee believes it is inappropriate to lower the target range until there is greater confidence that inflation will continue to move towards 2%...

Finally, it is also worth paying attention to whether officials will vote against the current Federal Reserve resolution because they support interest rate cuts in July. Some economists say they will pay attention to whether Chicago Federal Reserve Chairman Goulsby, the big dovish within the Federal Reserve, will become the first policymaker to vote against the Fed's decision in more than two years. After Cleveland Federal Reserve Chairman Meester retires in June, Goulsby will have the right to vote on the Federal Reserve's decision in the second half of the year.

What will Powell's press conference say?

The Federal Reserve's monetary policy statement is likely to trigger the first wave of market conditions at 2 a.m. Beijing time on Thursday. However, in the end, the “right to explain everything in words” will undoubtedly still depend on Federal Reserve Chairman Powell's hawkish attitude half an hour later...

Many analysts said that Powell may be asked by reporters about the future of the Federal Reserve's next meeting in September, as well as the rest of the year and the pace of easing next year. While he may welcome recent good news on inflation, he may also revert to the Federal Reserve's standard wording — that its policy path will “depend on data,” and the central bank is “meeting by meeting” to set policies. And if Powell can directly hint that interest rates will be cut next month, it is undoubtedly expected to be a major benefit for the market.

Timiraos said that Powell could not have been so vocal about what will happen after the first rate cut, but considerations surrounding this topic may be an important part of private discussions among officials this week, because once policymakers start cutting interest rates for the first time, they will inevitably face more questions about when to cut interest rates again.

Since last year, Fed officials have predicted interest rate prospects in their quarterly economic forecasts (bitmap), indicating that once they take their first action, they will cut interest rates approximately once every quarter — by a quarter of a percentage point each time.

Federal Reserve officials will not release a new bitmap this week's resolution, but they will be making quarterly updates in September, which may enable them to show whether the above predictions are still reasonable. Of course, if the labor market weakens further between now and September, officials are likely to continue taking (interest rate cuts) actions during the first few meetings. The Federal Reserve will hold another interest rate meeting in November and December.

Furthermore, Powell may also be asked tonight about the extent of his concerns about the cooling of the labor market and what situation would constitute an “unexpected weakness” requiring countermeasures. The US non-farm payroll data for July will be released two days after the interest rate meeting (Friday).

Derek Tang, an economist at LH Meyer/Monetary Policy Analytics, said, “Powell may be asked what conditions will meet the standard of 'unexpected weakness', so that they can re-evaluate whether a quarterly interest rate cut of 25 basis points is sufficient.”

Finally, Powell may be asked again about the November presidential election, but he will almost certainly repeat his standard answer — that political factors have no influence on the Federal Reserve's interest rate decisions.

The following is a summary of a series of forward-looking reports on the Fed's decisions related to the Financial Services Association, which also covers aspects such as market background and historical trends...

The signal to cut interest rates is coming! New Federal Reserve News Agency: This week's Fed resolution will focus on the “four major highlights”

The ultimate forecast for interest rate cuts? The Federal Reserve shouted that the “modifier” of high inflation for nearly three years may change next week

The “Big Seven” lost a “Google” in 20 days! Whether US stocks can rotate healthily may depend on the Federal Reserve

The amazing “FOMC effect”! US stocks and US debt bulls have maintained a “total victory” in the past six weeks when the Federal Reserve has discussed interest rates