1

At 2 a.m. on July 30, investors around the world once again focused on the Fed's new interest rate meeting. So what's the big new message this time?

1. The target range of the federal funds rate remains at 0-0.25%.

The Fed reiterated last month that it would "at least" maintain the current level of bond purchases. That is, "in the coming months, the Fed will increase its holdings of US Treasuries and institutional residential and commercial mortgage-backed securities at at least the current rate to maintain a stable market operation."

In addition, the Fed will continue to provide large-scale overnight and regular repo operations, while closely monitoring market conditions and preparing to adjust its plans as appropriate.

Extend the validity of the temporary dollar swap lines and temporary repurchase agreement instruments with nine central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand, which were launched in March this year, until March 31 next year.

4. With regard to the US economy, the Federal Reserve statement once again reiterated that the COVID-19 epidemic has caused great difficulties to the US and global economies. It also said that "the current public health crisis will put severe pressure on US economic activity, employment and inflation in the near future, posing a major risk to the economic outlook in the medium term."

After the announcement of interest rates, Federal Reserve Chairman Powell attended the press conference. There are several key points as follows:

Powell said that the current economic downturn is very severe. The US GDP contraction in the second quarter is likely to be the largest on record, the economic development path is unusually uncertain, and the economic path depends on the level of government action.

On the inflation side, Powell said that the epidemic has a significant impact on inflation, higher food prices may increase the burden, but fundamentally, the epidemic is an anti-inflationary shock, long-term inflation expectations are quite stable, and the Fed has not even considered raising interest rates.

In terms of employment, Powell said that the economic outlook is unpredictable, the employment situation is not clear, and even if the economy resumes smoothly, it will take a long time for people to return to work and achieve economic recovery. Many people will need sustained support after losing their jobs, and many people in the entertainment and leisure industry will not return to work, but the Fed aims to create an environment conducive to employment.

On monetary policy, Powell said the Fed's policy position is appropriate and can adjust forward guidance and asset purchases if necessary. Maintaining credit flows is critical to economic recovery, lending programs have boosted the expansion of private credit, and the Fed is committed to using all its tools and keeping its lending instruments unchanged. But Powell reiterated that the Fed can only make loans, not allocate funds, and has not considered buying stocks.

In terms of fiscal policy, Powell said that fiscal policy can solve problems that the Fed cannot solve. The US fiscal response is strong, rapid and extensive, but economic recovery needs more fiscal policy, and both parties need additional fiscal support.

Both from the meeting statement and from the press conference, the Fed sent a signal to the market to maintain the current easing, in line with market expectations as a whole.

2

After the Fed announced the interest rate decision, there was a brief turmoil in overseas financial markets.

In the US stock market, the three major indexes opened high, dived slightly in late trading, and then pulled back to close strong. By the close, both the Nasdaq and the S & P 500 were up more than 1%, and the Dow was up 0.61%.

(source: Wind)

The collective rise in US stocks stems from the Fed's continued dovish style.

However, the dollar index continued to fall during the interest rate negotiations, falling to 93.2529 at one point, its lowest level in two years. Since may 18, the dollar index has fallen freely from around 100 to around 93, down as much as 7%.

(source: Wind)

If we look at the US debt, we will see a collective decline. Among them, the yield on five-year US bonds fell below 0.25% for the first time in intraday trading, falling as low as 0.248%, a record low. The yield on 10-year Treasuries fell another 1.19% to 0.574%, within walking distance of the all-time low of 0.502% set on March 8.

(source: British financial information)

And gold continues to move higher. During the Fed meeting, COMEX gold futures rose sharply, rising as high as $1974.9 / oz, continuing to hit an all-time high, and then recovered after a short-term correction.

(source: Wind)

In the past few months, the Fed has launched an unprecedented easing program in response to the impact of the epidemic on the economy, resulting in a sharp expansion of the Fed's balance sheet in a short period of time. This actually limits the possibility that the Fed can further increase its asset purchase program in a short period of time.

But this time, the Federal Reserve said that only a certain level of purchase, continued large-scale water release, will lead to a flood of money, will bring asset bubbles and inflation problems to the United States, and will seriously threaten the international status of the US dollar in the later stage.

Goldman Sachs Group Group issued a bold warning on Tuesday that the dollar is in danger of losing its status as the world's reserve currency, focusing on sudden US inflation concerns. Goldman Sachs Group strategists warned that US policy was raising concerns about currency "devaluation", which could end the dollar's dominance in the global foreign exchange market.

Of course, if the Fed continues to buy bonds at the current rate, there is no doubt that the US bond yield will be hit to the lowest, which will inevitably lead to the reduction of international capital holdings of US debt in the medium to long term, which will reduce the international share of the US dollar and further counter-attack the US dollar.

This is the main logic of why the dollar index continues to weaken under the dove of the Federal Reserve. Forced by helplessness, the Fed continues to hurt the dollar.

Why does gold continue to rise?

Gold is a hard currency, which can preserve its value, and people are willing to buy gold to fight inflation. The gold pricing factor is determined by the real interest rate, which is equal to the nominal interest rate minus inflation expectations.

(gold and real interest rates, source: Bloomberg)

The yield on the 10-year Treasury note, which represents nominal interest rates, has fallen, but the range is relatively limited, while inflation expectations have risen rapidly, driven by the continued large-scale discharge of water in various countries (Europe and the United States) and trillions of economic stimulus packages.

The Fed continues to be dovish this time, and the market expects real interest rates to weaken further and gold to keep rising slightly.

3

At 20:30 Beijing time tonight, the US Department of Commerce will release its GDP report for the second quarter of 2020. Investors will know how much trouble the US economy actually got into in the second quarter of this year.

Current market expectations are that the initial annualised rate of real GDP in the second quarter could be-34.1 per cent, the worst since 1940, with a previous value of-5 per cent.

But what the actual data are, it is worth looking forward to. This is undoubtedly another test for the stock market, bond market, gold and other markets. After all, on the one hand, monetary liquidity is another important dimension of economic fundamentals.