On the early morning of August 1st (this Thursday) Beijing time, the results of the Federal Reserve's July interest rate meeting will be announced.
Although the market generally expects the Federal Reserve to keep interest rates unchanged at this meeting, the meeting is still highly anticipated, and the market is generally concerned about how strong the signal of interest rate cuts released by the Federal Reserve is. As no new economic forecasts will be released at this meeting, the speech by Federal Reserve Chairman Powell after the meeting is particularly important.
Prior to this interest rate meeting, there was an array of economic data released. In the second quarter of 2024, the actual annualized growth rate of US GDP was 2.8%, compared to the previous value of 1.4%. At the same time, the overall personal consumption expenditure (PCE) price index for the second quarter and June in the United States reached its lowest level since the beginning of the year. The PCE price index increased by 2.6% year-on-year in the second quarter, compared to 3.4% in the first quarter. After excluding food and energy prices, the core PCE price index increased by 2.9%, compared to the previous value of 3.7%. The PCE price index in the United States increased by 0.1% month on month and 2.5% year-on-year in June, compared to the previous value of 2.6%. After excluding food and energy, the core PCE price index increased by 0.2% month on month and 2.6% year-on-year, unchanged from before.
This meeting may lay the groundwork for a rate cut in September
Hu Jie, a professor at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University and former senior economist at the Federal Reserve, told The Paper that this meeting may be pleased with the downward trend of inflation data in the past three months, and expressed cautious expectations for a decrease in the two months leading up to the September meeting, implying the possibility of a rate cut in September.
Hu Jie believes that the Federal Reserve is highly likely to decide on its first interest rate cut at the September meeting. After the September meeting, there was only one release of new monthly inflation data before the November meeting. Making another interest rate cut is somewhat hasty, and it is more likely to be a wait-and-see reaction of various economic indicators after the rate cut. Before the December meeting, there will be a total of three monthly inflation data releases. If these data show a stable downward trend in inflation, there may be another decision to cut interest rates at the December meeting.
Bai Xue, Senior Deputy Director of Research and Development at Dongfang Jincheng, analyzed Pengpai News that it is unlikely that the meeting will directly release a signal of interest rate cuts in September, and it is highly likely that the guidance of data dependence will be maintained. However, the July meeting has important transitional significance, so the Federal Reserve is likely to lay the groundwork for the potential first interest rate cut in September. Based on Powell's speech in Congress in July and the recent trend of narrowing differences among Fed officials regarding interest rate cuts, the market generally believes that factors such as sustained inflation decline and labor market cooling approaching pre pandemic levels have formed the basis for interest rate cuts. Therefore, the Federal Reserve should adjust its statements on inflation and the labor market at this meeting, implying the possibility of a rate cut starting in September. It is expected that the Federal Reserve will initiate its first interest rate cut in September and may cut rates twice throughout the year, with one rate cut in each of the third and fourth quarters.
Cui Xiao, senior economist at Swiss wealth management firm Baida Wealth Management in the United States, expects the Federal Reserve to keep interest rates unchanged on Wednesday, but will emphasize further progress on inflation and hint at a rate cut in September. Cui Xiao stated that the latest inflation data, a cooling labor market, and risk management methods that are eager for a soft landing all indicate that the easing cycle will begin in September. However, Cui Xiao believes that the possibility of Powell sending a strong signal of interest rate cuts in September is unlikely.
Some market views suggest that the Federal Reserve will cut interest rates by 50 basis points in mid September. Regarding this, Hu Jie stated that the possibility of a 50 basis point interest rate cut is extremely low. 25 basis points is the standard unit for interest rate adjustments by the Federal Reserve, and the operating range will not be increased unless under special circumstances. At present, the unemployment rate in the United States has slightly increased and the economic growth rate has slightly decreased, but both are at a very healthy level. However, the inflation rate has not yet reached the target, and there is no reason to support excessive interest rate cuts.
Bai Xue also believes that if the Federal Reserve starts cutting interest rates in September, the magnitude will be 25 basis points. A 50 basis point interest rate cut is considered an extraordinary rate cut. Against the backdrop of the US economy not experiencing a cliff like recession and financial markets not experiencing a liquidity crisis, there is no need for an extraordinary and significant rate cut. A significant rate cut may also trigger the risk of inflation rising again. Therefore, the possibility of a 50 basis point interest rate cut in September is very low.
Cui Xiao stated that it is expected that the Federal Reserve will cut interest rates by 25 basis points twice in September and December. She analyzed that the market expects three interest rate cuts this year, and given the slowdown in inflation, especially the cooling of the labor market, she agrees with this risk direction. However, she still expects a quarterly interest rate cut until she sees further deterioration in labor demand and an increase in layoffs (rather than just normalization). Hurricane Beryl hit Texas, which is one of the reasons for the recent increase in unemployment claims. Therefore, there is a certain downside risk to this week's salary data.
Will more consideration be given to the job market
Powell recently mentioned that given the progress made by the Federal Reserve in reducing inflation and cooling the labor market over the past two years, rising inflation is not the only risk that needs to be faced at present. Does this mean that the Federal Reserve will shift its focus to the job market and the risk of economic downturn?
Hu Jie believes that the Federal Reserve will always prioritize achieving its inflation target of 2%. At present, this goal has not been achieved, and the priority of other economic indicators is still after the inflation rate. Recently, the unemployment rate has slightly increased and the economic growth rate has slightly decreased. The Federal Reserve's attention to the risk of economic downturn will increase, but the overall US economy is still in a good state, which will not cause excessive concern for the Federal Reserve and will not affect its pace of inflation control.
Bai Xue has a slightly different view on this. Bai Xue believes that there is a high possibility of a change in the Federal Reserve's risk management considerations during this meeting, shifting from concerns about rising inflation risks to concerns about rising unemployment rates. The sustained improvement in recent inflation data is one of the key factors driving the Fed's attitude shift. Meanwhile, as the unemployment rate rose above 4% in June, the weight of employment and economic considerations in the Federal Reserve's policy decisions is increasing.
Bai Xue stated that the current real interest rate in the United States (the difference between 10-year US Treasury yields and CPI year-on-year) has remained significantly higher than 1%, at a historically high level. Combined with the recent general weakening of economic indicators, continuous downward revision of employment data, and a significant increase in unemployment rate, it indicates that high interest rates are increasingly suppressing economic momentum, and the risk of economic downturn is rising. In this context, the Federal Reserve's decision-making focus is gradually shifting towards employment and preparing for interest rate cuts, which is the general direction of policy trends.
Apart from interest rate cuts, what are the other focuses of this meeting?
Hu Jie believes that the three monthly inflation data released in the past have once again established a downward channel for the inflation rate, but whether the decline is stable still needs to be observed. If the data for the next two months consolidates the downward trend, the September meeting is likely to decide on a rate cut. In this context, this meeting will review the speed of inflation decline, carefully evaluate the prospects of economic slowdown, and confirm the pace of inflation governance. The focus of market attention is to confirm that this meeting marks a shift in the Federal Reserve's attitude from eagle to dove.
Bai Xue said that the market's focus is on the Federal Reserve's views on inflation trends and the labor market, as well as its description of the path of interest rate cuts within the year, and based on this, whether it deviates from the general expectation of starting interest rate cuts in September. What changes have occurred between the statements in the policy statement and before, whether the market believes that the process of reducing inflation is close to completion, and whether more attention will be given to the labor market; The market will also pay attention to Powell's speech, looking for more policy considerations (such as the impact of the general election and the issuance of treasury bond) and clues to the path of interest rate reduction, including the time point and times of interest rate reduction. Therefore, the information revealed at the July meeting will determine whether the market will reprice the interest rate cut starting in September.